The period from 1870 to 1910, which includes the Age of Prosperity, is shown everywhere as one of rapid economic growth. This growth is often seen as rapidly and unevenly distributed with the poorest 90% enjoying very few improvements.
This popular view is probably wrong because of the way we use existing inequality data. In fact, the inequality between the top 10% and the bottom 90% of the income distribution in America has almost decreased.
Let’s look at that data. Currently, there are no actual measurements from 1871 to 1909. One in 1870 and another in 1910.
An estimate of 1870 appears work by Peter Lindert and Jeffrey Williamson. They use what is known as a “social table.” This estimation method estimates the distribution of income by assigning average income to different social or occupational groups based on historical records, such as census data. It simultaneously provides a country’s total income and income inequality. That measure is undeniable, and if anything, it is possible say down inequality due to poverty census problems.
The 1910 estimate is taken from Thomas Piketty’s famous work Capital at 21St A century, and is not directly based on income data. Instead, he used tax records from 1917 to estimate the top 10% and data from 1913 for the top 1%, then extrapolated these figures back to 1910.
The problem is that the estimates Piketty (and his co-author Emmanuel Saez) created for 1913 and 1917 are now known to overestimate inequality. In the article on Journal of Economics with Phil Magness, John Moore and Phillip Schlosser and a companion article by Phil Magness in Economic Inquiry, we have corrected these errors. In fact, we have shown that their entire series from 1917 to 1962 was flawed because of the way they handled the lost files, how the income was converted into adjusted income, and how they forgot that the state and local governments (5% of workers income above average of national income) was not required to pay federal taxes until 1938.
We also found that Piketty and other authors miscalculate income. They wrongly define gross income as 80% of personal income (as reported by national accounts) minus transfers. They justified this by saying that “the ratio between gross income reported on tax returns and personal income minus transfers to national accounts has been stable since the late 1940s (around 75-80%).” However, according to their data, the actual rate was 82.7%. Although this difference may seem small, it largely reduces the income shares of the wealthy. Using unconstrained methods, we found the largest and, therefore, the smallest shares of income for the richest groups.
Overall, we found that the income share of the top 10% was 5 percentage points lower than Piketty’s 1917 figure. If one uses the same regression method as Piketty does in his book, he also gets a lower share of the total income. for the richest 10% of Americans. When this is combined with Lindert and Williamson’s estimates of 1870, we see a significant decrease in inequality as can be seen in the figure below.
This is rich in results. Consider that economic growth, depending on the data series used, shows that Americans enjoyed an increase in income of between 1.9% and 2.0% per year between 1870 and 1910. At that time in history, such rapid growth had never been seen. And when there was almost a similar growth, the increase in inequality was clearly visible.
Finding that the bottom 90% received a larger share of the pie means that the bottom 90% likely saw improvements that were larger than the average gains. Based on the numbers I found, this means that the income of the poorest has increased between 2.0 and 2.2% every year.
This difference shows that a period often seen as one of rising spending and inequality was, in fact, not only the fastest and most progressive growth ever seen at that time but also the first time in history that the poor saw their incomes grow faster than average. , they experienced a significant improvement in their standard of living.
Some contemporary writers of the 19thth Hundred noted that there are distinct benefits at lower income levels. We seem to have ignored them, in part, because we relied on data that misled us, obscuring the real progress made by those at the lower end of the income distribution that people of the past saw with their own eyes.
Vincent Geloso is an Assistant Professor of Economics at George Mason University.
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