The Myth of American Inequality

The Myth of American Inequality by Phil Gramm

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America has spent trillions of dollars on fighting poverty. If you believe government statistics or the evening news, poverty has won the war. We are constantly hearing that the poor are getting poorer and the rich are getting richer.

The good news is that it may be the case that those trillions have not been wasted. Phil Gramm, who had been a professor of economics before becoming a Republican senator from Texas. Gramm and other economists have recrunched the numbers used by the Census Bureau and come up with some surprising information.

Basically, Gramm discovered that the census numbers do not account for transfer payments and services provided to the poorest quintile of the population. This is not an insignificant detail. While those in the poorest quintile only earn about $3,000 in income, they receive more than $41,000 in transfer payments.

Moreover, the census bureau did not account for the money taken from the richest quintiles in taxes. When these corrections are made, the four lowest quintiles - or 80% of the population - make pretty much the same amount of money, which means that the narratives of economic inequality and growing inequality are without substance.

Gramm's group analysis also concludes that inflation has not been as high as economic calculations have held. Part of this is from systemic problems in the calculation of inflation. Another is from not picking up the tremendous price declines when innovative products hit the market. Another is the practice of product substitution as consumers buy the cheaper product.

The effect of all this is to provide a more optimistic conclusion about poverty than we get from official statistics:

“The more accurate measures show that only 1.3 percent of children and less than 0.4 percent of seniors live in poverty. For children living with married relatives, the poverty rate is a mere 0.2 percent. Poverty affects 1.7 percent of Blacks, about 92 percent fewer than shown by the Census counts. While the improved measures show that poverty among Blacks is still somewhat higher than for Whites, the difference is only 0.6 percentage points, versus the 11.5 percent difference in the Census numbers. With the improved estimates, poverty affects 1.3 percent of women and 1.0 percent of men.

Gramm, Phil; Ekelund, Robert; Early, John. The Myth of American Inequality (p. 97). Rowman & Littlefield Publishers. Kindle Edition.

The actual problem is that the inequality is so slight that the second lowest tier makes only a small incremental amount compared to the lowest quintile, notwithstanding spending more than 30 hours a week more in labor.

“Also note the stunning fact that the second quintile of households has an average net income after transfers and taxes that is only 8.6 percent above the average income of the bottom quintile. This means the second quintile is only slightly better off than the bottom quintile despite the fact that the second quintile earned more than six times as much, it had more than twice the proportion of its prime work-aged adults working, and they worked, on average, 1.8 times as many hours per week.

Gramm, Phil; Ekelund, Robert; Early, John. The Myth of American Inequality (pp. 31-32). Rowman & Littlefield Publishers. Kindle Edition.

The apparent absence of absolute poverty is something we could have inferred from observations about how people live:

“Compared to 1972, our homes today are much more spacious and modern. The proportion of homes with two or more rooms per person is 33.5 percent greater today. The proportion with two or more bathrooms has grown by 200.5 percent; 313.1 percent more have central air conditioning; and 68.3 percent more have dishwashers.3 Most homes in 1972 had televisions, but only about half were color. Today they are all color, and most are high-definition, flat-screen TVs connected to cable or satellites.4 Most homes in 1972 had at least one phone, but none had cell phones or internet access.

Gramm, Phil; Ekelund, Robert; Early, John. The Myth of American Inequality (pp. 84-85). Rowman & Littlefield Publishers. Kindle Edition.

And:

“Our cars last more than twice as long,6 they are almost four times safer,7 and many have GPS navigation and premium sound systems. No standard model lacks air conditioning or power steering. Today almost three times as many of us are college graduates.8 Americans live 7.8 years longer,9 partly because the death rates from cancer declined by 31 percent from 1991 to 2018.10 Our median age is almost ten years older, and yet the proportion of people reporting poor health is 20.3 percent smaller.11 Real median household net worth is up 172.2 percent.12 In short, by virtually any physical definition of economic well-being, working Americans across all income levels, racial classifications, education levels, and other commonly used statistical classifications are substantially better off today than they were in 1972. So how did we obtain this massive cornucopia of prosperity without a pay raise since 1972?

Gramm, Phil; Ekelund, Robert; Early, John. The Myth of American Inequality (p. 85). Rowman & Littlefield Publishers. Kindle Edition.

Other myths exploded by Gramm's team include alleged pay differentials between men and women and between the races. The answer can usually be traced to the number of hours worked or to the nature of the work done. Transfer payments and taxes also reduce the differentials.

“On average, Black households received $2,212 more in transfer payments than White households, and White households paid $14,482 more in taxes than Black households. As a result, the overall gap between Black and White household incomes after transfers and taxes was more than one-third smaller than the gap for earned income (23.4 percent versus 36.4 percent). Hispanic incomes after transfers and taxes also showed about the same difference—a 39.3 percent smaller gap with White income than existed between the earned incomes of the two.

Gramm, Phil; Ekelund, Robert; Early, John. The Myth of American Inequality (p. 159). Rowman & Littlefield Publishers. Kindle Edition.

This book is heavy on the details. Gramm throws a lot of numbers at the reader. Surf along though and you can follow the argument and be surprised by how we've been swindled by uncritically trusting what we are told.