What would you say if someone told you that many academics, the U.S. government, and the media exaggerate income inequality, understate real income growth for U.S. households, overstate poverty, and understate income mobility? If someone had asked me, I would have said I believe. I have followed these issues, and even written about most of them. But on reading The Myth of American Inequality: How Governments Bias the Policy DebateEven I was blown away by the strength of the evidence for this conclusion.
The book’s three authors are former US senator and former economics professor Phil Gramm, Auburn University economics professor Robert Ekelund, and former Bureau of Labor Statistics assistant commissioner John Early. The authors dive deep into the data and use largely government-generated data to make their case. They noted that in calculating household income, the U.S. Census, part of the Commerce Department, systematically leaves out two-thirds of the transfer payments that federal, state and local governments make to people. This dramatically undercuts the incomes of the lowest two-fifths of people (what economists and statisticians call quintile) because these two quintiles, and especially the lowest, receive a vastly disproportionate share of transfer payments. The census also leaves out taxes paid to federal, state and local governments. Because high-income people pay most of the taxes, failure to deduct these taxes significantly increases the income of high-income people. Both factors cause the Census Bureau to systematically overstate income inequality. They also show that the government’s usual measure of inflation adjustment, the consumer price index, systematically overstates inflation and, therefore, understates real wage and real household income growth. Adjusting the data for both transfer payments and overstatements of inflation, the authors show that the percentage of U.S. households in poverty, rather than being in the lower teens, is actually about 1.1 percent.
Along the way, the authors show that US income mobility is high: Most people, over their lifetimes, move from one quintile to another. They also dispel several myths about the rich, the top 1 percent, the top 0.1 percent, and the incredibly wealthy Forbes 400. As a disturbing bonus, they show that in recent years some federal government agencies have encouraged people to become more dependent on government welfare.
This is David R. Henderson, “The Myth of Economic Inequality,” from Defining Concepts, November 3, 2022.
Inflation correction through adjusted measures for substitution and quality improvement results in:
Gram et al. Note that when using the CPI to show an 8.7 percent increase in real wages between 1967 and 2017, using a measure that corrects for substitution bias and improvements in the quality of goods and services, it is concluded that the rate of real wages rose by a whopping 74.0 percent over those fifty years. percentage During that same period, using the CPI shows that real median household income rose 33.5 percent, but using a price index that shows a 93.3 percent increase for replacement and quality improvements.
This seems consistent with our observations. Think about what people have now that they didn’t and how those things contributed to their well-being: homes with two bathrooms and widescreen TVs, mobile phones that provide directions, music players, calculators, and more, and medical care that improves our life expectancy and Keeps us from long hospital stays. Those are just three of the many improvements.
Read the whole thing.
Thanks to a co-author, John Earley, I had about 2 tables in the book to quickly answer a question.