The Myth of American Inequality

by Phil Gramm

from the economic origins of Roman Christianity

this doesn’t sound like the America you live in, that is because it’s not. There are at least three dead giveaways to the fact that the official measurements of the economic well-being of Americans are wrong. The most obvious clue is that from the ramp-up of funding for the War on Poverty in 1967 to 2017, annual government transfer payments to the average household in the bottom 20 percent of the income distribution rose more than fourfold in inflation-adjusted dollars from $9,677 to $45,389.6 And yet the official poverty measures tell us that the percentage of people living in poverty hardly changed during that fifty-year period.

These numbers failed the laugh test in a year when federal spending, mostly on transfer payments, rose almost 50 percent and personal savings exploded.

the Census on household income inequality show that in 2017 the bottom 20 percent of households had an average income of $13,258,9 other, less publicized data from the Bureau of Labor Statistics show that these same households spent $26,091 on consumption—two times more than their income.

the top 20 percent of households had average annual income of $221,846, but BLS reports they consumed only $116,998.

twice its Census income only because the Census does not count two-thirds of transfer payments as income for those who receive them.

In measuring income, the Census Bureau chooses not to count over two-thirds of all transfer payments made by federal, state, and local governments as income to the recipients of those transfer payments. In 2017, federal, state, and local governments redistributed $2.8 trillion, 22 percent of the nation’s earned household income, with 68 percent of those transfer payments going to households earning in the bottom 40 percent.

Americans pay $4.4 trillion a year in federal, state, and local taxes, 82 percent of which are paid by the top 40 percent of household earners. Even though most households never see this money, because it is withheld from their paychecks, the Census Bureau does not reduce household income by the amount of taxes paid when it measures income inequality.

The net result is that in total the Census Bureau chooses not to count the impact of more than 40 percent of all income, which is gained in transfer payments or lost in taxes.

payments and taxes yields a measure of income inequality that is only one-fourth as large as the official Census measure.

distribution of income is unfair when the ratio of the income for the top 20 percent of households to the bottom 20 percent is 4.0 to 1 rather than the 16.7 to 1 ratio found in the official Census numbers.

income inequality is not rising. It has in fact fallen by 3.0 percent since 1947 as compared to the 22.9 percent increase shown in the Census measure.

you count all transfer payments as income to the households that receive the payments, the number of Americans living in poverty in 2017 plummets from 12.3 percent, the official Census number, to only 2.5 percent.

There are certainly people who are physically or mentally unable to care for themselves and have fallen through the cracks in the system that delivers transfer payments, but, for all practical purposes, poverty due to a lack of public or private support has been virtually eliminated in America.

Delays in introducing new products into the price index miss the dramatic price declines and quality improvements from the early models and the benefits from replacing older products that are inferior and even more expensive.

For example, the cell phone was first introduced as a specific item in the Consumer Price Index in 1998. But because the device was only included in the Consumer Price Index fourteen years after its first public sale, the index never captured the initial 75 percent drop in cell phone prices or the value of their lighter batteries and longer-lasting charge.

In this book, we will show how claims that real hourly earnings and real median household income have stagnated in postwar America and that the poverty rate has remained unchanged for fifty years are solely the result of a failure by the statistical agencies of the American government to count most transfer payments as income and to use the most accurate available price indexes to adjust for inflation. Every significant measure of economic well-being expressed in terms of dollars is higher than the official measure shown in government statistics.

Friedrich Engels, whose father owned large textile mills in Salford, England, and in Germany, in 1845 wrote a book titled The Condition of the Working Class in England. In it he expressed nostalgia for rural life and claimed people didn’t have to work so hard in rural areas.

The economy was awakening from a millennial-long slumber.

mankind’s turning of the tide from economic stagnation and pervasive poverty to a secular increase in prosperity that still dominates the world we live in.

We can appreciate the true achievements of the Industrial Revolution in England during the Victorian era only by understanding that from the fall of Rome in 476 until the Enlightenment of the seventeenth and eighteen centuries, econo...

Labor and capital came to serve their owners, rather than the crown, guild, church, and village.

Labor and capital were recognized as private property and not as communal assets subject to involuntary sharing.

Rural populations and rural life gave way to urban society as people left rural areas for what they perceived to be a better life in the cities.

Poverty in rural England had been largely hidden. The poor lived in villages off the road or in the forest, and even a rundown mud shack, when viewed at a distance across the creek, looked picturesque.

When huge numbers of relatively poor people flooded into the cities in search of a better life, they were painfully visible.

Wages rose after the Black Death due to a reduced supply of labor, only to recede over time. Real wages in 1800 were about what they had been in 1209.

revolution in economic production accelerated beginning around 1800, and the quality of human life in Great Britain experienced more rapid improvement than had ever occurred in recorded human history.

Professor N. F. R. Crafts, of the London School of Economics, showed a similar result for real per capita income (in 1970 US dollars). In England, it rose from less than $500 in 1830 to over $1,200 in 1900.15 A new era of human achievement had begun.

Life expectancy for males rose by 20 percent, from 40.2 years to 48.5 years, from 1841 to 1901. For females, it rose by 24 percent, from 42.2 years to 52.4 years.

The literacy rate, which was 64 percent for men and 53 percent for women in 1830, improved to an almost-universal 98 percent for both by 1900.17

The broad-based abundance created by the Industrial Revolution during the Victorian era produced widespread school attendance and almost-universal literacy. In closing the ugly ten-millennial chapter of child labor by the end of 1900, the Industrial Revolution ushered in a new chapter of childhood nurturing and learning.

The basement environment even in the finest homes was often infested with vermin, damp, and unhealthy. The factories offered higher pay, shorter hours, better working conditions, and even more fresh air.

seen rates, we had an unprecedented, incredible outpouring of passion over the living and working conditions of the poor.

Their philosophical basis rested in writings that extolled a “return to nature” and a kind of perfectibility of human nature in a rural setting.

overstate the general inflation rate.

In postwar America, we have experienced strong and widely shared prosperity. Some government policies contributed to those results, and other policies inhibited them.

Since then, however, the value of employer-paid benefits has expanded, and the War on Poverty has created an explosion of new programs,

Medicare, Medicaid, food stamps, housing subsidies, and numerous others that have not been classified as cash payments.

In 2017, the average household with earned income in the bottom 20 percent of all households received more than $45,000 in government transfer payments; yet, remarkably, Census failed to count nearly $32,000 of those transfers as income to the recipients.

But the purchase requirement was eliminated in 1977, and beneficiaries now receive free debit cards that they can spend on the food of their choice. Because the debit cards can be used only for food, the Census has considered them “in-kind” payments,

value is not counted as income for the recipients of the debit cards.

Medicare and Medicaid beg...

housing subsidies for low-income households.

The Earned Income Tax Credit began in 1975.

additional Child Tax Credit

Census. By 2017, transfer payments were a whopping 18.2 percent of all personal income, but Census counted only one-third of those transfers as income to the households that received them.

The result is that today two-thirds of all government transfer payments to individuals and households are not counted by Census in its income estimates.

Households in the top fifth of income earners lose 35.2 percent of their pretax income to taxes of all kinds; those in the bottom fifth of earners lose only 7.5 percent.

The problem is that Census uses “money income” to measure income inequality and poverty as if it were an accurate measure of the totality of income.