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Wrong

Posted By Russ Roberts On June 12, 2009 @ 5:10 pm In Data,Inequality | Comments Disabled

Over at Freakonomics [1] (HT: Planet Money [2]), Justin Wolfers cites this graph as proof that the rich have gotten most of the income gains in the last 35 years:

Agraph [3] 

This alas, is a meaningless chart. It tells you nothing about who got the gains of the last 35 years. Why? Because they're not the same people in the quintiles. Starting in 1973, and it's not a coincidence, the divorce rate in the United States began to rise. The number of families increased dramatically simply because of divorce. There was also an increase in the number of families headed by single women with children. The quintile breaks-points changed, not because the economy was growing or shrinking but simply because of changes in the types of families.

The chart is highly misleading. It implies that poor people have done poorly while rich people have thrived. Rich people have thrived. But so have poor people. If you look at longitudinal studies of the same people (the Michigan PSID for example) you get a totally different picture than this one. And that's because this one is designed to fulfill a political agenda. It's a beautiful example of how facts by themselves are not meaningful. There is nothing dishonest about the chart, just its interpretation.

I invite my students from last semester to remember what else we came up with when talking about a graph just like this one.

In the comments to Wolfers post, nosybear writes:

Shows what we know – some time in the last three decades we as a nation
decided the rich should get richer, the poor, well, not so much.
Education alone doesn’t account for it. Taxation does. We’ve apparently
decided generational wealth is a good thing and oligarchies should run
the country.

But this isn't true. There is no "we." This isn't explained by taxation. How would that work? The left is angry about measured inequality but they can't point to the mechanism that leads to all the poor people being held down. Especially when we know that educational attainment is growing in America and education does lead to higher income.

I'm suggesting that there is no explanation because there is nothing to be explained. the phenomenon that the rich "have gotten almost all of the gains" is a statistical artifact.

There have been changes in the distribution of income, the amount of inequality, and the returns to education since 1973. This chart distorts what really happened.

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[1] Freakonomics: http://freakonomics.blogs.nytimes.com/2009/06/12/economic-growth-across-the-income-distribution/#more-13103

[2] Planet Money: http://twitter.com/planetmoney

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