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NEWSLETTER

The taming of income inequality

Contrary to popular belief, the gap between upper- and lower-income Americans is not wider than ever, but narrower.

Twenty dollar bills are counted on June 15, 2018, in North Andover, Mass.Elise Amendola/Associated Press
Heather Hopp-Bruce

Americans have been told for years that income inequality is a national scandal. A decade ago, President Barack Obama pronounced it “the defining issue of our time.” Today, Democrats like Senator Bernie Sanders thunder that levels of wealth and income inequality are “outrageous and grotesque and immoral.” In a recent speech, Nikole Hannah-Jones of The New York Times labeled America “one of the most unequal societies in the history of the world.”

But what if it isn’t true? What if income inequality, far from rising to dangerously high levels in the 75 years since World War II, has actually fallen in the postwar period? What if all the rhetoric about the “grotesque” gap between America’s rich and poor is wildly inconsistent with reality?

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In an eye-opening new book, “The Myth of American Inequality,” three noted economists make that case convincingly and back it up with an ocean of data. The authors bring different backgrounds and political views to their work. Phil Gramm for 24 years represented Texas in Congress, where he specialized in budgetary matters and chaired the Senate Banking Committee. Robert Ekelund carved out a distinguished career in academia, publishing dozens of books and hundreds of peer-reviewed articles. John Early, a former legislative aide to George McGovern, was assistant commissioner of the federal Bureau of Labor Statistics.

“The Myth of American Inequality” runs to 250 pages and includes 63 pages of supporting data and source notes. But here is the authors’ argument in a nutshell:

For 75 years, the Census Bureau has calculated household income without taking into account a vast range of government benefits and transfer payments that enlarge that income. Food stamps, housing subsidies, Medicaid, Medicare, Pell Grants, the Earned Income Tax Credit, and scores of other federal, state, and local programs are not included in the official income statistics reported by the Census Bureau. Nor does the bureau account in its data for income taxes paid by US households. The result is a government portrait of income in America sharply at odds with the real world.

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The Census Bureau didn’t set out to deceive anyone. When it began calculating household income on a systematic basis in 1947, it included only “cash” payments — meaning currency, paychecks, or direct deposits to a recipient’s bank account. That was a reasonable definition at the time, since it accounted for virtually all measurable income Americans earned.

But things changed. Beginning with the War on Poverty in the 1960s, a vast array of government benefits began flowing to American households, particularly those with lower levels of earned income. Yet the Census Bureau never updated its definition of “income” to account for all the new ways in which Americans were getting paid. Of the $2.8 trillion per year in government transfer payments to American households — via programs ranging from food stamps to Section 8 rental assistance to college work-study grants — the Census Bureau excludes an astonishing $1.9 trillion.

The bureau also ignores federal, state, and local taxes, which eliminate more than 34 percent of American households’ earned income. “Income paid in taxes is income lost,” the authors note, “and in most cases income never received,” since it is withheld from wages and salaries in advance. “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. … Any claim about income inequality that does not adjust for these vast differences in taxes paid is extremely misleading.”

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Thus, when the Census Bureau calculates the income data that the inequality statistics are based on, it disregards two huge pieces of the equation: the vast amounts of money that upper-income families lose to taxes and the vast amounts that lower-income families gain in government benefits. The result is a severely distorted picture of inequality. According to the Census Bureau, the income of the top quintile of households is 17 times that of the bottom quintile. Factor in all the government benefits and tax payments it leaves out, however, and the ratio shrinks to a modest 4 to 1.

Over the last half-century, funding for the War on Poverty has skyrocketed. In inflation-adjusted dollars, the value of government benefits paid to the average household in the bottom fifth of income earners rose from $9,677 in 1967 to $45,389 in 2017 — almost a fivefold increase. “And yet the official poverty measures tell us that the percentage of people living in poverty hardly changed during that 50-year period,” the authors write. In truth, the percentage of Americans living in poverty plummeted. The War on Poverty has been a thundering success, at least when it comes to lifting most poor Americans out of destitution.

The data omitted by the Census Bureau in its household income calculations are collected by other government agencies and they reveal a staggering mismatch between official income statistics and reality. For example: In 2017, the Census Bureau claimed that the average household in the bottom 20 percent had an income of $13,258. But the Bureau of Labor Statistics, in its data for the same year, calculated that those same households spent, on average, $26,091 on consumer goods and services. How could the bottom quintile of Americans consume twice as much as their official income? The answer is simple: Their actual income was considerably higher than the government reported.

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Gramm, Ekelund, and Early are owed a debt of gratitude. With admirable clarity, their book demonstrates that the federal government egregiously overstates the degree of inequality and poverty in the world’s wealthiest nation. Skewed statistics have led to a skewed perception of life in America, and in turn to a skewed political debate on spending, taxing, and the social safety net. “The Myth of American Inequality” refutes the demagoguery, and convincingly shows that the gap between top and bottom is not wider than ever, but narrower.

Jeff Jacoby is a Globe columnist. He can be reached at jeff.jacoby@globe.com. Follow him on Twitter @jeff_jacoby. This column is excerpted from the current issue of Arguable, his weekly newsletter. To subscribe to Arguable, visit bit.ly/ArguableNewsletter.