1/18/12

Krugman on increasing inequality

Paul Krugman posted on increasing economic inequality borrowing  a graph from Lane Kenworthy. The graph shows a rapid deviation between the median family income (as published by the Census Bureau) and real GDP per capita (supposedly reported by the BEA) since 1977/1978.

There are two problems with this graph and post. Firstly, one should not ignore the fact that the GDP deflator and CPI started to rapidly (20% per year) deviate since 1977/1978, i.e. exactly the time of the deviation between median family  income and real GDP per capita in the presented graph.  Lately, we have reported the descrepancy between the CPI and GDP deflator and the problem with real GDP calculations: http://mechonomic.blogspot.com/2011/10/real-real-gdp.html

Secondly, one should not also ignore that fact that the portion of people with income, i.e. those who counted in the statistics of personal and family income, jumped from ~0.82 to ~0.95 after the 1977 revision to the procedure of personal (and thus family) income surveys (CPS ASEC). We have described and assessed this fact in our paper on the evolution of average and median income  (http://ideas.repec.org/p/inq/inqwps/ecineq2005-11.html) . This step in the income time series severely disturbed all income statistics.

This is not to say that there is no reason for the deviation between median family income and GDP per capita, but there are at least two artificialities (breaks) in the corresponing time series. One should not interprete this deviation as a meaningful one before considering the influence of artificial breaks.It might happen that the deviation just manifests the change in measurements.  

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