The Myth of Income Inequality

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Image: Don Hankins via Flickr, CC BY 2.0 (cropped).

Don Hankins

Bernie Sanders loves to pound the table about this, but the fact is that America's problems are far removed from ‘income inequality.'

Senator Bernie Sanders contends that our country is “experiencing an unprecedented level of income and wealth inequality,” requiring “ a return to fairness.”  It’s always a bit unsettling when a politician proclaims that he wants everyone to pay his fair share.  Fairness is an arbitrary term that can’t be measured.  It means different things to different people.  What seemed fair to Tony Soprano may have been patently unfair to the associate he shot in the head. 

Former senator Phil Gramm, Robert Ekelund, and John Early coauthored The Myth of American Inequality (Rowman and Littlefield, 2022).  All three are trained economists and statisticians.  They analyzed data from a variety of government sources, including the Bureau of the Census and the Internal Revenue Service.  They provide some interesting insights.  Their most important premise is noted in the title of the book: inequality, which so many liberals contend to be the biggest threat to democracy, is in fact a myth.

The Census Bureau is responsible for measuring income inequality and the poverty rate.  Since 1947, the Census has defined income as cash payments made to households (p. 13).  In 1947, most government payments were made in cash, so the data were accurate.  In the mid-1960s, the War on Poverty created an explosion of programs, including Medicare, Medicaid, food stamps, housing subsidies, and many more that aren’t classified as cash payments.  The Census Bureau also fails to add payments from private charities into its calculations. 

Insurance and other benefits some employers provide aren’t made as cash payments and aren’t accounted for.  The Census Bureau also fails to reduce incomes by the federal, state, and local taxes households pay.   Failure to account for all the debits and credits that affect household income distorts the statistics government agencies distribute, and so the figures Senator Sanders uses to inform the American people of the severity of income inequality are incomplete and inaccurate.  Gramm says, “The world’s premiere statistical agency, calculating the most important economic measure of the country’s well-being, using the most sophisticated and accurate techniques available, produces a distorted picture of reality by choosing to measure the wrong things.”

The economic data shown below are divided into five quintiles, each representing 20% of the population.  The column titled “Average Income Census Bureau” shows data provided by the Census Bureau.  The column titled “Average Income After Transfers and Taxes” shows income data after non-cash government and employer transfers are added and taxes paid are subtracted. 

The statistics in the two columns are remarkably different.  Inequality exists but is muted dramatically when transfers that dozens of government programs and taxes paid are included.  Incomes of the bottom and second quintiles increase dramatically, whereas incomes of the top and fourth quintiles are greatly reduced.  The income inequality that Bernie Sanders and other liberal politicians use to shame the public isn’t as extreme as they would have us believe. 

Gramm found that the bottom and second quintiles contain “eighteen million prime work-age adults which live in whole or in significant measure on government transfer payments.  Today public assistance continues to grow faster than the earned income of taxpayers, with the average nonretired household in the bottom quintile receiving more than $41,000 in government transfer payments, while employers cannot find people willing to work in their eleven million vacant jobs.”

It seems prudent and simple to sever the relationship between able-bodied adults and the welfare state.  However, able-bodied adults with surplus time engage in activities that lead to the procreation of children.  The welfare state is constructed to care for these children, who grow into able-bodied adults and often repeat the behavior their parents engage in.

Vice President J.D. Vance grew up in an environment of financial insecurity and parental neglect.  Fortunately, he had the loving support of grandparents and a sister who filled parental gaps and made the most of the financial situation they found themselves in.  He wrote Hillbilly Elegy (William Collins, 2016) as a testament to a “family and culture in crisis.”  The book provides a glimpse of the people who embody government statistics.

In one observation, Vance tells the story of a young man he worked with in the warehouse of a tile store in Middletown, Ohio (p. 6).  The man’s pregnant girlfriend worked in the office of the business.  The work was hard, but the pay was good, and the business provided employee health insurance.  Sadly, the young man’s attendance was unreliable, and he performed poorly on the job.  His girlfriend exhibited a similar work ethic.  Both were dismissed.  They either learned from their mistakes or disappeared into the welfare state Vance describes so well.

He goes on to elaborate about “what goes on in the lives of real people when the industrial economy goes south.  It’s about reacting to bad circumstances in the worst way possible.  It’s about a culture that increasingly encourages social decay instead of counteracting it” (p. 7).  Vice President Vance worked hard, educated himself, and now stands prepared to counteract the social decay he is uniquely positioned to recognize.  Accomplishing this will be far more difficult than writing about it, but he stands on the precipice of great achievements.

Many (maybe most) Americans are victims of the unimaginable success the country has laid at their feet.  So much wealth has accumulated in our country that the government can provide $41,000 a year to millions of families because they choose not to work while millions of jobs are available.  Politicians use distorted government statistics to support claims of inequality to achieve their goal of expanding the welfare state.  Elaborate government schemes to redistribute wealth will only exacerbate the social decay that J.D. Vance lays bare.  Policies should be enacted to encourage able-bodied adults to work, reduce the welfare state, and strengthen the social fabric of the nation.  The last thing the government of the United States needs is more money.

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Image: Don Hankins via Flickr, CC BY 2.0 (cropped).

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Image: Don Hankins via Flickr, CC BY 2.0 (cropped).