1) Never Get Involved in a Land War in Asia. 2) Don't Rely on a Paper Where Lawrence Katz Says the Data Are Not Up to the Task
These are the first two rules of conducting your life in order to avoid an epic fail.
Lawrence Katz:
[Burkhauser's data] are not up to the task. And the results are likely to be greatly overstated and hinge on what seem to me to be rather implausible assumptions in which the authors impute the annual accrual of capital gains income from quite poor household data on asset classes combined with the assumption that everyone gets the average rate of return so that no one is lucky, no one is skilled in investing. If you eliminate the possibility of anyone doing really well in terms of their investments, you can make it look like the capital incomes of the top end did not do so well.
But does Thomas Edsall know these rules? No.
He starts out:
What if We're Looking at Inequality the Wrong Way?: Richard V. Burkhauser, a professor of public policy at Cornell and an adjunct scholar at the American Enterprise Institute, is fast becoming a champion of the right, challenging the conventional wisdom about income inequality. The last time Burkhauser appeared in this column, he had provided ammunition for conservatives to dispute liberal orthodoxy on the issue of growing inequality (along with co-authors Jeff Larrimore and Kosali Simon).
And then Edsall blathers on for three thousand six hundred opinions-of-shape-of-earth-differ before, in the very last sentence, writing: "Burkhauser’s use of 'yearly accrued capital gains' fails the test of measuring what is most significant to know in policy making and in assessing the true quality of life in America."
Why oh why can't we have a better press corps?
Jared Bernstein is The Sanitation Department:
When the Results Look Weird, Check the Methods…Carefully!: Some folks have asked me to weigh in on the seemingly implausible findings in this recent paper by Richard Burkhauser. Thomas Edsall usefully raised some objections in this NYT piece, but at least as I read his critique, he failed to make the critical point: though the research asks a legitimate question, the results make no sense. By finding that between 1989 and 2007, the real incomes of the wealthiest households have fallen—quite sharply by some of their measures—while those of the poorest households have gone up, their results fly in the face of the vast majority of inequality research based on a wide variety of data sources…. The main difference between ABL and CBO is how they treat capital gains. The CBO uses high quality tax data with the amount of realized capital gains reported by tax filers. ABL try to do assign annual changes in unrealized gains—the extent to which the value of assets fluctuates each year—to households that hold such assets…. The ABL approach demands more and better data than they had, as revealed by their peculiar results….
As EPIs State of Working America shows, this unequal pattern of growth shows up in wages from labor market surveys, earnings from Social Security records (high-quality administrative data), and net worth (assets-liabilities)—each of these is from a different data source…. Put all of those trends together, and add in the fact that the macroeconomic data on “factor shares”—the share of national income going to compensation (the source of most income for middle and low-income families) is now at a 50-year low and that going to profits at an all-time high—are pointing in the same direction, and it should be clear that something is wrong with ABL’s methods.
Where they seem to have jumped the analytic shark is in imputing the appreciation or losses of unrealized capital, business, and housing wealth to households. Here they make two errors that significantly distort the findings (h/t’s to Gary Burtless and Dean Baker, both cited in the Edsall piece)… their results are highly sensitive to the years they choose to compare… they assigned the same percentage returns in stock and home value appreciation to everyone who owns stocks or a home…. Once you see these results—and in one appendix table, real income falls for every income group, 1989-2007 (so…um…where did the economy’s growth go?)—your best move is to say, “we have proved that given data constraints, we are unable to reliably impute income including yearly changes in asset valuations.” That’s actually a helpful finding. To plough ahead without that introspection, and to claim your findings reveal “dramatic” reductions in inequality suggests either methodological carelessness or an ideological thumb on the scale.
