by Donna Martinez
Former Senior Writer and Editor, John Locke Foundation
Lots and lots has been written and debated about “income inequality.” Our friends on the Left believe government should intervene via mandates on employers and higher tax rates on high earners in order to make things more “fair.” Free-market conservatives, on the other hand, want to bolster an opportunity society where every person has access to choices and tools to follow their chosen path — in other words, to flourish and be happy and productive. But before we discuss the best path forward, we should acknowledge the difficulty in measuring one’s income, particularly when a person is receiving benefits from the social safety net. For if we don’t measure correctly, we don’t really know what the “inequality” really is. This piece from the American Enterprise Institute lays out the basic challenge.
A growing literature in economics has identified problems with measuring income accurately and completely in various datasets. If income is under-reported, particularly for low-income workers, then we may overstate the rise in inequality.
Moreover, income does not fully capture a household’s standard of living. Among other issues, at very young or very old ages, individuals may borrow or rely on lifetime savings to maintain their standard of living. Income may not perfectly capture how well off people are at different points in the life cycle.
Let’s begin with the measurement issues. Research in economics has shown that when households are surveyed, individuals don’t always accurately report benefits and transfer payments such as Medicare, Medicaid and Food Stamps.
However, such programs have grown in importance over the last several decades precisely to supplement incomes at the bottom of the distribution. Economists Bruce Meyer and James Sullivan show that when comparing data from the Current Population Survey to administrative data aggregates (the most accurate data), the ratio of reported benefits to actual benefits is 0.6 for Food Stamps and 0.5 for TANF.
In other words, receipts reported on household surveys are more than 40- to 50-percent lower than those in administrative data. Hence, measurement issues explain much of why trends in income inequality vary widely across different studies.
Measurement — it’s a key point and the basis for reasoned discussion about how best to empower people toward their chosen path.