The U-Curve Decline Was Less Than Many Economists Think

By David Henderson.

"Piketty and Saez (2003) found a pronounced U-curve pattern of American income inequality since 1917, displaying a precipitous decline during World War II to a level that would hold until 1980. We offer revisions to their income inequality estimates prior to 1960 with three important findings. First, Piketty and Saez overstate inequality levels in this period. Second, the decline during WWII was smaller than depicted. Third, the Great Depression, rather than WWII, played the more significant role. These findings indicate a need to reevaluate commonly held assumptions about the evolution of inequality during the period of the ‘Great Leveling,’ as well as the nature of its posited relationship to tax policy.

This is from Vincent J. Geloso, Phillip Magness, John Moore, and Philip Schlosser, “How Pronounced in the U-curve? Revisiting income inequality in the United States, 1917-1960,” The Economic Journal, March 8, 2022.

The Economic Journal is a prestigious British journal that also charges you a lot to buy the paper. So instead, you can read an earlier version that was published on SSRN. It’s here.

Here’s an excerpt from that earlier version:

The purpose of this paper, we must emphasize, is not to assert that the United States was an exception to century-long international patterns in inequality. Neither do we question the idea that top income shares fell then rose over the 20th century. We accept the general occurrence of the “great levelling,” subject to further investigation of its shape and magnitude. We show instead that the left-side of the PS [Piketty/Saez] U-curve likely overstates the original height and ensuing decline of top income shares, with implications for distributional pattern[s] over time and for other derivative works that rely upon the PS series. Our adjustments do not change the fact that inequality fell between 1929 and 1945. What they do is attenuate this decline so that, when combined with other proposed corrections to the right-side of the U-curve, we see a much shallower “tea saucer” of inequality in the United States over the the course of the twentieth century. We confirm an inequality peak in 1928-1929, which is actually much more acute to those years than in PS. However, the “great levelling” (an expression we borrow from Lindert and Williamson [2016]) becomes a comparatively gradual story where the Great Depression is a more readily visible factor. This draws into question numerous inferential claims that wartime income tax policy and its subsequent entrenchment as a permanent feature of the mid-century tax system played a major role in the observed levelling.

Past editors of The Economic Journal included Francis Y. Edgeworth (from 1891 to 1911) and John Maynard Keynes (from 1912 to 1944.)"