Rethinking Inequality Measurement: A Critique of Tax-Based Data and the Case for Global Macroeconomics

This podcast episode features James Galbraith, who critically analyzes prevailing methods of measuring economic inequality, particularly those employed by Thomas Piketty and the World Inequality Lab. Galbraith argues that their reliance on income tax records presents significant methodological flaws, including limited country coverage, variable data quality, and potential misinterpretations of historical and contemporary trends. He highlights that many countries lack comprehensive income tax filing, forcing researchers to make 'heroic measures' that compromise data reliability. Furthermore, he points out specific instances where Piketty's findings, such as France being more unequal in 1964 than today or the collapse of income share for the bottom 50% of US households, are likely inaccurate due to data misinterpretation or incomplete context.

Galbraith contrasts tax-based measures with other data sources, acknowledging that household surveys, while also having their own idiosyncrasies and definitional variations (e.g., income vs. expenditure, gross vs. net tax), often provide more extensive information. He champions the use of payroll records as a superior alternative, describing them as a 'single consistent measure' available with 'greater density' and being both 'easy and inexpensive to calculate.' He demonstrates how payroll data often aligns more closely with survey estimates than with tax-based measures, suggesting the latter are 'idiosyncratic' and require significant caution. He also addresses the complexity of defining and consistently measuring wealth, noting it's not a 'well-defined economic concept' due to varying inclusions like housing, retirement security, or financial assets.

The discussion extends to observed global patterns of inequality, noting an upsurge after 1980 linked to events like the Latin American debt crisis, the collapse of the Soviet Union, and the Asian crisis. However, Galbraith points out a subsequent stabilization or even decline in inequality levels for about a decade after 2000, attributing this to factors like progressive governments in Latin America and economic recovery in countries like China and Russia. He specifically corrects the narrative of US exceptionalism in inequality, explaining that a 1986 tax reform increased reporting requirements for the top 1% without necessarily reflecting an actual increase in their share, making the US comparable to other Anglo-Saxon countries when corrected.

Ultimately, Galbraith advocates for a fundamental shift in how the economics profession approaches inequality research. He argues that inequality is not merely a microeconomic phenomenon but a 'macro question' deeply intertwined with the functioning of the global economy. He stresses the need for a 'global macroeconomics' perspective that focuses on how global policies, particularly financial regimes (such as Bretton Woods, floating exchange rates, and the current dollar-based system), shape the distribution of income and wealth. He concludes that understanding 'who gets what' requires analyzing these large-scale, debt-driven global economic forces, just as economists analyze inflation, unemployment, and growth rates.

the bottom 50% of us households have experienced a collapse in their income share simply is not true

the coverage is not as extensive as one would hope for uh and the reason for that is that not all that many countries actually have income tax records

the estimates that you get from payroll records are generally speaking closer to the broad range of survey estimates than they are to u to pick these measures and it tends to suggest that the tax measures are quite idiosyncratic and should be treated with a great deal of caution

the advantage of our approach which use payroll data is that it's a single consistent measure and it's available in considerably greater density

while inequality levels were much higher in 2000 than they were in 1980 they did tend to come down a bit for another decade or so

the world inequality lab uh has made Fairly serious misinterpretations

wealth is not uh a well-defined economic concept

economics needs to function at the global level it needs to focus on how Global policies are set and the most important policies are Financial policies

the debt driven character of global growth is the same thing as the rise and E of inequality

inequality is as much a macro question as inflation Unemployment uh the growth rate