Tuesday, November 15, 2011

Is U.S. inequality special?

In this post, Greg Mankiw argues that the U.S. is not the only country to see an increase in inequality over the past 40 years. Referring to a plot of the top income shares in the U.K., Mankiw notes:
“The figure suggests that the explanation of growing inequality over the past several decades cannot be U.S.-specific but must have broader applicability... You find a similar U-shaped pattern in Australia, Canada, Ireland, and New Zealand but much less so in France, Germany, Japan, and Sweden.”
Mankiw uses the impressive “Top Incomes Database,” compiled by (among others) Thomas Piketty and Emmanuel Saez. It is a fantastic resource; it enables you to plot data on income shares and inequality for a wide-range of countries over more than one-hundred years. Perusing the data, one finds that, in fact, many countries have seen an increase in inequality. But Mankiw seems to be implying that, since this is a global phenomenon, that shifts in U.S. policy aren’t driving the increase in inequality.

Using the database, I generated the following graphs: (1) comparing the U.S. with other rich English-speaking countries; and (2) comparing the U.S. with rich, but non-English speaking countries. I chose the countries Mankiw cites as examples in his post. The data covers the period between 1950 and 2007:*

As Mankiw notes, the changes in the top share of incomes for other rich English-speaking countries largely track those of the U.S. It is worth noting the discontinuous jump in the U.S. series in the mid-1980s, coinciding with the reform of the tax system during the Reagan administration.

In contrast, the rich non-English-speaking countries do not see much of a change in their top income shares. For example, the share of the top 1% in France was 8.98% in 1950 and 8.94% in 2007. The corresponding numbers for the U.S. are 11.60% and 18.29%. It takes a lot of motivated reasoning to detect an upward trend in the non-English-speaking countries.

To explain the difference between the two groups, Mankiw offers the following idea:
“Might the rising share of the top 1 percent be related to the increasing use of English as a global language?”
I’m not exactly sure what this means or what the causal mechanism here would be. I would suggest a simpler explanation: English-speaking countries have tended to follow an economic model (often referred to as the “Anglo-Saxon Model”) that is more market-driven and relies on a smaller welfare state than the rest of Europe. Thus one should expect those countries to have higher levels of market-income inequality. Further, like the U.S., these countries have reformed their tax systems and de-regulated much of their economy, leading to even greater inequality. So while it’s true that increased inequality is not solely a U.S. phenomenon, it does not follow that policy changes aren’t an important part of the explanation. In fact, countries that have followed similar policies to the U.S. have seen increases in inequality, while those that haven’t, well, haven’t.

*I chose the years based on data-availability. I encourage people to play around with the database if they are curious about other countries, years or variables.

It is also worth mentioning that the data presented here is pre-tax gross income. Given that other countries have more progressive tax/transfer systems than the U.S., this is likely an underestimate of the difference in inequality between the U.S. and the rest of the rich world.

No comments: