Is Inequality Really As Bad As the Statistics Say?

Atlanta is No. 1 again, but not for a desirable reason. The U.S. Census Bureau reports that no other large American city has higher income inequality than Atlanta.

But is the measurement correct? 

That’s an important question if we are to debate potential policy responses to income inequality – a hot political topic in the United States for more than a decade. If inequality isn’t as stark as commonly thought, for example, there might be less urgency for robust new policies.

The Census Bureau’s methodology of calculating household income, the basis for most discussions about income, poverty and inequality, is brought into question by a new book: “The Myth of American Inequality” by former U.S. Sen. Phil Gramm and two co-authors.

Gramm (who holds three degrees, including a Ph.D. in economics, from the University of Georgia) along with John Early (an economist and two-time assistant commissioner of the U.S. Bureau of Labor Statistics) and Robert Ekelund (an economics professor emeritus at Auburn University) examined the census methodology after confronting a conundrum:

Why do federal data show that low-income households consume more – a lot more – than they earn in income?

“The Bureau of Labor Statistics puts out data every year saying how much Americans consumed by quintile – that is, the bottom 20% up through the top 20%,” Gramm explained in a recent discussion of the book. “The Census Bureau puts out household income.

“Well, this year the census figure shows that people earn only about half as much as they spend in the bottom quintile. In the second quintile, people spend 11% more than they earn, and in the top quintile people spend only about 50% of their income, even though there’s no data to show people are saving at that sort of rate.”

Of course, income statistics in a vacuum are rather meaningless. To most people, income matters because it allows them to consume what they need or want. So if income statistics don’t reflect what households are able to consume, they aren’t accurate measures of well-being.

The discrepancy seems to lie in how the income figures are calculated. Since 1947, Gramm said, the Census Bureau’s definitions of income have excluded most non-cash benefits received, such as food stamps or housing vouchers. And these benefits have grown tremendously.

When the so-called war on poverty began in 1965, Gramm said, “we were providing $9,700 worth of transfer payments to the average household in the bottom 20% of American earners. Since 1965 it has grown to $45,400.”

Also left out of the official income statistics are tax credits received – even though Gramm called the Internal Revenue Service “the largest welfare agency in America” due to the amount of income it redistributes in this way. Finally, tax payments made by households are not subtracted from income, even though they obviously affect how much money a household can spend on other things.

“So, our official (income) statistics in the United States, as hard as this is to believe,” Gramm said, “don’t take into account 40% of gross domestic product.” That includes about two-thirds of all transfer payments – almost $2 trillion in that category alone.

What does all this mean for income inequality? Gramm said he and his co-authors decided to find out.

“The Census Bureau tells us that the top 20% of Americans earn 16.7 times as much as the bottom 20% of Americans,” he said. “We show in this book that when you count all transfer payments as income to the people who got the payment, and you subtract all taxes from the income of the people who paid the taxes, that the ratio is not 16.7 to 1; it’s 4 to 1.

“Now you can argue that we should be transferring more resources, that we still have too much inequality,” he continued. “But the point is that the argument is very different when the ratio is 16.7 to 1, versus 4 to 1.”

The bottom line, according to Gramm, is that a proper calculation of income shows that inequality has not grown in recent decades, but in fact is lower than it was in 1947.

It’s important to note that these statistics reflect an immense amount of government redistribution of income and intervention into the economy. It would be better if incomes were more even without such government action. 

But it’s equally important to note that those most vocal about addressing income inequality tend to argue not for measures to enhance market-based outcomes, but to increase government intervention even further.

Before we do so – whether nationally or closer to home in Atlanta – let’s be sure we have our facts right. “The Myth of American Inequality” suggests strongly that we do not.

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