NCPA - National Center for Policy Analysis


December 26, 2006

The growth and distribution of income is a topic that generates strong opinions based on weak facts. But if the facts are wrong (and they usually are), then the opinions are, too, says Alan Reynolds, a senior fellow at the Cato Institute.

Take the "Family Income Stability" index, for example.  The statistic has been touted by left leaning political scientists as showing a downward instability trend in U.S. wages from 1974-2002.  In reality, the index only measures temporary income change of any sort.  If, for example, incomes never budged, that would get a perfect score.

In fact, the index has been shown to be a horrible predictor of economic wellbeing:

  • In 1974-1975 inflation was 9-10 percent, and the unemployment rate averaged around 8 percent, yet those were the very best years surveyed, according to the index, with a record low index of instability of 0.16 and 0.19, respectively.
  • The index ranks 1979-81 nearly as favorably, despite the fact that the nonenergy inflation rose by 10 percent to 12 percent every year, and unemployment rose every year from 7.1 percent in 1980 to 9.7 percent in 1982.
  • Things supposedly turned worse as soon as the economy and stock market turned up, with the index rising above 0.30 from 1983 to 1988.
  • The 1990s were especially bumpy -- jumping to 0.74 in 1993 and remaining at 0.57 in 1996, before falling back to 0.32 during the 1998-2000 stock boom.

Overall, says Reynolds, there's nothing to conclude from a set of made-up statistics that supposedly make the economy of 1996 appear 3 times worse than 1974, except that political scientists should not tinker with economics.

Source: Alan Reynolds, "Nostalgic for 1974?," Cato Institute, December 19, 2006.

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