Finance / Government Watch / Politics

Income Inequality in America Is Not What It Seems

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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.


Reprinted with Permission from - National Review by - Dan McLaughlin

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michael deprisco
1 month ago

I been hearing the war on hunger since LBJ declared war on it in the 60’s. Same with inequality. Since the 60’s who has been mostly in charge oh let me see oh yea the Democrats. I take it there polices are not working maybe we should try something else same old beat just a different drum.

Robin Bunting
1 month ago

Wow, I am thankful for this article explaining what has been happening via false information. What can an average American do to help get the word out? I am going to share this article for one.

Judy Gonzales
1 month ago

Mr. Paul E. explains all of this, typically in his wisdom, quite eloquently. Thank you Paul E.
I just want to add one other thing however….
This generation has has come from a lack of parental guidance and a base moral family structure, as well as broken homes. With many coming from homes with
one parent authority, which some of these parents lack their own proper upbringing and education, lacking the maturity they need for their own self discipline let alone trying to raise children. And while yet other children are neglected and abused physically as well as emotionally. This all generates low self esteem and self loathing among youth who never had the moral example to follow to learn how to appropriate their feelings. So then they turn to drugs and alcohol, mimicking their abusive parents, which we know only postpones the hurt and insecurity. This isn’t always the explanation for how this generation is evolving. There’s the mere
lack of proper supervision and actual proactive parenting. Example; children old enough get left to themselves because their parents have to work, and it’s not always the ideal home setting where there are both parents in the home which would allow each parent to work different shifts so that one parent could supervise their children, or be there for their growing teen. Nope, most I refer to are living in broken homes. Not sure the stats on that, but I’m sure it’s staggering. Anyhow, these kids left to themselves are in no way ready to make responsible decisions for themselves. Some parents just throw cell phones and numerous electronic gadgets and game consoles at them believing those will adequately keep them out of trouble. All this does is offer them no disciplinary limits on their use of time, plus making them physically weaker and put on the pounds. Thus, a generation of the morally deprived, lazy, undiciplined and drug induced.
So….thee wrong headed ‘idea’ of inequity, it’s just something the Left made up to attract the morally deprived, self centered, spoiled and Lazy youth of this generation who they can easily manipulate into believing that sheer garbage, and that they’re not responsible for their own actions and decisions they make. No accountability is their motto. It’s another reason removing God from everything gives them that path to fulfill their fantasies. And what sickens me; is the wicked nature of their justifying their own life choices of the perversions they’re pushing on our children; Doesn’t matter what they want to label anything they decide is what they want ‘children’ to adhere to. They are wicked, evil demon possessed individuals who one day, and I believe sooner than we think, will face the God they believed they could deny and avoid. I pray for our country, those who have authority over us, and for Israel.
May God have mercy upon us, our nation and forgive our sin in turning from him. Amen.

Judy Gonzales
1 month ago
Reply to  Judy Gonzales

Oops, I mentioned inequity instead of income inequality, what the the article was about. Just read it too quickly I guess. Well, what I stated is true, but in the case of income inequality, the Progressives are not focused on the facts. A business needs qualified, customer service worthy people to work for them. No one in their RIGHT MIND anyway would hire based on a persons race, color or gender. Some business people will however, out of compassion for a disadvantaged person, maybe a homeless person, or someone down on their luck, so to speak, who maybe lost their job at no fault of their own, or got booted out of their home because they could no longer afford to pay the high mortgage or rent; maybe a person who was just released from jail or prison who has shown the willingness to work and be a productive citizen. Other than that, nothing else should be considered in the hiring process, period. The Progressives have the intellect of a 10 year old, not to insult all 10 year olds, lol, but they don’t have clear vision for the success that’s necessary for not just a business, but a country to prosper.

Hal
2 months ago

The American way philosophically is to provide “equal rights” for all citizens. The DemocRat Party philocophically and pragmatically considers the American way to rig it so that no one has equal rights, and the DemocRat party patrons have superior rights. The DemocRat Commie Party seeks to RULE the Nation …. not just GOVERN the Nation.

anna hubert
2 months ago

There is no institution or agency or system in the world that can make up for indifference laziness and lack of grit in the individual

PaulE
2 months ago

Socialist terms such as inequality, equity, social and economic justice only resonate with a portion of the public, because they lack any true understanding of real economics and finance. They don’t truly understand how to leverage the opportunities that a capitalist society affords them, so they look for anyone or anything else to blame for what they see as the reason they have less than the person right next to them. So they jump at any pitch that promises to correct the situation and provide them with what they think they deserve with little to no effort. All that is usually asked from these people is their vote to empower a certain set of people to run things on their behalf. At least that’s the sales pitch. No need to be concerned about all the other stuff these elected leaders have planned for them and everyone else down the road. All so they can take from those that have slightly more than the people dumb enough to empower them and then redistribute it their voting constituents. Minus a nice cut off the top for the people now in power to make it all happen of course and only until they no longer need the dumb people to maintain their hold on power.

Ignorance leads to people looking to latch onto anything that sounds appealing, no matter how deeply flawed it might be. Which is why we so desperately need real economics taught in our schools starting in the middle schools and continuing through high school. Absent that, it is up to every one of us to teach our children and grandchildren about real economics. If you don’t know it yourself, then get your kids a tutor. Simply throwing one’s hands up in the air and giving up is of course NOT a solution to anything. Socialists of course would fight against this tooth and nail, because an educated public wouldn’t fall for the Socialist message in the first place.

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