The Myth of American Inequality

How Government Biases Policy Debate

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A better title is found on the book flap: "Everything you know about income inequality, poverty, and other measures of economic well-being in America is wrong." The authors (Phil Gramm, Robert Ekelund, and John Early) all have academic or professional backgrounds in economics, and Gramm, of course, was a US Congressman for six years, and a US Senator for nearly 18 years. (He is just a few months older than Joe Biden.) Their audacious thesis is presented convincingly (at least for this fan of free-market capitalism): the "official government statistics" that get reported periodically on inflation, incomes, and poverty are deeply flawed. Alternative measures exist, because serious people demand them. But they need to be dug out of more obscure sources, a task only suited for … well, diligent scholars, like these guys.

The book's style leaves something to be desired for the casual reader. There are graphs and dense tables aplenty. And many eye-glazing paragraphs filled with data: dollars, dates, percentiles, percentages, rates, etc. It's dry stuff. The key points—the stuff the authors really want you to know—are repeated over and over.

But if you can pay attention throughout, it's pretty damning. The government is kind of lying to you. Only "kind of", because it's open about its flawed methods, which may have worked OK in the past, but have persisted due to inertia and (I would guess) political cowardice.

And of course, some favor this inherent dishonesty: it creates winners and losers. It boosts some political narratives over others.

First: the Consumer Price Index (CPI), used to "adjust income eligibility levels for government assistance, federal tax brackets, federally mandated cost-of-living increases, private sector wage and salary increases, poverty measures, and consumer and commercial rent escalations". As a short-term month-to-month measure, it's not bad, but it has well-known biases that overstate inflation. So over years, that overstatement builds up. Good news for (say) Social Security recipients, at least until the trust fund is emptied.

The official US poverty rate has been "stuck" since around 1970 between 10-15%. But the calculation the government uses to determine poverty omits the value of many of its transfer payments to the needy. And the overstated CPI above also inflates the poverty rate. In fact, the authors claim, actual poverty has been in a long-term decline and is nearly zero. (I don't, frankly, know if that includes all those homeless folks in the big cities.)

Another source of bias occurs at the upper end of the income scale, and it's something I'm ashamed to admit that I'd been oblivious to. We citizens also make "transfer payments" to the government: these are called "taxes". These transfer payments are (nevertheless) counted as part of your income. This, despite the fact that in most cases, that money never even touches your bank account; subject to withholding, it just goes directly to Uncle Stupid's coffers. (And, in other cases: as people who pay estimated taxes know, the government gets pretty mean if you fail to pay them first.)

But, bottom line: your "official income" according to the government includes a big chunk of cash that you either can't, or probably shouldn't, spend as you desire on stuff you want.

Taken together, the government mismeasures drastically overstate measures of "inequality" like the Gini coefficient. The authors particularly criticize the scholarship of folks like Piketty, Saez, and Zucman, who use the flawed numbers to argue for (even) more punitive taxation of the rich.

The mismeasures also drastically understate the progress in economic well-being over the past few decades. As noted above, this feeds into a anti-capitalist narrative that's echoed in the mainstream press and in many political speeches. And the result is reflected in the nasty, resentful mood of the electorate. (Headline a couple days ago in the Wall Street Journal: Voters See American Dream Slipping Out of Reach, WSJ/NORC Poll Shows.

The authors wind up with some policy suggestions: first (obviously): reform the government's statistical calculations to use alternative, less-biased measures of economic statistics. But also: Embrace school choice. Reform occupational licensure and other barriers to earning a living. At the same time, remove the disincentives to work, as welfare reform did in the 1990s.

Last Modified 2024-01-09 6:49 PM EDT