The defining issue of our time is how to keep that promise alive. No challenge is more urgent. No debate is more important. We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules. What’s at stake aren’t Democratic values or Republican values, but American values. And we have to reclaim them.

That was President Barack Obama in his 2012 State of the Union Address (delivered in January of 2012), and he is referring to the growing share of national income that is going to those who are the most well off (full transcript here).

Much has been written about income inequality already, and I do not intend to write more about it here. Instead I thought I’d write a ‘literature review’ of what’s out there. What you’ll find here is a collection of peer reviewed journals, white papers released by various think tanks, articles written by researchers and journalists, and some blog posts. Most of the things cited here are not papers in peer reviewed journals, but I do my best to give them a disproportionate share of the citiations. I’ve read most of the things linked to here (over the course of two years or so). I try to give a little summary about what is stated in each article, usually using the authors own words, and keep my opinions out of this review.

This is not meant to be comprehensive, but if I missed something important feel free to let me know in the comments.

UPDATE: I’ll be adding new content every now and again.

What is income inequality?

The guys over at Vox.com created a summary about income inequality. It’s presented in their nice card format. They even have a card defining the gini coefficient and the “Great Gatsby Curve”.

Here is a video about income equality titled Income Inequality: Evidence and Policy Implications (made for the general audience). The speaker is Emmanuel Saez, one of the leading researchers on income inequality.

Income Inequality Data

Good income data for top earners is hard to get. Facundo Alvaredo, Anthony Atkinson, Thomas Piketty, and Emmanuel Saez, the leading researchers on income inequality, created The World Top Incomes Database (I’ll call it the WTI-DB), which they make freely accessible here. The database is extensive, allowing you to breakdown income into several categories, such as: wages, salaries, and pensions; dividends; interest income; entrepreneurial income; and rents (housing rents, not economic rents). The following tables were created using their data, which was accessed on 2014-09-03. All dollar figures are in 2012 dollars.

Note: I’m also interested in the breakdown of these figures by looking at those who fall within the top 10%-5% or 1%-0.1%. Some of this data is already calculated in the WTI-DB, while others you can calculate using their data. I’ll calculate that stuff in another post.

Income share table

The following table is each earning groups income share as a percentage of total income. For example, in 1972 the top 10% earned 31.62% of all income earned in the United States. The estimates in this table exclude capital gains. In other words, each person’s income excludes income from capital gains.

	Top 10%	Top 5%	Top 1%	Top 0.1%	Top 0.01%
1972	31.62%	20.37%	7.75%	1.92%	0.52%
1982	33.22%	21.40%	8.39%	2.45%	0.77%
1992	39.82%	27.88%	13.48%	5.21%	2.02%
2002	42.36%	30.36%	14.99%	5.94%	2.30%
2012	48.16%	35.76%	19.34%	8.82%	4.08%

This one includes capital gains. Specifically, fractiles in this table are defined by total income including capital gains. Data is expressed as a percentage of total income which includes capital gains.

	Top 10%	Top 5%	Top 1%	Top 0.1%	Top 0.01%
1972	33.59%	22.52%	9.64%	3.13%	1.18%
1982	35.33%	23.83%	10.80%	4.18%	1.73%
1992	40.82%	29.06%	14.67%	6.03%	2.46%
2002	43.82%	32.07%	16.86%	7.34%	3.14%
2012	50.42%	38.56%	22.46%	11.33%	5.47%

Average income table

This table is the average income of people who fall in that particular income percentile. All estimates exclude capital gains. Each percentile is calculated using total income excluding capital gains.

	Bottom 90%	Top 10%	Top 1%	Top 0.1%	Top 0.01%
1972	$34,360	$143,020	$350,689	$866,360	$2,353,821
1982	$31,324	$140,226	$354,171	$1,034,361	$3,270,427
1992	$31,174	$185,632	$628,427	$2,430,711	$9,402,423
2002	$34,067	$225,360	$797,357	$3,157,193	$12,240,438
2012	$30,439	$254,449	$1,021,761	$4,660,988	$21,569,156

This one includes capital gains. Specifically, each percentile is defined by total income including capital gains; income includes capital gains.

	Bottom 90%	Top 10%	Top 1%	Top 0.1%	Top 0.01%
1972	$34,900	$158,842	$455,808	$1,478,340	$5,572,007
1982	$31,709	$155,922	$476,423	$1,842,783	$7,651,295
1992	$31,653	$196,519	$706,250	$2,903,549	$11,857,207
2002	$34,566	$242,648	$933,878	$4,064,985	$17,398,425
2012	$30,997	$283,734	$1,264,065	$6,373,782	$30,785,699

My guess is that they took the arithmetic mean for each fractile, excluding people who did not earn any income. I’m interested in knowing the median income for the bottom 90% as well.

Income threshold table

The following table is the income thresholds per percentile, i.e. how much money you need to make to be in that percentile. Each percentile is defined by total income excluding capital gains; income excludes capital gains.

	90%	%95	99%	99.9%	99.99%
1972	$91,825	$113,156	$209,077	$488,416	$1,075,802
1982	$90,310	$111,225	$195,419	$507,517	$1,479,436
1992	$99,457	$129,052	$264,782	$970,988	$3,912,394
2002	$111,358	$150,923	$324,909	$1,236,752	$5,052,365
2012	$112,200	$157,510	$371,689	$1,549,616	$7,205,236

This one includes capital gains, so this is the actual “amount of money you need to make to be in that percentile”. Specifically, each percentile is defined by total income including capital gains; income includes capital gains.

	90%	95%	99%	99.9%	99.99%
1972	$94,439	$120,830	$235,328	$713,071	$2,546,847
1982	$91,836	$116,523	$217,546	$773,150	$3,460,786
1992	$101,106	$133,130	$281,705	$1,118,561	$4,931,449
2002	$113,370	$156,302	$351,724	$1,445,167	$6,781,853
2012	$113,820	$161,438	$393,941	$1,906,047	$10,256,235

Capital gains table

The following table expresses the fraction of each fractile’s income that is received from capital gains. Each fractile is defined by total income excluding capital gains, but each figure is calculated using the percentage of total income including capital gains. For example: look at all the people who earned an income in 1972, excluding their income from capital gains, and then look at the top 10% of all of these earners. Of those who are in the top 10%, what percentage of their income came from capital gains? The answer would be 6.81%.

	Top 10%	Top 5%	Top 1%	Top 0.1%	Top 0.01%
1972	6.81%	8.99%	14.78%	23.48%	30.61%
1982	7.31%	10.08%	17.78%	28.59%	34.59%
1992	4.30%	5.42%	8.18%	10.86%	11.14%
2002	5.24%	6.44%	9.51%	13.10%	14.28%
2012	8.80%	10.80%	15.36%	19.80%	20.36%

This one includes capital gains. For example: look at all the people who earned an income in 1992, including their income from capital gains, and then look at the top 10% of all of these earners. Of those who are in the top 10%, what percentage of their income came from capital gains? The answer would be 6.39%.

	Top 10%	Top 5%	Top 1%	Top 0.1%	Top 0.01%
1972	11.89%	16.38%	28.42%	53.35%	75.27%
1982	11.66%	16.53%	30.35%	53.45%	71.04%
1992	6.39%	8.29%	13.11%	20.22%	27.14%
2002	8.27%	10.65%	17.13%	27.83%	38.99%
2012	11.39%	14.56%	22.57%	33.81%	41.57%

Income inequality by profession and class

• According to this article by Manoj Jain at The Washington Post, there is growing income inequality within the medical profession. This change is largely driven by payments to medicare. Also,

  … 16 percent of the country’s sometimes scorned “1 percent” is made up of medical professionals.

• This aljazeera article by David Cay Johnston tries to look at how different classes of earners have faired between 2000 and 2012. The author uses Bureau of Labor Statistics data¹. He finds that people earning between $100,000 and $400,000 (in 2012 dollars) have done remarkably well during this periond. From the article:

  Most astonishing is how much of the overall increase in wages earned by the 153.6 million people with a job in 2012 went to this narrow band of very well paid workers: Just 7 percent of all jobs pay in this range, but those workers collected 76.9 percent of the total real wage increase.

• James Piereson, of the Manhattan Institute, has an op-ed in the Wall Street Journal titled The Truth About the ‘One Percent’. It’s about the composition of the 1 Percent. Some excerpts

  According to research on individual tax returns in 2004 and 2005 by Jon Bakija of Williams College, Adam Cole of the Treasury Department and Bradley T. Heim of Indiana University, the top 1% consists primarily of salaried executives at nonfinancial businesses (30%) and secondarily of doctors (14%), people working in finance (13%) and lawyers (8%). Among the “super rich” in the top 0.1% (about 110,000 households), the distribution still favors business executives (41%) over people in finance (18%).

  […]

  Emanuel Saez of the University of California ( Berkeley ) has shown in a series of papers that, as he writes, “The top income earners today are not ‘rentiers’ deriving their incomes from past wealth but rather are the ‘working rich,’ highly paid employees or new entrepreneurs who have not yet accumulated fortunes comparable to those accumulated during the Gilded Age.”

Income Inequality and Society

President Obama in a speech on economic mobility in December of 2013:

So let me repeat: The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe. And it is not simply a moral claim that I’m making here. There are practical consequences to rising inequality and reduced mobility.

For one thing, these trends are bad for our economy. One study finds that growth is more fragile and recessions are more frequent in countries with greater inequality. And that makes sense. When families have less to spend, that means businesses have fewer customers, and households rack up greater mortgage and credit card debt; meanwhile, concentrated wealth at the top is less likely to result in the kind of broadly based consumer spending that drives our economy, and together with lax regulation, may contribute to risky speculative bubbles.

[…]

And finally, rising inequality and declining mobility are bad for our democracy. Ordinary folks can’t write massive campaign checks or hire high-priced lobbyists and lawyers to secure policies that tilt the playing field in their favor at everyone else’s expense. And so people get the bad taste that the system is rigged, and that increases cynicism and polarization, and it decreases the political participation that is a requisite part of our system of self-government.

The 1-Percent

Exotic meals – I call that opulence
I’m talkin’ Wall Street money, you just an occupant
I’m in that 1 Percent. Over a hundred grand
I don’t trust a bank either it’s in a rubber band

Ryan Leslie. 5 minute freshen up.
Les is more (2012).

• George Stiglitz, of Columbia University, wrote a piece in Vanity Fair in May of 2011 titled Of the 1%, by the 1%, for the 1%. In it, he summarizing income inequality data, and mentions some of it’s causes.

  Economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.

  … Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

  He also has a book about this issue called The Price of Inequality. I have not read it.

• Mike Konczal, of the Roosevelt Institute, wrote a post in September of 2013 on the 1 Percent’s income share since the recession of 2009. He points out that the only time it was higher was in 1928. Basically, the 1 Percent’s income share is at record highs.

• Greg Mankiw, of Harvard University, has a paper defending the 1 Percent in a paper published in the Journal of Economic Perspectives (abstract here and pdf here). It’s a 15 page essay and he only touches on some topics. He is not convinced by the arguments made by George Stiglitz in his book The price of Inequality, here is an excerpt

  Joseph Stiglitz’s (2012) book, The Price of Inequality, spends many pages trying to convince the reader that such rent-seeking is a primary driving force behind the growing incomes of the rich. … I can report that I was not convinced. Stiglitz’s narrative relies more on exhortation and anecdote than on systematic evidence. There is no good reason to believe that rent-seeking by the rich is more pervasive today than it was in the 1970s, when the income share of the top 1 percent was much lower than it is today.

  I am more persuaded by the thesis advanced by Claudia Goldin and Lawrence Katz (2008) in their book The Race between Education and Technology. Goldin and Katz argue that skill-biased technological change continually increases the demand for skilled labor.

  Later he writes

  [To] the extent that Stiglitz is right that inefficient rent-seeking is a driving force behind rising inequality, the appropriate policy response is to address the root cause. It is at best incomplete and at worst misleading to describe the situation as simply “rising inequality,” because inequality here is a symptom of a deeper problem. A progressive system of taxes and transfers might make the outcome more equal, but it would not address the underlying inefficiency.

• The Economist.com responds to parts of Greg Mankiw’s essay in an article titled The 1 percent needs better defenders. The core of his or her’s response is the following

  Inequality is rising for structural reasons that have nothing to do with the social value produced by the labour of the top one percent of earners. If the government were to, for example, return top marginal tax rates to the levels that prevailed in the 1990s or the 1970s in order to compensate for the superstar effect, there is no reason to believe that the top one percent would produce any less value for society than they do now.

Inequality and opportunity

The Equality of Opportunity Project is an initiative started by four economists, two at Harvard University and two at UC Berkeley, whose aim is examining how equality of opportunity has changed in the US. Specifically, they examine how upward income mobility has changed in the US. So far they have two papers from their efforts (although it’s not yet published in a journal, it seems like solid work)².

• Economic mobility – the ability to go from rags to riches – has remained constant in the US for the last half century according to this paper (pdf) by some economists. The executive summary for that paper can be found here (pdf). Two things come to my mind when it comes to economic mobility and income inequality: decreased oppression of blacks and women should increase economic mobility, and increased income inequality implies less economic mobility.

• The New Yorker and the New York Times have articles, here and here respectively, discussing some of the implications of the above paper’s finding.

• Some geographic regions are more mobile than others according to this paper (pdf), which is summarized at voxeu.org and on their project website here (pdf). Their core data set consists of all children born in the US between 1980 and 1982 and is broken down into Commuting Zones. From the voxeu.org post,

  Commuting zones are geographical aggregations of counties that are similar to metro areas but also cover rural areas.

  The New York Times has an interactive graph of the results in an article. The main message is that economic mobility is not uniform throughout the US. I looks like Boston, L. A., New York and San Francisco have average economic mobility.

The “Great Gatsby Curve”

According to wikipedia

The Great Gatsby curve is a chart plotting the (positive) relationship between inequality and intergenerational social immobility in several countries around the world.

The Great Gatsby Curve plots the Gini coefficient on the horizontal axis against economic immobility on the verticle axis. Alan Krueger, then Chairman of the Council of Economic Advisers, presented³ the Great Gatsby curve in the President’s Economic Report to Congress (pdf here). Bloomberg.com produced a great infograph describing the Great Gatsby Curve. Paul Krugman has a blog post describing the curve here, and the White House has a post with an animated infograph describing the curve here.

• Two notable attacks on the “Great Gatsby Curve” were made by Scott Winship and Donald Schneider of the Manhatan Institute, they can be found here and here (titled The Collapse of the Great Gatsby Curve and Great Gastby Curve Revisited: Part 1 respectively). In Great Gastby Curve Revisited: Part 1, the authors discuss some interesting findings, here is one related to economic mobility within a Commuting Zone (CZ):

  … [this] chart shows how each CZ’s prevalence of single-motherhood among families with children compares with its relative mobility. It reveals a pretty strong relationship – a 20-percentage-point increase in the share of families with kids headed by a single mother predicts a 15-percentile increase in the gap in average adult income between the poorest and richest child. For that matter, the correlation is 0.61, which means that the variation (the “standard deviation”) across CZs if we simply predicted mobility from that best-fitting line and the CZ single-motherhood figures would be 61 percent as large as the actual variation in mobility. In other words, a CZ’s prevalence of single motherhood predicts its relative mobility quite well all by itself.

  Just to be clear, they are not trying to suggest single motherhood is the primary cause of immobility⁴.

• Carter Price, of the Washington Center for Equitable Growth, responds to Winship el al.’s article The Collapse of the Great Gatsby Curve here. He summarizes and responds to all of Winship’s points from that article.

• Miles Corak, of the University of Ottawa, responds here to Winship el al.’s The Collapse of the Great Gatsby Curve article. He also offers a short review on how theory predicts rising income inequality leads to less generational mobility (links in original):

  The workhorse theoretical model for intergenerational dynamics is presented in a couple of papers by Gary Becker and Nigel Tomes, the original one published in the Journal of Political Economy in 1979. Their analysis was extended by Gary Solon in a way that offers a framework for making comparisons across time and space: indeed, Solon called his article A model of intergenerational mobility variation over time and place. (The source is here.)

  If you want to understand differences between countries or differences within a country over time, then Solon’s theory suggests you organize your thinking around three broad factors: how families function and how effective parents can be in determining their children’s human capital; how labour markets function, in particular the earnings return to human capital; and how public policy functions, in particular the extent to which government policy is of relatively more benefit to the relatively disadvantaged (what Solon calls the “progressivity” of public investment).

  His reworking of the Becker-Tomes model makes the prediction that he summarizes in the last sentence of his paper: “an era of rising returns to human capital or declining progressivity in public human capital investment is also an era of declining intergenerational mobility.”

• Richard Reeves, who is at the Brookings Institute, responds to Scott Winship here. He makes many useful comments and summarizes where he and everyone who cares about inequality may be comming from as a policy matter. To me, it sounds like Reeves also finds Winship’s arguments convincing, but he doesn’t think the Great Gatsby Curve matters anyway, starting his article with this:

  The debate rages over whether the “Great Gatsby curve”–positing a link between income inequality and intergenerational mobility–is as fictional as its namesake. The latest salvo is from Scott Winship, over at the Manhattan Institute, throwing buckets of cold water on the theory.

  It is an interesting argument for wonks. But in the end it matters little for policy. We can get on with tackling social immobility and/or income inequality without waiting for the outcome of the scholarly spat over statistical connections.

Income inequality and growth

• The OECD has a summary report titled Is inequality good or bad for growth?. Their answer is: yes it does. Specifically, they start off with this

  Widespread increases in income inequality have raised concerns about their potential impact on our societies and economies. New OECD research shows that when income inequality rises, economic growth falls. One reason is that poorer members of society are less able to invest in their education. Tackling inequality can make our societies fairer and our economies stronger.

  More on this summary can be found here and here. The summary is 4 pages long, summarizes 4 papers/working papers written by people at the OECD.

• Federico Cingano, an economist at the OECD and the Bank of Italy, has a paper titled Trends in Income Inequality and its Impact on Economic Growth (as of 2015-01-06 it is a working paper). From the abstract we have

  … Drawing on harmonised data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth. In particular, what matters most is the gap between low income households and the rest of the population. In contrast, no evidence is found that those with high incomes pulling away from the rest of the population harms growth…

  Eric Crampton, of the University of Canterbury, comments on it here, noting

  They find that net inequality (after tax-and-transfer) hurts economic growth, that gross inequality (pre tax-and-transfer) doesn’t hurt growth, that changes in human capital (education) do not affect growth one way or another - there’s a slightly negative effect of education on growth in the set of specifications, but it’s not significant; and, investment doesn’t affect growth one way or another.

  The set of results is then a little surprising. We usually expect investment to matter a lot for growth - both in physical plant and equipment (investment) and in people (education). They find that neither does anything and that the only thing that matters is inequality.

• Standard & Poors has a report titled How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide. I’ll cite three critics of the report. The American Enterprise Institute’s criticism can be found here; The Manhatan Institutes criticisms can be found here; and John Cochrane, of the University of Chicago, posted his criticisms here.

• Lane Kenworthy, of UC San Diego, has written quite a number of papers, articles, and book chapters about economic inequality, living standards, and economic policy and has posted some of them on his website. In his book chapter (pdf) titled Has Rising Inequality Reduced Middle-Class Income Growth, he tries to, well, answer that question. Here is one excerpt

  In the first two countries, the United States and the United Kingdom, top-heavy income inequality soared. In the next two, Canada and Finland, inequality increased moderately. In the last two countries, Germany and the Netherlands, we see little or no rise in inequality.

  Given these trends in inequality, we might expect to find middle-class incomes growing slowest in the United States and the United Kingdom, at an intermediate pace in Canada and Finland, and fastest in Germany and the Netherlands. But this expectation turns out to be wrong.

  In the conclusion he writes

  [A] rise in income inequality may contribute to a worsening of overall or average outcomes (Wilkinson and Pickett 2009). The average level of life expectancy or college completion may decline or rise less rapidly than it otherwise would have. Crime may accelerate. Trust and community may weaken. The middle class may fare worse economically. This brings us back to middle-class income growth. Looking across countries, inequality’s effect so far has been overshadowed by the impact of economic growth and of changes in net government transfers. Yet, that will not necessarily hold going forward.

• In another book chapter (pdf) titled Lifting Living Standards in an Open Economy: The Danger of Front-Loading Income Inequality, he makes a few points about the evidence that’s typically made to support more re-distributive policies. He makes the case that the arguments often made for the reduction of income inequality do not rest on much solid evidence, and he looks at each of these arguments. The arguments are income inequality reduces growth, reduces opportunity, increased financial instability, reduced health, and increased political influence. He goes on to point out the shortcomings of the evidence that is often presented. He then lists the things that income inequality worriers should focus on instead. Excerpt:

  I believe, as I said earlier, there are good reasons to object to the high and rising level of income inequality in the US. Yet I fear the American left’s recent move to put income inequality reduction front and centre might be harmful rather than helpful. It may foster a conviction that the key to addressing America’s social, economic and political problems is to reduce the top 1 per cent’s share or the Gini coefficient. That could distract attention from more direct and effective efforts to address those problems.

  Such efforts include fully universal health insurance; improvements in eligibility, duration and benefit level for various social-insurance and social-assistance programmes; wage insurance; early education; enhanced financial support for college; a minimum wage indexed to prices; an expanded earned-income tax credit indexed to average compensation; and monetary policy less tilted towards inflation avoidance. Policy changes like these would go a long way towards improving economic security, enhancing opportunity (and mobility) and ensuring shared prosperity in the US. Inequality of political influence could be lessened via direct reforms, such as reversal of the Citizens United decision, introduction of a strong transparency rule and public funding for congressional election campaigns.

• Jared Bernstein, of the Center on Budget and Policy Priorities, has a white paper (pdf) titled The Impact of Inequality on Growth published at the Center for American Progress. From his conclusion and policy implications section:

  There are numerous reasons for policymakers and citizens to be concerned about the rise of inequality, not the least of which are its impact on the basic American social contract that says that work pays off; the diminishing of opportunity; the rise in societal unrest; and its impact on political functionality. But the concern of this paper is the impact of inequality on macroeconomic growth.

  The review of the evidence suggests that while some of the traditional channels by which inequality affects growth have solid theoretical backing, empirical evidence is elusive. Intuitive and historically verified growth-accounting methods predict that if inequality, through its impact on diminished educational opportunity, leads to a less-well-educated workforce against a counterfactual with less inequality, growth will be diminished. But for a number of reasons stated in the text, there is no correlation, even with the requisite lags between trends in inequality and trends in labor quality.

  A summary of the report can be found here

Income inequality and other things

This section is basically ‘miscellaneous papers or articles about income inequality’.

• Gender differences. Fatih Guvenen, Greg Kaplan, and Jae Song have an NBER working paper titled The Glass Ceiling and The Paper Floor: Gender Differences among Top Earners, 1981-2012. From the abstract:

  Despite making large inroads, females still constitute a small proportion of the top percentiles: the glass ceiling, albeit a thinner one, remains. We measure the contribution of changes in labor force participation, changes in the persistence of top earnings, and changes in industry and age composition to the change in the gender composition of top earners.

  A non-gated version can be found here.

• Mating Lasse Eika, Magne Mogstad, and Basit Zafar have an NBER working paper titled Educational Assortative Mating and Household Income Inequality. A non-gated version can be found here. Seems interesting, particularly this part from the abstract:

  When looking within the group of college educated, we find strong but declining assortative mating by academic major. These findings motivate and guide a decomposition analysis, where we quantify the contribution of various factors to the distribution of household income. We find that educational assortative mating accounts for a non-negligible part of the cross-sectional inequality in household income.

• Voting. Andrew Gelman, Lane Kentworthy, and Yu-Sung Su have a paper (pdf) (published here in December 2010) titled Income Inequality and Partisan Voting in the United States. Their abstract reads as follows:

  Objectives. Income inequality in the United States has risen during the past several decades. Has this produced an increase in partisan voting differences between rich and poor?

  Methods. We examine trends from the 1940s through the 2000s in the country as a whole and in the states.

  Results. We find no clear relation between income inequality and class-based voting.

  Conclusions. Factors such as religion and education result in a less clear pattern of class-based voting than we might expect based on income inequality alone.

• Health. Paul Krugman wrote an op-ed in January of 2014 talking about how inequality may be bad for society. In it he makes many interesting points. He also makes one error claiming (citation in the original)

  There is, for example, strong evidence that high inequality leads to worse health and higher mortality.

  Greg Mankiw points out the error here.

• Rent-seeking. Charles Lane, of The Washington Post, wrote an article titled Federal Washington cashes in on connections, that touches on income inequality created by rent-seeking behavior (according to Wikipedia, rent-seeking: is spending wealth on political lobbying to increase one’s share of existing wealth without creating wealth).

• Globalization. Peter Lindert and Jeffrey Williamson have a book chapter (pdf) titled Does Globalization make the World More Equal. I haven’t read it but I thought someone might be interested in it.

• Poverty rates. Timothy Taylor wrote an interesting post about changes in the poverty rate over the last 30 years. It doesn’t really have much to do with income inequality, but I found it really interesting.

• Higher eduction? Here is an article on income inequality and higher education. This one seems like a stretch.

Inequality before or after taxes?

How we measure income inequality matters.

• Burkhauser et al., of Cornell University and the American Enterprise Institute, analyzes income inequality using after tax data in their June 2011 paper titled A “Second Opinion” on the Economic Health of the American Middle Class. Their findings: the incomes of those in the middle class have increased substantial after taking into account taxes and transfers. From the conclusion

  When using the most restrictive income definition – pre-tax, pre-transfer tax unit cash (market) income – the resources available to the middle class have stagnated over the past three business cycles. In contrast, once broadening the income definition to post-tax, post-transfer size-adjusted household cash income, middle class Americans are found to have made substantial gains, and these increases are even larger when including non-cash income such as the ex-ante value of health insurance.

  They use US Census Bureau Data, specifically the yearly Current Population Survey data⁵.

• In another paper⁶ titled Levels and Trends in United States Income and Its Distribution A Crosswalk from Market Income Towards a Comprehensive Haig-Simons Income Approach, Burkhauser et al. (2013) find that the middle class is doing even better by

  … incorporating yearly-accrued capital gains to measure yearly changes in wealth rather than focusing solely on the realized taxable capital gains that appear in IRS tax return data.

  Thomas Edsall, of Columbia University, responds to these findings on the NY Times here.

• Chris Dillow has a post on why income inequality before taxes and transfers matters.

Wealth inequality

In a blog post titled Wealth inequality: signal or noise, Ashok Rao⁷ makes the argument that wealth inequality is not the important variable, but instead we should focus on income inequality. He is responding to this video, created by people over at Vox.com, that tries to make the case that wealth inequality is dangerous for America. His argument relies on data that shows the wealth held by the top “1 percent” has been holding constant for the last 30 years.

Greg Mankiw wrote an article in the NY Times titled How Inherited Wealth Helps the Economy. Here is a useful excerpt (which was presented in one of Chetty et al.’s papers on opportunity) (link in the original):

REGRESSION TOWARD THE MEAN This is the tendency of many variables to return to normal levels over time. …

The same is true for income. According to a recent study, if your income is at the 98th percentile of the income distribution — that is, you earn more than 98 percent of the population — the best guess is that your children, when they are adults, will be in the 65th percentile. They will enjoy higher income than average, but much closer to that of the typical earner. (This regression to the mean over generations, of course, has nothing to say about a nation’s overall income inequality, which is an entirely separate issue.)

• Alex Ulam, of the American Prospect, has an article on how the mortgage interest deduction is bad for inequality (presumably wealth inequality). In this article she links to a paper by two researchers at the Mercatus Center at George Mason University. You’ll find a summary and the full paper here. From the summary:

  The mortgage interest deduction (MID)—the second largest tax break in the United States at $69 billion per year—has long been touted as a critical tool for promoting middle-class prosperity and homeownership. But Americans may be surprised to learn that the only taxpayers who receive a large benefit from this deduction are those in upper income brackets; most taxpayers don’t benefit at all from the deduction.

• Wojciech Kopczuk and Allison Schrager have an article over at Foreign affairs about wealth inequality.

Capital in the Twenty-First Century

Capital in the Twenty-First Century is, as I hope I’ve made clear, an awesome work. At a time when the concentration of wealth and income in the hands of a few has resurfaced as a central political issue, Piketty doesn’t just offer invaluable documentation of what is happening, with unmatched historical depth. He also offers what amounts to a unified field theory of inequality, one that integrates economic growth, the distribution of income between capital and labor, and the distribution of wealth and income among individuals into a single frame.

This is from Paul Krugman’s review of Thomas Piketty’s book, Capital in the Twenty-First Century, which was written for the New York Review of Books. Marshall Steinbaum’s white paper (linked to below) opens with the following:

In “Capital in the Twenty-First Century,” Thomas Piketty of the Paris School of Economics proposes an economic theory of rising inequality over time thanks to the growing prevalence of capital over labor. That theory’s analysis of recent trends and its prediction about future inequality—and the capital-centered channel that he specifies for it to play out—have been subjected to criticism from economists, most pointedly from some who conduct research in macroeconomic theory.

This book has been a big deal, and many people have written about it. I haven’t read it, and I haven’t read a large number of reviews either (including some that I link to here).

Matt Yglesias has a short guide to the book at vox.com. Ryan Avent, of The Economist Magazine, has a short article summarizing the book. It’s titled Thomas Piketty’s “Capital”, summarised in four paragraphs. Justin Fox has a summary at Harvard Business Review.

Note: I’ve left out Chris Gile’s (of the Financial Times) attack on Piketty’s book because I felt it was a non issue. Also note that this book is long, totaling 696 pages.

Pro side

• Martin Wolf of the Financial Times has a review. In his conclusion he writes:

  For me the most convincing argument against the ongoing rise in economic inequality is that it is incompatible with true equality as citizens. If, as the ancient Athenians believed, participation in public life is a fundamental aspect of human self-realisation, huge inequalities cannot but destroy it. In a society dominated by wealth, money will buy power. Inequality cannot be eliminated. It is inevitable and to a degree even desirable. But, as the Greeks argued, there needs to be moderation in all things. We are not seeing moderate rises in inequality. We should take notice.

• Paul Krugman has a review at the New York Review of Books. He is a big fan of the book.

• Robert Solow’s has a review at newrepublic.com. He is a fan as well.

• Marshall Steinbaum of the Washington Center for Equitable Growth has a white paper (pdf) titled Piketty’s Theory of Inequality and its Critics: A White Paper. She counters many of the arguments made by critics of the book.

• Stephanie Flanders of JP Morgan has a review over at The Guardian.

• Branko Milanovic of the CUNY Graduate Center has a review (pdf) that was published here.

• Jacob Hacker, Paul Pierson, Heather Boushey, and Branko Milanovic have a review over at The American Prospect.

Con side

• Lawrence Summers of Harvard University is quite critical of the work in his review.

• Mervyn King at The Telegraph is not a fan.

• Laurence Kotlikoff of Boston University has a post at pbs.org. He is also not a fan.

• Scott Sumner, of Bentley University, discusses the book many several times. Two good ones can be found here and here. The following is the concluding remarks from the first link

  I find it difficult to provide an overall evaluation of this book, because I found things on nearly every page that annoyed me. (I’ll cover a few of these in additional posts, some at TheMoneyIllusion.) On the other hand, I am obviously not the intended audience for this book. And if I look beyond my annoyance, I can understand why many readers found the book to be impressive, even a tour de force. If my book on the Great Depression ever comes out, I’d obviously rather someone say “it’s an impressive work of scholarship, although I didn’t buy the central argument about the importance of the global gold market,” rather than “it’s 600 pages of drivel.” Piketty’s book is impressive in some ways. I like his approach to methodology. He might well be correct about some of his predictions. As we saw with the General Theory, a book can contain many individual arguments that don’t hold up, and still be a milestone in the intellectual debate.

• Here is a note titled A note on Piketty and diminishing returns to capital. It’s a very long note.

• Daron Acemoglu and James Robinson, of MIT and Harvard respectively, have a paper that is critical of Piketty’s theory (unpublished at the time of this writing). It’s titled The Rise and Fall of General Laws of Capitalism, and it can be found here

• Peter Lindert, of UC Davis, has a working paper titled Making the Most of Capital in the 21st Century. Also, not a fan of the book.

• Per Krusell, of Institute for International Economic Studie, and Tony Smith, of Yale University, have paper that’s critical of the book. They have a summary of this paper posted at voxeu.org.

Neutral

• James K. Galbraith, of the University of Texas at Austin, has a review at Dissent Magazine. He concludes it saying

  In sum, Capital in the Twenty-First Century is a weighty book, replete with good information on the flows of income, transfers of wealth, and the distribution of financial resources in some of the world’s wealthiest countries. Piketty rightly argues, from the beginning, that good economics must begin—or at least include—a meticulous examination of the facts. Yet he does not provide a very sound guide to policy. And despite its great ambitions, his book is not the accomplished work of high theory that its title, length, and reception (so far) suggest.

• Greg Mankiw has a short post about the book.