Arnold Kling

DeLong Muffs It

Arnold Kling, Great Questions of Economics
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Brad DeLong, who usually is more careful than I am, muffs it in his analysis of the data on income distribution.

between 1970 and 1995 we got much slower growth in average incomes than in any other quarter-century, and a huge increase in inequality--so that in a quarter century the middle fifth got the kinds of income gains that we used to expect in a decade. That's not a well-performing economy.

He is treating the incomes in 1995 and in 1970 as if they were earned by the same people. But the data represent the income distributions of two different groups of people.

Suppose instead that you track a given group of people from 1970 to 1995. What you will find is that regardless of which quintile people belonged to in 1970, the majority wind up in the top 40 percent of the income distribution by 1995!

Our economy is a powerful escalator, pulling people up. By 1995, the bottom of the escalator is dominated by new immigrants and young families. If economic growth continues, they will climb the escalator to affluence. I suspect that part of the reason that the period of 1970 to 1995 does not look good from the standpoint of average incomes is that we introduced an unusually large percentage of immigrants to the bottom of the escalator. Bully for us!

Discussion Question. While the majority of the population rode the escalator, some individuals went up in rockets (Michael Dell, Andrew Grove, as well as many others less deserving). Have the rockets gotten out of hand?

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