For decades, there’s been no surer route to success within academic social science and history departments, or on the left side of the partisan divide, than to lament the persistence and rise of economic inequality in the United States. Some even maintain that inequality has transformed the nation into an oligarchy rather than a constitutional republic. In 2014 Bernie Sanders denounced “the obscene and increasing level of wealth and income inequality in this country” as “immoral, un-American, and unsustainable.” And more broadly, in 2020 The Economist, channeling Jane Austen, proclaimed it “a truth universally acknowledged that inequality in the rich world is high and rising.”
The problem with these assertions (both quoted on this book’s opening page), as economist (and former Senator) Phil Gramm and two other distinguished academic colleagues demonstrate, is that they are false. And their falsity is a product of a distortion of statistics by economists inside and outside the government. The consequence is both a radical underestimation of the opportunities that America offers to poor people, and a misdirection of public policy that weakens their ability to achieve what President Lyndon Johnson proclaimed in 1964 as the goal of the War on Poverty: not to make the poor permanent dependents, but “to allow them to develop and use their capacities” so as to share in America’s “promise.”
Sins of Omission
The authors’ most striking point is the contrast between frequently-cited statistics issued by the Census Bureau which portray vast inequalities of income between the top and bottom quintiles of American households (the former being 16.7 times higher than the latter in 2017), along with a poverty rate that hasn’t changed since the War on Poverty began, buttressed by BLS data making it appear that production workers’ average hourly earnings “peaked more than 45 years ago,” and the reality of American economic life.
The core problem is that these statistics omit most government transfer payments to households in the bottom quintile, which more than quadrupled in inflation-adjusted terms from $9,677 to $45,389 between 1967 and 2017. In consequence, in 2017, while “the average household with earned income in the bottom 20 percent … received more than $45,000 in government payments … Census failed to count nearly $32,000 of those transfers” as income. Transfer payments include benefits like food stamps, the “refundable” Earned Income Tax Credit, housing supplements, Medicare, and Medicaid, with the Census Bureau counting less than a third of such payments made by federal, state, and local governments, which totaled $2.8 trillion in 2017, with over two-thirds going to the bottom 40 percent of households.
Additionally, in counting household income, the Census Bureau’s statistics on inequality omit taxes levied on income by all three levels of government, of which 82 percent are paid by the top 40 percent of households. When adjustments are made for these omissions, income inequality proves to be only one-fourth as large as Census statistics indicate. And far from rising by 22.9 percent since 1947 as the Census numbers make it appear, inequality has fallen by 3 percent since 1947. Finally, once all transfers are counted, “the number of Americans living in poverty in 2017 plummets from 12.3 percent, the official Census number, to only 2.5 percent.”
Allowing that some few people who are “physically or mentally unable to care for themselves” may have “fallen through the cracks” in the social-welfare system, the authors conclude that “for all practical purposes, poverty due to a lack of public or private support has been virtually eliminated in America.” Meanwhile, contrary to the often-heard charge that the rich don’t pay their “fair share” of taxes, “households in the top fifth of income earners lose 35.2 percent of their pretax income to taxes of all kinds,” while “those in the bottom fifth … lose only 7.5 percent.”
The authors also note other factors to bear in mind when assessing income differences. First, since by definition, income earners must fall equally into one of the quintiles, “when one household moves upward in its quintile ranking, another household” must “fall into a lower quintile even though that household’s income may have stayed the same or even risen.” Additionally, I note, the fact of immigration, even before the massive increase of recent years, means that the lowest quintile will be constantly replenished by new, mostly poor, arrivals. This isn’t an argument against legal immigration, but only a further fact to be borne in mind in assessing income distribution: with time, many poor immigrants, or their offspring, will rise in economic status, just like their predecessors, but they will be replaced by others at the bottom of the scale.
Although the authors only touch on this point, a further misleading aspect of statistics on income distribution is that the lowest income quintile at any given time will include a substantial number of graduate students (whose earnings will rise once they get their degrees) and of retirees (who are living off savings and Social Security, generally at a lower income level than when they were employed). Nor do quintile divisions based on the sheer number of “households” (including individuals) allow for differences in family size: while having more children may lower a family’s per capita income, it may incentivize parents to work harder just to support their offspring.
The authors’ point in citing corrected statistics on income that account for taxes and transfers is not to argue in favor of some other income distribution on the grounds of justice—a question that lends itself to no formulaic answer. Rather, they raise a pair of problems for the relatively poor caused by the fact that government redistribution currently brings the average income of the lowest fifth of the population to a point only minimally below that of the next fifth.
First, such policies discourage the incentive to work—which (as Nicholas Eberstadt has demonstrated in his book Men Without Work)—is detrimental to the moral health of the dependent class, encouraging a lifestyle based on screen-watching and drugs. Second, they promote resentment by hardworking, self-supporting members of the middle class at being taxed to enable those who aren’t working or seeking employment to enjoy almost as high a living standard as they do. (This resentment helps draw middle-class and blue-collar workers to politicians like Donald Trump and Sanders who persuade them that “the system” is biased against them.)
Whereas the 1996 Welfare Reform Act’s work requirement showed encouraging results, increasing employment and reducing poverty, the requirement “did not apply to other welfare programs, such as food stamps and unemployment insurance,” which “continued to increase, creating additional incentives not to work,” while the mandate was subsequently weakened by allowing states to stop enforcing it. Indeed, the U.S. Department of Agriculture “trained state and local agencies to encourage their public assistance clients to enroll in food stamps,” rewarding agencies’ “success in overcoming the ‘mountain pride’ of potential beneficiaries’ who wished not to rely on others.” (So much for LBJ’s aspirations.) Meanwhile, the Earned Income and Child Tax Credits on average “eliminated all income tax liability” from each of the lowest two quintiles, instead delivering average cash payments at tax time of $1,884 and $1,231 in 2017 to those in the lowest and next-lowest quintiles, respectively.
Life Actually Is Better Now
Challenging widely accepted economic “wisdom,” the authors note that the statistics cited by the celebrated French economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman to demonstrate tax “dodging” by the American rich overlook a change in how income was categorized by the Census Bureau following the 1986 Tax Reform Act, which didn’t alter anyone’s tax bill. In fact, the share of income-related taxes paid by the top 10 percent of American households—1.35 of their income share—makes it the most progressive system at that income level of any OECD nation, well “ahead” of countries like France and Germany. (The French economists also ignore transfer payments in assessing inequality.)
Further, despite the OECD’s release of Gini coefficients (measuring inequality) that portray the U.S. as having higher levels of poverty than France and Germany, in relation to each country’s median income, the greater median income earned by Americans means that a much smaller percentage of the population live in poverty than in those countries. Hence, household income in the U.S. “differs” from that in other nations chiefly in that “Americans at all levels have a lot more of it.”
The authors devote an entire chapter to “Measures of Well-Being,” refuting the claim issued by the BLS that “real average hourly earnings for production and nonsupervisory employees” peaked in 1972, then fell for 22 years before returning to the 1972 level in December, 2018—thus feeding Sanders’s 2019 claim that “the average American” hadn’t gained a nickel in real wages over the preceding 45 years. To begin with, the claim is typically made by “comparing only wages and salaries and therefore excluding employer-paid benefits,” such as health insurance, which increased individual compensation by 6.7 percent. The figures also “exclude more than a third of all workers,” the self-employed, those who work in agriculture and government, and supervisory or managerial employees.
But the greatest flaw in the claim is that it disregards improvements in what a given, inflation-adjusted sum will buy since 1972: from more spacious houses, often equipped with central air conditioning, dishwashers, and color televisions, to “a far greater array of food products,” including “out-of-season fruits from half a world away” (even while this nutritional abundance costs “an ever-smaller portion” of family budgets), to cars that are safer and “last more than twice as long,” to the tripling in the number of college graduates, to an increase in average life span of 7.8 years, owing largely to medical innovations. These changes are omitted from statistics released by the Census Bureau and BLS because both agencies exaggerate inflation thanks to their reliance until quite recently on measurements that omit improvements in the quality of goods over time, even while price indices that do take account of such changes have long been available. The overestimate also caused the Census Bureau to overstate the threshold for defining poverty—that is, the minimum income necessary to be non-poor—by 72 percent between 1963 and 2017.
In their chapter on the “Super-Rich” (the top 0.1 percent of earners), the authors note that even this group derive a substantial part of their income from work, rather than coupon-clipping; that “almost two-thirds” had come from poor to upper-middle-class families; and that “wealthy investors who accumulate wealth but do not consume it (like the fictional Ebenezer Scrooge, or the real Warren Buffett) are public benefactors, not robbers, since “their wealth is creating jobs” and thereby “promoting the general prosperity.”
In 1843, when Charles Dickens published A Christmas Carol, “the Market Revolution, fueled by the thrift of Britain’s Scrooges, was already enriching all humanity,” initiating “a period of broad-based prosperity, the likes of which had never occurred in recorded history,” and a trajectory of progress (interrupted, one must acknowledge, by periodic wars and other catastrophes) that “has never ended.” (I recommend economic historian Deirdre McCloskey’s trilogy Bourgeois Dignity, Bourgeois Equality, and Bourgeois Virtue.)
The high degree of economic mobility that Americans have continued to enjoy over the past half-century still persists. As the authors observe, this fact is visible to anyone who has lived through the past fifty years of economic progress, such that “all but 6.2 percent of households in 2017” had achieved “incomes that would have placed them in the top quintile in 1967”—and reminding us that in the earlier year, “half of all households in the bottom quintile” lacked “complete” plumbing (whereas fewer than 2 percent lack it today), and that when people at any income level require hospitalization nowadays, “they will stay only a fraction of the time spent in 1967, are more likely to emerge fully restored, and are far less likely to be readmitted with the same complaint.”
As regards ethnic or racial differences in income, the authors acknowledge the persistence of an “earnings gap” (somewhat reduced since 1967) between blacks and whites (with blacks still earning 36.4 percent less than whites, while Asian-Americans in turn earn 38.5 percent more). They attribute these differences to levels of schooling, occupational choices, average age differences, and geographic variations. But overall, they note, over the past half-century, “the American economy has outperformed all other large, developed economies,” meriting “the title of a golden age.”
The Way Forward
The authors conclude by reminding us that prior to the Enlightenment, “the major source of income and wealth was land,” the quantity of which was fixed: hence (except to a limited extent under the Roman empire) no economic growth, and no individual gain except at someone else’s expense. By contrast, the modern commercial republic offers ordinary folk the “open field” and “fair chance” that Abraham Lincoln espoused to advance themselves through their own labor and talents.
In 2021 Democratic leaders promised to “cut child poverty in half” through a monthly tax credit costing $1.6 trillion over a decade, a promise that was wrong, not only because the officially reported child poverty rate would have been only one-fifth as large had the government included existing transfer payments as income, and because the real route to overcoming any remaining poverty is encouraging individual labor, rather than taxing its fruits away. Currently, an ever-increasing proportion of the population relies on public assistance, even while employers seek to fill eleven million jobs.
To overcome this situation, the authors recommend the restoration and enforcement of work requirements for public assistance; reforms in public education that would break the “education monopoly” through extended school choice (charter schools, vouchers) that would provide poor families with real options; and abolishing outrageous, state-imposed licensing requirements (including for shampoo assistants!) that bar entry into the work force. Their goal, like Lincoln’s and LBJ’s, is “an America where people can rise as high and go as far as the sweat of their own brows will take them,” thus being able to take pride in their achievements, large or small.
Owing to its reliance on statistics rather than sweeping political claims or literary allusions, one cannot expect this book to enjoy the readership and influence of Piketty’s Capital in the Twentieth Century (it doesn’t draw “evidence” from Balzac’s novels, predict the imminent downfall of capitalism, or demand a worldwide taxing authority). Nonetheless, it would be a boon for America if reading it were required of every high school and college teacher of history and the social sciences as part of job certification.