Chamber’s Donohue Takes Unfair Heat for Inequality Skepticism

Thomas J. Donohue, CEO of the U.S. Chamber of Commerce, came under fire in this morning’s Washington Post for sounding like a skeptic on the issue of income inequality.

While the Post may find such skepticism newsworthy, so too should the inequality data recently released by the Congressional Budget Office which clearly suggests that Donohue has a case. No matter if we measure inequality on a pre-tax basis or post-tax basis, it appears that inequality today is less than it was during the last two years of the Clinton administration and only slightly greater than the average level over the past thirty years.

The chart below shows the level of inequality in America from 1979 to 2010 as measured by the Gini Index. This index measures the relative distribution of income between groups of households on a scale of 0 to 1. A measurement of zero means that income is distributed perfectly equally across all households, while a measurement of 1 would indicate that income is concentrated entirely at the top.

As we can see, while inequality has gone through peaks and valleys over the past three decades, it has tended to stay within a fairly narrow range—between 0.400 and 0.500—and has largely tracked the business cycle. In 2010, the Gini Index for pre-tax income stood at 0.474, just 5 percent above the thirty year average of 0.451. The pattern for post-tax income is the same. This is hardly the sign of a radical shift in inequality.

The peaks have typically been during times when the economy was booming or in a bubble (such as in 1986, 2000, 2007), while the valleys have come during weak economic times (such as 1979-1982, 1991, 2001-2002, and 2008-2009).

Cynically speaking, those who think inequality is a bad thing should like recessions because they reduce income inequality and hate boom times because they make us less equal. In reality, the underlying data shows that the wellbeing of all Americans improves with economic growth and sinks for everyone during the bad times.

Objectively, the data supports Donohue’s basic message that policy should be less concerned about the narrow goal of closing inequality and more focused on broader goal of promoting economic growth as a means of lifting the poor up from poverty.

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