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I spotted the graphic at the right in the Washington Post last week.
My first thought was that this was two dimensional data being shown in a one dimensional graphic. The differences shown are the product a very separate economic factors. Day care costs are very likely linked to local cost of living factors and state regulations. College costs one the other hand a more closely tied to how each state chooses to subsidize the education of their residents and how they charge for out of state students.
My second line of thought went down the path of why compare the two costs. They occur at different times in the life cycle of a family. The child care costs usually kick in early on, while college costs kick in 15 or so years later. By that time the family income should be somewhat higher due to things such as career advancement.
Part of the groups advocacy seems to be to make child care look at expensive as possible in their comparisons. The data in the graphic apparently came frim Appendix 6 of the report. The child care costs in the comparison are those for full time care infants in center. It is hard to imagine picking a more expensive choice. Meanwhile the college costs are for those as a public college. Those are of course on the low end of scale of costs for a college education. Following the link provided in the report the college numbers are for instate tuition and fees for four-year colleges. So they conveniently did not include the full cost of a college education. They left out the major cost or room and board – or the equivalent cost if the student lives off campus. This makes the child care cost seem large in comparison the the college costs.
It is worth pursuing some of the other tables in the report to see how they treat the data. In Appendix 4 they compare average costs of care for school age care in a center to the median income for a single mother. What does it mean to compare a mean to a median? Without knowledge of the distributions of the two variables it is hard to say. Is the mean cost anywhere near the median cost. How many single mothers are using a center for child care vs other less expensive options? And I though we had gotten past the single mother to a single parent concept sometime ago.
Likely the group feels they met the goal of showing that child care costs are high. But don’t we already know that? The real question are the costs “reasonable” given the service supplied?
When a solution to a problem is proposed it is usually good practice to ask the simple question “What will doing this action accomplish?” Sometimes the answer is “nothing.”
This past week an editorial appeared in the Washington Post by Charles Lane on the subject of income inequality. The auspicious title was “Fixing one driver of inequality may hit close to home for some progressives.” Charles Lane was the author.
In response to proposal to increase the minimum wage and increase taxes on the rich he turns his attention to what he labels “Exhibit A” in government policies that “skew” the income distribution upward. The culprit is the treatment of residential real estate in the tax code via deductions for both the interest payments on home loans and for property taxes. He seems to relish the fact the eliminating these tax benefits would hurt the most in the areas that support President Obama.
Charles Lane throws out some very big and impressive numbers on the cost to the treasury of these deductions. He uses numbers like $70.3 billion, $31.7 billion and $52.5 billion. They are impressive amounts with a total cost of $154.5 Billion. These are annual number. Lane’s point is that the bulk of these deductions help those in the top quintile of the income distribution. Thus eliminating, or curtailing them would reduce income inequality. On that point he is correct.
However when I ask the simple question does it make a material difference the answer is not much.
The Census Bureau regularly releases numbers on income and income inequality. The most recent data is for 2012 in the report “Income, Poverty, and Health Insurance Coverage in the United States: 2012.” Additional data can be found in the income section of the Census Bureau website.
This provides all the data need for a quick back of the envelope calculation. First note that Lane does not claim that the value of all of the deductions accrue to those in the top quintile of the income distribution. But let me make the assumption that they do. This will mean that be eliminating the entirety of these deductions I am overstating the impact the change will have on income inequality. The Census Bureau tables show that in 2012 there were 124,459 thousand households in the United States with a mean income of $71,274. Simple multiplication gives an estimate of aggregate income in the county of $8,871 billion. The Census Bureau report shows that 51.0 percent of this income is taken by the top quintile. That comes to an aggregate income for the top 20 percent of households of $4,524 billion dollars. The tax deductions cost the treasury $155 billion. The cost to the top quintile then is something less than that figure. That is it less than 3.3 percent of their income.
It seems obvious that anything that impacts only about three percent of the income of those in top 20 percent will do very little to reduce income inequality when that group is making over five times those in the second quintile, over three time that of those in the middle quintile and over twice that of in the fourth quintile.
The bottom line is that while there may be good reasons to doing away with the deductions, reducing income inequality is not one of them.
With President Obama visiting the Pope I thought I would go back to a report from about two weeks ago about income inequality in the District of Columbia. The D.C. Fiscal Policy Institute put forth a paper that put the District of Columbia income gap “one of the biggest in the U.S.”
The report started with the statement that the average income of the top 5% of households is the largest among large cities in the U.S. I really don’t care for comparisons that deal with just the raw numbers as the level of income in any local area is very much dependent on the cost of living in that area. The areas like the District of Columbia and San Francisco have higher costs of living numbers. Thus the average income for any group would be expected to be higher in those areas. To compare the various geographic areas adjustments for those differences are needed. That is why many economists rely on the measures like the Gini Index to measure income inequality.
In comparing the various metropolitan areas the D.C Fiscal Policy Institute used their own measure of the income gap. They choose the ratio of the average income of the top 5% to the average income of the bottom 20%. They certainly have the right to choose whatever measure they wish to use. But a multitude of differencing measures, to me at least, creates confusion. There already exists a similar measure to theirs. It is the Palma Index of income inequality. That measure is calculated as the average income of the top 10% to the average income of the bottom 40%. Why not stick with that measure? I suspect because the D.C. Fiscal Policy Institute makes the level of inequality appear worst.
Given that he Palma measure is already in place I don’t see the value of new and essentially similar measure. I do not know of a single measure the captures the true picture of the level of income inequality for comparative purposes. I did come across another interesting piece comparing the Palma Index to the Gini Index. That post was in response to comments about the author’s paper on the Palma Index. Both of the post and the paper are a year old. To my reading the post shows that both the Palma and the Gini have serious shortcomings.
Significant income inequality is real. Measuring it and how it changes is still a work in progress.