Socialist Security #1

Andrew Kliman Andrew_Kliman at
Fri Jul 24 10:35:53 PDT 1998

Max Sawicky wrote:

"The Census data counts wealthy people but "top-codes" high income persons. This means it does not report their actual income, but a fixed floor amount (I forget what it is). ... assorted techniques are available to researchers to impute their incomes for purposes of analysis. ... there is no real political issue here about biases in the reporting of the distribution of income or wealth."

Yes, but Doug had it right. Top-coding imparts a downward bias to measures of inequality. Moreover, if income *gains* accrue disproportionately to those richer than the "floor," which is exactly what happened in the 1980s and presumably much of the 1990s, then top-coding imparts a downward bias to measures of *change* in inequality. For instance, imagine that in a certain year the floor is X and some people have incomes of X+1. Then, next year, incomes are unchanged throughout the income distribution, except that this group's incomes increase to 2X. Inequality has increased, but the increase will not be registered.

It is good to know that there are standard techniques for imputing incomes to those above the floor, but they're not always used, so there *is* a political issue here -- the usual problem of lying with statistics by using them selectively.

Fairly early on in the inequality debate, maybe 1990 or so, Joseph Pechman had an article, perhaps in the Am. Econ. Review, in which he used a different data set from everyone else (IRS instead of Census data, I think), a data set without the top-coding, and found that the Gini coefficients or whatever had increased a good deal more than previous studies indicated. This helped solve a puzzle at that time: people knew that inequality was increasing substantially, but the rise wasn't showing up in the data.

But ... there is an even more important issue, I think, which is that unrealized capital gains are not counted as income. In the present bubble economy, and really since the bull market began about 15 years ago, that matters a good deal. Aside from measurement problems, there's really no justification for this. It is sometimes said that the income exists only "on paper," but (wake up, people) that's also the main form in which wealth exists nowadays. Besides which, the whole concept of "income" is pretty flaky. If the bourgeoisie were to provide company housing, feed us in company canteens, and provide transportation to and from work, all of that would be business expenditures, not income. Because they find it cheaper and more convenient to make us fend for ourselves, these business expenditures are considered income. (Gee, we own homes and cars and have sophisticated kitchen appliances, look how rich we are -- not.) Viewed on a *functional* basis, only wages and benefits in excess of the minimum we need in order to go back to work for them are income. Then, the statistics would indicate some significant changes. For instance, a drop in measured wage income from $30,000 to $27,000 is counted as a fall in income of 10%. But if $24,000 is the minimum needed in order to go back to work, then income is really declining from $30,000 - $24,000 = $6,000 to $27,000 - $24,000 = $3,000 -- a fall of one-half (50%).

Andrew ("Drewk") Kliman Home: Dept. of Social Sciences 60 W. 76th St., #4E Pace University New York, NY 10023 Pleasantville, NY 10570 (914) 773-3951 Andrew_Kliman at

"... the *practice* of philosophy is itself *theoretical.* It is the *critique* that measures the individual existence by the essence, the particular reality by the Idea." -- K.M.

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