With Income, Mobility Is the Issue—Not Inequality

Judging by surveys by the Pew Charitable Trust and others, it is further down on the list of things most people care about.

Yet President Obama calls it “the defining challenge of our time.” Senator Harry Reid says there is “no greater challenge” facing the country. Not to be outdone, Massachusetts Senator Elizabeth Warren goes further, saying “the system is rigged.”

Attention is further focused on this with the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century, a book so popular with the bien pensant that if it wasn’t so full of dry data it would have been turned into a Hollywood screenplay by now. Piketty’s work in collaboration with University of California-Berkley economist Emmanuel Saez represents an impressive collection of data that analyzes income distribution over long periods of time.

The share of income received by the top 1 percent, according to Piketty and Saez, has grown from $1 out of every $10 in 1979 to one $1 of $5. Some say middle-class wages and household incomes have stagnated. Poverty has risen; economic mobility has fallen.

Is this true? And even if it is, does it accurately reflect the challenges America truly faces? In the first place, studies that measure income inequality by largely focusing on pretax incomes while ignoring the transfer payments and spending from unemployment insurance, food stamps, Medicaid and other safety net programs are conceptually flawed. By ignoring benefits such as employer-provided health insurance and showing capital gains as giant lump sums of income, such studies exaggerate income concentration.

“Politicians who rest their demands for more redistribution on studies of income inequality but leave out the existing safety net are putting their thumb on the scale,” observes AEI resident scholars Keven Hassett and Aparna Mathur.