Introduction
In today's heated political climate, few topics generate as much controversy and passionate debate as economic inequality. It's a subject that touches on fundamental questions about fairness, opportunity, and the very nature of the American dream. But what if much of what we think we know about inequality in the United States is wrong?
This is the provocative argument put forward by Phil Gramm in his book "The Myth of American Inequality." Gramm contends that the official statistics used to measure poverty and income disparity in America are deeply flawed, painting a misleading picture that fuels divisive rhetoric and misguided policies. By taking a closer look at the data and accounting for factors often overlooked in standard economic measures, Gramm presents a radically different view of the economic landscape in modern America.
The Power of Statistics in Shaping Our Worldview
We begin with a fundamental truth: our understanding of large-scale economic trends is heavily dependent on statistical measures. While we can observe our own financial situation and that of those immediately around us, grasping the economic reality for millions of people across a nation requires data – lots of it.
Statistics on household income, wealth distribution, and earnings form the backbone of how we perceive economic inequality and poverty. These numbers don't just inform academic discussions; they drive political debates, shape public opinion, and ultimately influence the laws and policies that govern our society.
Given their outsized importance, it's crucial that these statistics accurately reflect reality. If they don't, we risk basing our national conversation and policymaking on a distorted view of the world. This, Gramm argues, is precisely what has happened in the United States.
The Conventional Wisdom on Inequality
Before diving into Gramm's analysis, it's worth summarizing the prevailing narrative on economic inequality in America:
- Income inequality has risen dramatically in recent decades.
- The middle class is shrinking and struggling to maintain its standard of living.
- Poverty remains stubbornly high despite decades of anti-poverty programs.
- A small elite at the top is accumulating an ever-larger share of the nation's wealth.
This narrative has become so entrenched that it's accepted across much of the political spectrum. Even traditionally conservative voices like The Economist magazine have come to view rising inequality as an established fact.
Defining Our Terms
To engage with Gramm's argument, we need to clarify a few key concepts:
Inequality vs. Poverty: These related but distinct concepts are often conflated in public discourse. A society can have high inequality without widespread poverty (imagine a country where everyone is quite well-off, but some are extremely wealthy), or it can have low inequality with high poverty (if everyone is equally poor).
Income: In the context of government statistics, income typically includes:
- Earnings from work (wages, salaries, self-employment income)
- Investment returns (interest, dividends, rent)
- Pensions
- Child support and alimony
- Regular financial contributions from non-household members
The U.S. Census Bureau divides households into five income brackets, or quintiles, each representing 20% of the population.
With these definitions in mind, let's explore Gramm's key arguments.
The Missing Trillions: How Official Statistics Ignore Government Assistance
One of Gramm's central claims is that official income statistics fail to account for a massive amount of government assistance, leading to a significant underestimation of the true income of lower-income households.
The Cash-Centric Legacy
The current method for measuring household income was established in 1947 when over 90% of all compensation and government assistance was received in cash. This made sense at the time – tracking cash flows provided a reasonably accurate picture of household spending power.
The Shift to In-Kind Benefits
Today, however, a large portion of government assistance comes in the form of "in-kind" benefits rather than direct cash payments. Examples include:
- Food stamps (now provided via debit cards that can only be used for food purchases)
- Subsidized healthcare (where the government pays providers directly)
- Housing assistance
- Heating subsidies
- Tax credits
- Subsidized childcare and other social services
The $2.8 Trillion Blind Spot
Gramm points out that there are over 100 federal programs spending more than $100 million each on transfer payments annually, plus thousands of smaller state and local initiatives. In total, these assistance programs amount to a staggering $2.8 trillion per year.
The problem? Due to its outdated, cash-centric definition of income, the Census Bureau doesn't count over two-thirds of this amount when calculating household income.
The Real Income of Low-Earning Households
This omission leads to a severe distortion of our understanding of low-income households' actual economic situation. For example:
- In 2017, the Census Bureau reported that the average household in the lowest income quintile earned just $4,908 annually.
- However, the same households received an average of $45,389 in government transfer payments that year.
- More than 40% of all government assistance spending went to households in this lowest quintile.
Spending vs. Official Income
The disconnect between official income statistics and reality becomes even more apparent when we look at consumer spending data from the Bureau of Labor Statistics:
- For the past decade, households in the bottom 20% of earners have consistently spent about twice their reported income.
- Those in the second-lowest quintile spend about $1.10 for every dollar of reported income.
This apparent paradox is explained by the transfer payments that aren't counted as income but do enable higher levels of consumption.
Rethinking Poverty in America
If official statistics underestimate the true income of poorer households, it follows that they may also overestimate the extent of poverty in the United States. Gramm makes a compelling case that this is indeed the case.
How Poverty is Measured
The official poverty threshold in the U.S. is based on the cost of an economical but nutritionally adequate diet for different types of households. The assumption is that the average household spends about one-third of its after-tax income on food, so the poverty line is set at three times the cost of this basic food budget.
The Paradox of Persistent Poverty
Official poverty rates have remained relatively stable since the 1960s, fluctuating between 11% and 15% of the population. This seems to suggest that the "war on poverty" declared by President Lyndon B. Johnson in 1964 has been largely ineffective.
However, Gramm argues that this statistical stability masks a significant reduction in actual poverty, which isn't captured by official measures due to the exclusion of most transfer payments from income calculations.
Recalculating Poverty Rates
When government assistance is factored in, the picture changes dramatically:
- In 2017, the true income of the average household in the bottom quintile was $53,610.
- After taxes, this left $49,613 in disposable income.
- The official poverty threshold for a family of four that year was $24,339.
Based on these adjusted figures, Gramm estimates that the actual poverty rate in America is under 3%, not the 13% reported in 2017.
Supporting Evidence
Several other indicators support the idea that severe poverty is far less common than official statistics suggest:
- Only 2.5% of Americans experience even a single day of hunger or malnutrition each year.
- Just 1% of the population lives in housing classified as "severely inadequate," down from 4% in 1975.
- Less than 0.5% of U.S. residents experience homelessness in a given year, including brief periods.
The Democratization of "Luxuries"
Another sign of improving living standards is the widespread availability of goods once considered luxuries:
- Air conditioning is now seven times more common in bottom-quintile households than it was in 1963.
- Similar trends can be observed for vehicles, microwave ovens, personal computers, and video games.
A Historical Perspective
Perhaps most strikingly, Gramm calculates that 94% of all households in 2017 were at least as well-off as the top quintile in 1967. This suggests that the vast majority of Americans today enjoy a standard of living that would have been considered upper-middle-class just a few generations ago.
The Tax Factor: How Progressive Taxation Affects Income Inequality
Another key aspect of Gramm's argument is that official income statistics, by focusing on pre-tax income, significantly overstate the degree of income inequality in the United States.
The Progressive Tax System
The U.S. employs a progressive tax system, meaning that higher earners generally pay a larger share of their income in taxes. This system is designed to reduce income inequality, but its effects are not captured in most measures of income disparity.
The Impact on High Earners
The tax burden on high-income households is substantial:
- The average household in the top quintile loses over 35% of its pre-tax income to various taxes.
- For the top 5% of households, about 50% of marginal income goes to federal and state taxes.
Comparing Tax Burdens Across Income Levels
In contrast to the high tax rates paid by top earners:
- The bottom 40% of households effectively pay no federal income tax at all.
- The average household in the bottom quintile pays only about 7.5% of its income in taxes.
Recalculating Income Inequality
When we adjust for both transfer payments and taxes, the picture of income inequality changes dramatically:
- In 2017, the average top-quintile household had a pre-tax income of about $296,000 (including some transfers like Social Security and Medicare).
- After paying nearly $107,000 in taxes, this left $189,000 in after-tax income.
- Meanwhile, the average bottom-quintile household had a true income (including all transfers) of about $50,000, with minimal tax burden.
The result? Instead of the top quintile earning 16 times more than the bottom quintile (as pre-tax, pre-transfer figures suggest), the actual difference in disposable income is closer to a factor of four.
The Bigger Picture: Prosperity and Progress
Stepping back from the details of tax policy and transfer payments, Gramm's analysis paints a picture of an America that is far more prosperous and economically mobile than is commonly believed.
The Decline of True Poverty
While pockets of genuine poverty certainly still exist in the United States, Gramm argues that severe deprivation has become relatively rare. The social safety net, for all its flaws and inefficiencies, has largely succeeded in providing a basic standard of living for the vast majority of Americans.
The Broad Middle
Rather than a society sharply divided between rich and poor, Gramm's data suggest that the vast majority of Americans – perhaps 97% – enjoy living standards that would be considered middle-class by historical or global standards. Yes, there are still meaningful differences in income and wealth, but the gap between the "haves" and "have-nots" is not nearly as stark as often portrayed.
Upward Mobility and Improving Standards
One of the most encouraging aspects of Gramm's analysis is the evidence of widespread improvements in living standards over time. The fact that most households today live better than the top earners of just a few decades ago speaks to the overall economic progress of American society.
Implications for Policy and Public Debate
If Gramm's analysis is correct – or even partially correct – it has significant implications for how we think about economic policy in the United States.
Rethinking Anti-Poverty Programs
If severe poverty is less prevalent than official statistics suggest, it may be time to reassess the structure and goals of anti-poverty programs. Perhaps the focus should shift from broad-based assistance to more targeted interventions for the small percentage of Americans still facing genuine deprivation.
The Role of Progressive Taxation
The data on after-tax income inequality raise questions about the appropriate level of tax progressivity. Is the current system achieving its intended goals? Are there ways to make it more efficient or equitable?
Addressing Perceived vs. Actual Inequality
If the gap between rich and poor is smaller than many believe, why does the perception of extreme inequality persist? Are there ways to better communicate the realities of income distribution to the public?
Focusing on Economic Growth
Given the evidence of broad-based improvements in living standards over time, should policymakers place a greater emphasis on overall economic growth rather than on redistribution?
Potential Criticisms and Counterarguments
While Gramm's analysis is thought-provoking, it's important to consider potential criticisms and alternative perspectives:
Relative vs. Absolute Poverty
Some argue that poverty should be measured in relative rather than absolute terms. Even if living standards have improved across the board, significant disparities may still create social and economic tensions.
The Cost of Living
Gramm's analysis may not fully account for regional variations in the cost of living, particularly in urban areas where housing costs have skyrocketed.
Wealth Inequality
While the book focuses primarily on income, wealth inequality – which includes assets like property and investments – may paint a different picture.
Social Mobility
Even if current living standards are higher than in the past, concerns about declining social mobility and the ability of younger generations to surpass their parents economically remain valid topics for debate.
Quality of Life Factors
Pure economic measures may not capture all aspects of well-being, such as work-life balance, job security, or access to education and healthcare.
Conclusion: A Call for Data-Driven Debate
"The Myth of American Inequality" challenges us to reconsider many of our assumptions about the economic realities of modern America. While Gramm's conclusions are sure to be controversial, his emphasis on the importance of accurate data in shaping public policy is difficult to argue with.
The book serves as a reminder that statistics, while powerful tools for understanding our world, can also be misleading if not carefully examined and placed in context. As we grapple with complex economic challenges and strive to create a more prosperous and equitable society, it's crucial that our debates and policy decisions be grounded in the most accurate and comprehensive data available.
Ultimately, Gramm's work invites us to move beyond simplistic narratives of a nation divided between rich and poor. Instead, it presents a vision of an America that, for all its imperfections and remaining challenges, has made remarkable progress in improving the living standards of the vast majority of its citizens.
Whether one fully accepts Gramm's conclusions or not, "The Myth of American Inequality" makes a compelling case for a more nuanced and data-driven approach to understanding and addressing economic issues in the United States. As we look to the future, this kind of clear-eyed analysis will be essential in crafting policies that can build on past successes and create new opportunities for all Americans to thrive.