We all have opinions on the issues of income inequality and poverty in the United States. But would your opinion change if incomes in the United States were actually much more equal than you thought? And what if you learned that only 2.5% of the US population live in poverty?
The Myth of American Inequality, by Phil Gramm, Robert Ekelund and John Early, makes an entirely convincing case that (as the jacket cover reads) “[e]verything you know about income inequality, poverty, and other measures of economic well-being in America, is wrong.” As the authors explain, we mistakenly think things are worse than they are because we’re using bad information. Armed with accurate information, they show that incomes are much more equal than we’ve been told, and that in the last 50 years poverty rates have fallen significantly. The authors also show that lower- and middle-class wages have risen substantially in the last 50 years, contrary to claims that wages have “stagnated.”
But there is some bad news too. Fifty years ago, 68% of those in the bottom “quintile” of income earners worked. Today, only 36% in the bottom quintile work. Something is askew, especially in these days of help-wanted signs in the windows of so many businesses. Why have so many able-bodied working age people dropped out of the world of work?
INCOME INEQUALITY
Doesn’t everyone know inequality is getting worse? “It is a fact universally acknowledged,” says The Economist newspaper, “that inequality in the rich world is high and rising.”
Turns out, everyone may be wrong.
At first glance, income inequality in the US looks significant. Dividing income groups into 5 “quintiles” – 20% of the population per quintile – the Census Bureau reports that the top quintile has an average income about 17 times larger than the average income of the bottom quintile ($221,846 compared to $13,258 in 2017).
But the Census Bureau statistics are significantly flawed. First, the Census Bureau fails to count as income many of the transfer payments that go to the bottom quintile, omitting food stamps, Medicare and Medicaid, Earned Income Tax Credits, and other benefits. In 2017 households in the bottom quintile received an average of over $45,000 in transfer payments — but the Census included less than a third of those payments in its calculations of “income.”
Second, the Census Bureau doesn’t consider taxes paid. The top quintile lose 35.2% of their income to taxes; the bottom quintile lose 7.5%.
Here’s the result: After adding in all transfer payments paid by the government, and after subtracting taxes paid, in 2017 the bottom quintile had an average adjusted income of $49,613, and the top quintile had an average adjusted income of $197,034– only 4 times higher. Here are each quintile’s average incomes after transfer payments and taxes are taken into account:
Bottom $49,613
Second $53,924
Middle $65,631
Fourth $88,132
Top $197,034
We can discuss whether that level of inequality is a problem, but we should start the conversation with accurate facts. The top quintile has an average income 4 times larger than the bottom quintile — not 17 times larger. That puts the US right in the middle when compared with other developed nations – more equal than the United Kingdom and Japan, and only slightly less equal than Australia, Canada, Germany and France.
POVERTY
The US Census Bureau reports that the percentage of Americans living in poverty has changed little in the last 5 decades, hovering stubbornly in the 11% – 15% range. “In the past 50 years, scientists have mapped the entire human genome and eradicated smallpox . . . . On the problem of poverty, though, there has been no real improvement — just a long stasis,” writes Princeton professor Matthew Desmond in his March 2023 New York Times article entitled Why Poverty Persists in America.
According to Gramm, Ekelund and Early, the facts show otherwise.
In 2017, the Census Bureau reported that 12.3% of the population lived in poverty. As we’ve seen, though, the Census Bureau statistics are flawed, leaving out most transfer payments from its income calculations. When calculating poverty rates (defined as lacking the resources needed to meet minimum economic needs), the Census Bureau overlooks 88% of the transfer payments from the government to those classified as “poor.” When those transfer payments are taken into account, the percentage of Americans living in poverty falls from the Census Bureau’s report of 12.3% — to 2.5%.
These numbers, I think, should change the discussion on poverty in the US. Currently available government support is sufficient to meet minimum economic needs. The 2.5% of the population whose needs are not being met are not availing themselves of existing governmental resources, often due to mental problems or addiction or other issues. More of the same welfare spending isn’t going to reach them. We need to rethink how to help. “These special populations,” explain the authors, “require specifically tailored programs to address their specific needs. Simply increasing government expenditures on food stamps or other subsidies generally does not address their problems.”
WORK?
In 1964, Lyndon Johnson spoke to Congress about his plans for the War on Poverty, and he was careful to explain that the increased governmental assistance was to help the truly needy, and not to create dependency. “The war on poverty is not a struggle simply to support people, to make them dependent on the generosity of others,” Johnson said. “It is an effort to allow them to develop and use their capacities.” For those who are mentally or physically unable to work, government assistance keeps them from being destitute. For those who can work, but who need time for training or education, or who are facing temporary difficulties, government help can support them until they are able to work. But the purpose of government help was not to support indefinitely those who are able to support themselves.
Unfortunately, the dependency that Johnson feared has become the reality in the US. In 1967, 68% percent of prime working age adults in the bottom quintile had a job. By 2017, the percentage of prime working age adults in the bottom quintile holding a job had dropped by almost half, to 36%. And those who did hold a job worked an average of only 17 hours a week. Over that 50-year period, millions were lured away from the world of work by the ever-increasing government transfer payments. As we saw, families in the bottom quintile receive on average over $45,000 in transfer payments, enough to meet minimum economic needs – even without working at all. But not working has become a viable option for many able-bodied working age people.
“Only one structural change,” Gramm, Ekelund and Early point out, “can explain the major decoupling of prime working-age persons in low-income households from the world of work: the near quadrupling (in constant dollars) of government transfer payments to lower-income households.”
Millions of idle workers hurts the nation’s economy, of course. But it is bad for the people opting out of work. They lose the benefits of work, the self-respect, the independence, the acquisition of skills and knowledge – so many of the things that make up one’s “human capital.” That is the tragedy, the hidden cost of too much government help.
How can we help those who truly need it without enticing into idleness those who can work? Surely that should be a bipartisan goal. The Myth of American Inequality is an invaluable contribution to that vital question.