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Friday, December 15, 2006

Myth Busting

As I mentioned in this post, statistics must be analyzed with great care if they are to provide meaningful insight. Handled poorly they can provoke ill-advised political responses as Cox and Alm worn in the same post.
What we don't know about the economy could hurt us. Many of the suggested remedies to problems that don't exist may leave us worse off.
More careful analysis of data is provided in an Alan Reynolds article in the WSJ which Don Luskin posts and comments on here:
At last... Alan Reynolds' long-awaited blast against all the hype from the Left and the Right about so-called "income inquality," and the myth that the "top 1%" have suddenly started making all the money in this country. ... This is the best. I totally bow down before Alan Reynolds.
As many others have done, Virginia's Democratic Senator-elect Jim Webb recently complained on this page of an "ever-widening divide" in America, claiming "the top 1% now takes in an astounding 16% of national income, up from 8% in 1980." Those same figures have been repeatedly echoed in all major newspapers, including this one. Yet the statement is clearly false. The top 1% of households never received anything remotely approaching 16% of personal income (national income includes corporate profits). The top 1% of tax returns accounted for 10.6% of personal income in 2004. But that number too is problematic.

The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other.

The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution. In Washington higher taxes are always the solution; only the problems change.

Read the whole article - well worth it!


Bret said...

I guess I'm gonna have to buy Reynolds new book even though it's so expensive.

On the left, Reynolds' WSJ essay will be the most ignored article ever written, though I found it informative. I also highly recommend following the link and reading the whole article.

Oroborous said...

Household income inequality has widened over the past 20 years, as confirmed by U.S. Census Bureau data.

It's just that the break-point isn't between the bottom 99% and the top 1%, it's primarily between the bottom 40% and the top 60%, with a second break between the bottom 97% and the top 3%.

IMO, it means that the economy is doing what it's supposed to be doing, bringing riches to those who work hard, and to those of high ability, or some combination of the two. To my way of thinking, the problem area is the second-to-bottom 20%, which should be more closely keeping up with the upper quintiles. The bottom-most 20% will fall further and further behind, as it ought, being composed of those who cannot improve their circumstances for a variety of reasons.