Income Inequality and Information Filters

Paul Krugman muses on calling a spade a spade:

A Few Notes on Income Inequality - Krugman - NYT Web Journal: growing international trade plays some role in growing inequality, but it is, literally, a fraction of a fraction of the story. That's cold comfort for the factory worker whose plant has just been closed because it couldn't compete with imports from China, or the software engineer whose job has just been outsourced to India-- and unless we can do something to provide more economic security, protectionist forces will become unstoppable. But I still believe that we can increase economic security and reduce inequality without shutting down international trade.

One of the truly strange features about discussions of inequality is the way people shy away from talking about the extent to which the gains from rising inequality have gone to a tiny, wealthy elite.

Here's a mild example. A few days ago Steve Pearlstein of the Washington Post -- a good guy, and sensible -- wrote about income inequality. As I did in my column just a few days earlier, "Feeling No Pain," he emphasized the "retrospective income" distribution data released by the I.R.S. (Paper at http://www.irs.gov/pub/irs-soi/04asastr.pdf. Tables at http://www.irs.gov/pub/irs-soi/04asastr.xls.)

As he pointed out, those data show that the share of income received by the top 10 percent of taxpayers rose from 33 percent in 1979 to 44 percent in 2003. And for his pains, he was smeared by someone at the Cato Institute who needs help -- technical help. Hint to Alan Reynolds: check which table you're looking at before claiming that Congressional Budget Office data refute a statement you don't like.

But Pearlstein stops there, leaving the impression that everyone in the top 10 percent was a big winner. In fact, there was hardly any rise in the share of income going to people between the 90th and 95th percentiles: almost all the gain went to the top 5 percent. And most of the gain went to a very small elite. The income share of the top 1 percent went from 9.6 to 17.5 percent, accounting for more than 70 percent of the top decile's gain. The income share of the top 0.25 percent went from 4.9 to 10.5, accounting for a bit more than half the total gain.

Why stop with data that convey the false impression that the winners from inequality are a fairly large group? Does talking about the reality that a very small elite has gotten the lion's share of the gains sound too, um, shrill?