Cato’s Review of Inequality Literature

Chris Edwards and Ryan Bourne of the Cato Institute released a lengthy, thoroughgoing review of the empirical literature regarding wealth inequality this week. The whole article is worth reading, if you’ve got an hour or more to kill. If not, I’ve (helpfully, I hope) filtered out what I think are the most important findings, reproduced below by section.

“Wealth Inequality Has Increased Modestly”

[W]idely cited data by PSZ [Piketty, Saez, and Zucman] show that the top 1 percent’s share of U.S. income increased from 10 percent to 15.6 percent between 1960 and 2015. That estimate is after taxes and government benefits.

However, a 2018 study by economists Gerald Auten and David Splinter found very different results…. As with PSZ, they started with tax return data, but they produced more precise estimates. They found that the top 1 percent income share increased only slightly, from 7.9 percent in 1960 to 8.5 percent in 2015….

2019 estimates by the Federal Reserve and SZZ [Matthew Smith, Owen Zidar, and Eric Zwick] show lower figures for the top 1 percent share and a slower rise than the PSZ data. U.S. wealth inequality has risen, but given the huge changes in technology and globalization that have transformed our economy, some changes over the decades are not surprising….

A growing share of families—currently 22 percent—owe education-related debt. That debt is now the largest part of household debt aside from mortgages, and it substantially reduces net wealth for affected families in the SCF [Survey of Consumer Finances] data. However, the education investment funded by debt helps people build human capital, which is an asset. But the SCF does not include human capital, so it understates the true wealth of young people who invest in education….

Some wealth estimates, including the SCF, exclude defined benefit pension plans, which are owned broadly by the middle class. If defined benefit plans were included in the SCF data, it would reduce the top 1 percent share by 5 percentage points….

“Poverty Matters, Not Wealth Inequality”

Poverty and inequality are different things, but they are often conflated in political discussions. High poverty levels, which are clearly undesirable, are often caused by bad policies, such as a lack of open markets and equal treatment. Wealth inequality is different—it cannot be judged good or bad by itself because it may reflect either a growing economy that is lifting all boats or a shrinking economy caused by corruption….

One can see why wealth inequality is a useless measure by examining Gini coefficients across countries. The coefficients are calculated from distributions of income or wealth in populations and indicate the level of inequality in a single number from 0 to 100, with higher numbers indicating higher inequality. Wealth inequality is estimated to be high in the United States with a Gini coefficient of 85. On the other hand, many poor countries have much lower Gini coefficients, such as Ethiopia (61), Mynamar (58), and Pakistan (65)….

A scatterplot of countries in [the UN’s Human Development Index] and their wealth Gini coefficients shows a modestly positive relationship between the two variables—countries with higher wealth inequality tend to have higher human development….

Many poorer countries are starting to catch up to the living standards in developed nations as they accumulate wealth. The Credit Suisse study found that lower-income countries accounted for 10 percent of global wealth in 2000 but 25 percent by 2018, with China and India leading the way.

“Most Top Wealth is Self-Made”

Robert Arnott and coauthors examined the Forbes lists and found that of the 400 individuals on the 1982 list, just 69 individuals or their descendants remained on the 2014 list. They found that the wealth of those 69 people had grown far more slowly than if they had simply invested passively in stocks and bonds in 1982 and let their holdings grow. They conclude that “dynastic wealth accumulation is simply a myth.”…

[William McBride] estimated the growth for those who dropped off [the Forbes 400 list] by assuming that the drop-offs had barely missed the wealth threshold for the 2014 list. With that assumption, he found that the average annual real wealth growth rate over 26 years for the people on the 1987 list was at most a meager 2.4 percent. (By contrast, the average annual real return on U.S. stocks over the decades has been about 7 percent.)…

Steven Kaplan and Joshua Rauh found that the share of the Forbes 400 who are self-made rose from 40 percent in 1982 to 69 percent by 2011….

Wealth-X has created a database of the world’s richest people. On its list of 2,604 billionaires, 56 percent are self-made, 31 percent are partly self-made, and 13 percent have purely inherited wealth. On its broader list of people with more than $30 million in net wealth, 68 percent are self-made, 24 percent are partly self-made, and just 8 percent inherited all of their wealth….

William Nordhaus… [estimated] a model of U.S. business profits and productivity growth over a five-decade period. He concluded that “only a miniscule [sic] fraction of the social returns from technological advances over the 1948–2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.” He found that businesses received only about 2 percent of the surplus benefits from their innovations, with the rest accruing to consumers….

“Cronyism Increase Wealth Inequality”

The word “cronyism” is similar in meaning to crony capitalism, corruption, corporate welfare, and rent-seeking. It usually entails businesses gaining benefits at the expense of consumers or taxpayers….

Federal sugar regulations and trade barriers increase sugar costs for U.S. consumers by up to $4 billion a year. U.S. sugar producers gain wealth because the sugar protections give them monopoly power….

State occupational licensing reduces job opportunities while raising consumer prices. Licensure boards are often dominated by existing providers who seek to exclude new entrants—classic cronyism…. These rules raise incomes in protected professions but increase costs to U.S. households by about $1,000 annually on average…

Today, the federal government funds about 2,300 different subsidy programs, more than twice as many as in the 1980s. The number of pages of accumulated federal regulations has increased from 55,000 in 1970 to 127,000 in 1990, to 165,000 in 2010, and to 185,000 today. The growing volume of programs and regulations provide many ways that lobbyists can twist the rules and gain unfair advantage over consumers and other businesses….

Economists Sutirtha Bagchi and Jan Švejnar investigated the cross-country relationship between corruption and the type of wealth held by billionaires. Using the Forbes list, they separated the billionaires who made their wealth from political connections from those who did not. Let’s call those bad and good billionaires, respectively. Across countries other than the United States, 17 percent of billionaires were bad and 83 percent were good. In the United States, just 1 percent were bad and 99 percent were good. Thus, American billionaires overwhelmingly earned their wealth in productive and noncorrupt ways, according to this metric.

Bagchi and Švejnar found that countries with high shares of bad billionaires rank poorly on indexes of corruption…

“Inequality Does Not Erode Democracy”

Political scientist Martin Gilens notes that “the affluent are no more (or less) likely to be of one mind on the proposed policy changes in my dataset than are Americans within low and middle incomes.” Pew Research found that individuals with family incomes above $150,000 are equally likely to identify as Republican or Democrat (33 percent to 32 percent)….

Over the 22-year period examined by the authors [Branham, Soroka, and Wlezien],… the rich got their way 11 more times than the middle class, equivalent to just one bill every two years. This indicates that the rich’s views may be favored in federal policy outcomes, but the size of the effect is small….

When a U.S. political party has a strong majority and political gridlock is low, policy outcomes are only weakly related even to the rich’s preferences and unrelated to the least well-off. Parties instead deliver on their activists’ preferences. Unsurprisingly, it is when elections are close or control of government uncertain that politicians appear to respond more closely to the public’s preferences….

[E]conomists Stephen Bronars and John Lott found no change in politicians’ recorded voting patterns in politicians’ final term. This supports the idea that donors donate to members they agree with, rather than donating in expectation of changing member votes….

Studies appear to show that even though money raised correlates with electoral outcomes, it is not the causal factor. Large amounts of campaign money do not buy elections, rather what usually happens is that highly electable candidates have an easier time raising money. Note that self-financed wealthy candidates tend to do relatively poorly at elections.

There is much, much more at the link, including more than 200 references.