On That IMF Report on Inequality, Does It Distort the Situation?

Diana Furchtgott-Roth, a former chief economist at the U.S. Department of Labor, writes:

For President Barack Obama, income inequality is not only a pressing problem, it is "the defining challenge of our time." But the extent of inequality differs with the measure used. An International Monetary Fund report published in February 2014 measures inequality using "market income"-defined as income before taxes on upper-income individuals are removed and transfers to lower-income individuals added back.

This makes little sense. This pre-tax, pre-transfer measure of inequality fails to properly measure well-being, according to University of Chicago professor Bruce Meyer, one of the volume's contributors. Upper-income individuals cannot spend the money that is taken away in taxes, so it gives them no benefit (other than, perhaps, higher social status). On the other hand, lower-income individuals clearly benefit from more spending power with, among others, the Supplemental Nutrition Assistance Program, Medicaid, housing vouchers, and unemployment insurance. As such, it would be inaccurate not to include the latter in measures of their well-being...

Demographics also affect inequality. Increasing life expectancy, greater likelihood of divorce, and the rising percentage of births to single mothers all affect the distribution of inequality. Every time two earners marry or divorce, the distribution of inequality is affected. No less important in measuring inequality is the respective life-cycle stages of different individuals. A graduating student has no income and probably some debt, but a reasonable prospect of landing a job. If she marries another similarly-placed student, they might before long transform into a two-income family located in the middle or upper income quintiles.

This is the natural life-cycle progression, and the student's income should not be a social policy problem. Conversely, when the students retire after 50 years in successful careers, they might have assets but little income and return back, again, to the bottom quintile. This, likewise, is not a social policy problem in need of correction.