Income Inequality in America Is Not What It Seems

Alexis de Tocqueville opened Democracy in America by pronouncing, “among the new things that attracted my attention during my stay in the United States, none struck me more forcefully than the equality of conditions.” Today, Bernie Sanders says that the United States has “more income and wealth inequality than any other major country on earth.” “We are the most — one of the most unequal societies in the history of the world,” proclaimed Nikole Hannah-Jones of the New York Times in a lecture last week.

The views of Sanders and Hannah-Jones are sadly common among progressives, and they drive policy arguments. When Joe Biden came into office, Politico wrote that “President-elect Joe Biden will take office later this month with bold plans to fight growing economic inequality” and the Hill wrote that “a key priority of the Biden administration is to lessen the disparity in income between the wealthiest U.S. households and the rest of the populace.”

Phil Gramm is here to tell them to get their facts straight. Two decades after leaving the Senate, and still feisty a few months past his 80th birthday, Gramm has a new book out, The Myth of American Inequality: How Government Biases Policy Debate, co-authored with fellow veteran economists Robert Ekelund and John Early. I caught up with him to discuss the book, which “shows a very different and better America than the one that is currently portrayed in the official statistics of the nation and described by advocates across much of the political spectrum.”

Gramm is quick to emphasize that this is not, primarily, a policy book (although it does conclude with a few recommendations) — it is about facts, whether we’re counting the wrong things, and whether the fundamental statistics we use to measure our well-being are inaccurate. If we are going to debate inequality, it matters if the top fifth of the country makes four times as much as the bottom, rather than 16.7 times as much, as we are told by our government.

Indeed, he and his co-authors have different ideas about politics — but they all agree that the public debate has strayed far from factual reality, and that the way in which our government presents official measurements of income contribute to misleading the public. “For the past 20 years,” he says, “I have found that basic government statistics were at odds with what my eyes told me was happening in the country I was living in.” Talking with Early, a former George McGovern staffer and Bureau of Labor Statistics official, crystallized his determination to lay out in detail what the official numbers were missing.

Myth of American Inequality is crisply written, but it is not beach reading. It’s a battering ram of data, with 183 single-spaced pages full of statistics, charts, and graphs, plus six appendices and 50 pages of endnotes. The book’s core thesis is that the Census Bureau systematically overstates the inequality of Americans’ living conditions by measuring what Americans earn rather than what they keep, and by excluding noncash forms of benefits and compensation. Thus, on one hand, the statistical measures of inequality don’t count taxes, which makes the rich seem richer than they are; on the other hand, they don’t count the bulk of welfare-state transfer payments from the government, which make the poor seem much, much poorer than they actually are.

Gramm, Ekelund, and Early trace the inaccuracy of the Census Bureau’s metrics to computational decisions made in 1947, when noncash transfer payments such as food stamps or health-care benefits made up a much smaller proportion of the income of the poorest Americans. By 2017, those factors had grown from 2.5 percent to 18.2 percent of all personal income. As the welfare state has grown, so has the gap between reality and the government statistics that are supposed to measure it. According to the Census Bureau, inequality is up 22 percent since the end of the Second World War — but using the adjustments made by Gramm, Ekelund, and Early, inequality has actually declined by 3 percent in that period.

When the same adjustments are made across international comparisons, it turns out that inequality in the U.S. is less than in Britain or Japan, comparable to that in Australia, and not dramatically higher than the inequality in Germany or France — in exchange for which we have a higher overall standard of living. Counting all the taxes actually paid, we also have “the most progressive income tax share of any OECD nation,” with the top quintile paying 1.35 times their share of income in taxes, compared with 1.10 in France or 1.07 in Germany.

A striking example that drives home the authors’ point about the unreality of the official numbers: Comparing the Census Bureau’s income figures with consumption data, the households in the bottom income quintile (i.e., the 20 percent of households with the smallest income by official measures) spend twice as much money as they are reported to earn. The top quintile, by contrast, consumes only half as much — and isn’t saving enough to make up the entire other half. Both figures make sense only when you include what the government is giving, and subtract what it takes.

The War on Poverty and successive expansions of the entitlement state have hugely expanded the scale of government handouts. In inflation-adjusted dollars, the bottom quintile received average transfer payments of $9,677 in 1967 — which grew to $45,389 by 2017. Yet, in 2017, the Census Bureau reported the average income of that quintile as $13,258 — less than a third of the income they were receiving from the government.

Symptoms of the disconnect between reported poverty rates and actual living standards can be found in the data: “Home ownership is so pervasive in America that somewhat more than half of all households in the bottom and second quintiles owned their homes and, consequently, were assessed property taxes.” A 2011 survey found that 42 percent of poor Americans owned their home, 88 percent had air-conditioning, two-thirds had cable or satellite television, and a third had flat-screen TVs. By contrast, measurements of “food insecurity” simply ask about fear of running out of food at any time in the past year — a far less verifiable data point. And that is before you get to the subject of another of the book’s chapters: the difficulty of quantifying the huge improvements made in the quality of goods and services consumed by Americans over time.

At this point, a liberal or progressive might argue that Gramm, Ekelund, and Early are actually making a case for the success of the Great Society, the entitlement state, and progressive taxation: These policies reduce inequality and raise all but about 2 percent of Americans from living in serious poverty, whether or not they can support themselves. Gramm’s response is to point to what Lyndon Johnson promised his programs were about: helping people “to develop and use their capacities.” Instead, they created incentives for people to drop out of the labor market, to the point where only 10 percent of the bottom quintile’s income is earned income. That does not serve the human potential of poorer Americans, who miss out on the vigorous social mobility that is otherwise visible in the statistical picture. The book does not get into the secondary noneconomic effects of government dependency on human happiness, such as its effect on crime rates and family formation.

The War on Poverty model is unsustainable if progressives keep expanding it. “No government except for France’s transfers as much wealth as we do,” Gramm notes, and he asks, “if everyone’s in the wagon, who’s gonna pull?” Moreover, as the book details, even by the official measurements, the poverty rate had dropped in half between 1947 and 1965, before LBJ launched his project — but the official poverty rate has remained relatively stable since, as the entitlement state has dulled the incentive to escape. The authors note the signal success of the 1996 welfare-reform bill in restoring incentives to work — albeit during an economic boom — and how the succeeding two decades of federal and state policy have backslid by eroding those incentives.

Social factors lurk behind the numbers. The average household in the bottom quintile has 1.69 members, compared with 3.10 in the highest quintile — another reason why per-household figures overstate inequality. “The old stereotype of a poor household in America being composed largely of a single mother and a house full of children is fifty years out of date,” the authors write. People with low incomes are disproportionately the unmarried young and the widowed elderly. Nearly half of the bottom quintile are retired and on Social Security — and many of those may have more wealth than income. Meanwhile, one growing driver of income inequality that isn’t a statistical illusion is the sharp rise in the past half-century in the share of households headed by a marriage of two working college graduates: from 5.2 percent in 1967 to 29.5 percent in 2017. Three-quarters of all college graduates live in such households, marking them off as a separate social class from the other two-thirds of the country.

There is much more in Myth of American Inequality, including a close look at the rapid turnover in America’s economic hierarchy. Gramm’s strongest policy recommendation is simply for Congress to fix how the government measures income. Even Democrats might find something to like: As things are currently reported, Joe Biden had to deal with headlines showing record-high inequality during his first year in office while he was shoveling trillions of dollars in additional transfer payments out the door. But a better reason to fix how we measure inequality is simply that it is better to tell the truth.