Eric Zwick, Associate Professor of Finance and Fama Faculty Fellow, Booth School of Business, testified to the Joint Economic Committee Hearing on Wednesday, October 16, 2019, “Measuring Economic Inequality in the US.” Zwick presented his research on, and lessons from, measuring economic inequality in America.

Read the executive summary below and download the full testimony text and testimony slides here.

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Prepared Testimony for Joint Economic Committee Hearing Hearing on “Measuring Economic Inequality in the United States”

Eric Zwick, Associate Professor of Finance, Booth School of Business, University of Chicago

EXECUTIVE SUMMARY

Vice Chair Maloney, thanks to you, Chairman Lee, and members of the Joint Economic Committee for the opportunity to appear today to discuss my research and lessons for measuring economic inequality.

My name is Eric Zwick. I am currently Associate Professor of Finance in the Booth School of Business at the University of Chicago. In my research, in addition to working with academics at other universities, I have collaborated with staff economists across the government, including in the Treasury’s Office of Tax Analysis (OTA), the Internal Revenue Service (IRS) Research and Statistics Division, the Federal Reserve, and the Congressional Budget Office (CBO). However, the views I express today are my own.

I will make three points today that I first summarize here:

  1. Inequality is high and has risen. There is a significant and well supported scientific consensus that inequality in America is high and has risen. However, the academic community is still debating the size of this increase and learning about the composition of high end inequality. Specifically, top inequality is more human-capital intensive than previously thought. In other words, relative to what we previously thought, households at the top of the income distribution derive more of their income from their work and entrepreneurship and less from investment income like dividends and interest.
  2. Measuring broad inequality requires assumptions based on evolving data collection and methods, therefore conclusions from the research frontier are somewhat uncertain. The state of the art on implementing distributional national accounts, which would provide statistics like GDP but broken out by different income groups, remains a work in progress. The conclusions we can draw from various attempts at distributional accounts are therefore somewhat uncertain. The core issue is that distributional national accounts methods require many assumptions, and the ultimate conclusions are sensitive to which assumptions we make. When data are missing on who gets what type of income, researchers make certain assumptions to fill in the gaps. These assumptions are in many cases well justified and defended. But they necessarily rely on incomplete data and convenient simplifications. As a result, alternative assumptions 1 Economic Measurement and the Distributional Accounts Zwick can be equally and in some cases better justified, with significant quantitative implications for measuring income inequality, wealth inequality, and progressivity of tax burdens. It is also important to recall that what we observe in tax data is influenced by reporting responses to changing tax rules over time.
  3. I recommend several clear next steps for collecting new data to help implement distributional national accounts and improve inequality measures. The academic literature remains somewhat divided on the technical specifics of distributional accounts. These divisions largely reflect an evolving state of current knowledge that is changing as new data becomes available. This is not unusual in academic research and I strongly believe that we will reconcile these differences and continue to build toward a consensus method over time. My recommendations for a path forward are predicated on this belief. These recommendations include having the experts at the Bureau of Economic Analysis (BEA) take on this exercise, as well as several concrete suggestions for new information that can improve distributional national accounts while also aiding tax enforcement.

At the outset, let me also say that I greatly admire Professor Zucman’s work despite our occasional friendly disagreements over accounting methods. I also have tremendous respect for the work of his colleagues Thomas Piketty and Emmanuel Saez, who have been asking essential and fascinating questions about economic growth and inequality and who have pioneered methods to answer these questions. My work would not have been possible without theirs.

Furthermore, I want to be clear that my reading of the evidence is not that inequality in America is low or that it has not increased at all. Rather my reading is that the increase has been more modest and the nature of that increase—what factors contribute, who benefits—skews away from the passive capital highlighted in Piketty (2014)1 and toward human capital, labor, and entrepreneurial activity.

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