# The Myth of American Inequality by Phil Gramm, Robert Ekelund & John Early - Blinkist

What’s in it for me? A fact-based view of economic inequality.

Our view of the world depends on statistical measures.

Direct observation tells us how well we’re doing, but we can only form a picture of the well-being of nations and societies by looking at economic indicators.

To answer questions about how poor or rich or equal or unequal a country is, we need data on things like mean household income, wealth distribution, and average hourly earnings.

Political debate and policymaking rely on the accuracy of those statistics.

If they’re wrong, we’re likely to waste a lot of time arguing over faulty assumptions.

Worse, we might pass legislation that is ineffective if not downright counterproductive.

The Myth of American Inequality makes the case that the official statistics which frame economic debates in the United States are misleading at best.

Rather than facilitating the rational discussions on which democracies depend, they’re fueling populism and sowing division.

It’s time to correct our faulty statistical picture of inequality and poverty in America.

And that’s exactly what we’ll be doing in this Blink.

Official statistics paint a bleak picture of inequality and poverty in America.

The United States is a nation divided by rising inequality.

Poverty is back, and it’s snapping at the heels of America’s once-affluent middle classes.

For most citizens, this is an age of stagnating wages and belt-tightening.

For a tiny class of plutocrats at the top, it’s a bonanza.

So goes the new common sense anyway.

That consensus spans the political spectrum.

Self-declared socialist senator Bernie Sanders says inequality in America is nothing less than “obscene.

” For the staunchly anti-socialist Economist magazine, meanwhile, it’s a “universally acknowledged truth” that inequality is on the rise in the United States.

When left and right butt heads, it’s over the question of whether or not this is a bad thing – or if anything can be done about it.

That it is rising is established fact.

We all know it.

Well, as Mark Twain once said (or is reported to have said anyway), what you don’t know can’t get you in nearly as much trouble as “what you know that ain’t so.

”  The authors of The Myth of American Inequality argue that pretty much everything we think we know about income inequality and poverty in the United States falls into that latter category.

Americans should debate these topics, they say – such discussions are vitally important in democracies.

But productive conversations happen when participants have a solid grasp of the facts.

Today’s debates generate more heat than light because they are based on widely held assumptions that are false.

That, in a nutshell, is the argument you’ll be hearing in this Blink.

Before we get to busting myths, though, let’s take a moment to define some terms.

First off?

Inequality and poverty.

These two concepts are often conflated, but they’re not the same.

We can all be equally poor on $5,000 a year or equally rich on $5 million a year.

We can be poor and unequal – a society in which the poorest households earned $5,000 and the richest earned $10,000 a year would fit the bill.

But it’s also possible to have income inequality without poverty.

Most people would likely be content to live in an unequal society in which no one earned less than $250,000 a year, no matter what the plutocrats in the top 1 or 0.

1 percent took home.

The difference is worth bearing in mind as we’ll be making two distinct but related claims.

First, poverty has declined so sharply in the United States that no more than 3 percent of all Americans can be said to be poor.

Second, there is a gap between bottom and top earners, but there isn’t a sharp divide between rich and poor.

Some 97 percent of Americans are well-off by historical and global standards.

Yes, the wealthiest Americans earn more, but the gap isn’t anywhere near as large as many people assume.

This brings us to our next term: income.

What is income – or, more precisely, how does the United States government define it?

Income can be lots of things.

It can be earnings – wages, salaries, or money earned from self-employment.

It can be returns on investments – think interest, dividends, and rent.

It can also be pensions, child support, alimony, and regular contributions from family members or friends who don’t live in your household.

That’s not the full list, but that’s the bulk of the cash entering households which Uncle Sam classifies as income.

The United States Census Bureau sorts households into five income brackets called quintiles.

It begins with the bottom 20 percent of earners.

Then the second quintile is from 20 to 40 percent, the third is from 40 to 60 percent, and so on.

Official figures paint a damning picture of widespread poverty and steep income inequality in contemporary America.

Take just a couple of eye-catching numbers from 2017.

According to the Bureau, the average annual income of a household in the lowest bracket was $4,908.

In the same year, the average household in the top quintile had an annual income of $295,904.

Those are staggering figures.

But there’s a well-known saying: there are lies, damned lies, and statistics.

As we’ll soon see, official statistics wildly overestimate the extent of both income inequality and poverty in America.

Official statistics ignore government assistance programs.

We’ve looked at what the official definition of income includes.

But we also need to talk about what it leaves out.

First, though, a little historical context.

The Census Bureau’s procedure for measuring income was established in 1947.

It was cash-centric – and for good reason.

Over 90 percent of all employment compensation and government assistance back then was received in cash – that is, in currency, check, and direct deposits to recipients’ bank accounts.

Government aid programs subsidized specific goods – medical care, say, or college degrees – but folks got assistance in the form of direct cash payments.

So tracking cash flows made sense; it was a pretty accurate way of approximating the actual income and spending power of households.

Due to the way the government now provides assistance, that’s no longer true.

Today, transfer payments (that’s the catch-all term for such programs) are “in kind.

” Take food stamps.

It used to be that people who were eligible for such assistance got cash.

Now they get debit cards which can only be used to buy food items.

Try to purchase something else with that card and the payment will be declined.

Per the Bureau’s definition, then, the government is providing food, not cash.

For that reason, it’s not classified as income.

Same goes for subsidized health care.

Patients never handle a penny of the money used to pay for medical treatment – the government pays doctors and hospitals directly.

So it's another in-kind benefit, not income.

It’s the same for tax credit schemes, housing supplements, heating subsidies, and subsidized or free social services like day care.

So why does this matter?

Let’s zoom out and look at the big picture.

There are over 100 federal programs that spend more than $100 million on transfer payments every year.

There are thousands of state and local government agencies with smaller budgets.

All in all, these assistance programs cost $2.

8 trillion a year.

Due to its cash-centric definition of income, over two-thirds of that amount isn’t counted by the Bureau when it looks at household income.

That decision massively distorts our understanding of the actual spending power of American households.

For example, we’ve already seen that the average household in the lowest quintile of earners made just $4,908 a year in 2017.

How do households survive on so little?

Put bluntly, they don’t.

That year, the same average household received $45,389 in government transfer payments.

In fact, more than 40 percent of all spending in government assistance went to households in this quintile.

So, yes, households in the bottom 20 percent don’t earn much – but that doesn’t really tell us a lot about their total spending power.

We can see that most clearly when we compare Census data on income with spending data collected by the Bureau of Labor Statistics.

For the last ten years, the latter data set has shown that the bottom 20 percent of earners consume twice as much as their income.

For every dollar entering the household, it spends two dollars.

Households in the second quintile, meanwhile, spend roughly $1.

10 for every dollar earned.

Transfer payments make up the difference.

Government assistance, in short, backstops low-income households’ spending power and their overall standard of living.

We’re not here to talk about the pros and cons of government welfare programs – that’s up to American voters.

The point is, it makes little to no sense to omit trillions of dollars from official income statistics simply because they’re not cash.

Yes, beneficiaries of food stamp programs can only purchase food with their debit cards, but that doesn’t mean that the $64 billion the federal government spends on such programs every year is worth zero.

Dodgy income statistics distort our understanding of poverty.

Let’s pause for a second and pose a question: If the Census Bureau underestimates the true income of poorer households, is it also overestimating the number of poor Americans?

The short answer is yes.

Let’s break down the authors’ reasoning.

We can start by looking at the official poverty threshold.

How is it calculated?

Well, a household falls below that threshold if it lives on an income that doesn’t cover its essential needs.

Needs, of course, are relative – differently sized households have different needs.

For that reason, the United States government calculates poverty thresholds for each of the 28 types of families it recognizes.

It then uses an inflation-adjusted consumer price index to determine the cost of an economical but nutritionally adequate diet for those families.

The assumption here is that the average household spends a third of its after-tax income on food.

That means a household must earn three times as much as it needs to spend on food to be above the official poverty threshold.

Between 1963 and the present, there was no meaningful trend in the official poverty rate; it neither rose nor declined substantially.

Instead, it oscillated between roughly 11 and 15 percent of the population.

What’s striking about this statistical picture is that this period coincides exactly with the “unconditional war on poverty” declared by Lyndon B.

Johnson 55 years ago – a war which has continued to be waged by virtually every president since.

A key plank of that war was (and is) increased government spending on programs designed to alleviate poverty.

Those programs account for the figure we discussed earlier – the $2.

8 trillion spent on transfer payments each year.

Which brings us to the solution to this conundrum.

Spending almost $3 trillion a year on transfer payments has moved the dial on poverty.

The reason we don’t see that reflected in official data is simple: the Census Bureau underestimates the true income of American households in the lowest quintiles.

Including those transfers corrects our statistical picture.

In 2017, for example, the true income of the average household in the bottom 20 percent of earners was $53,610.

Once payroll, excise, sales, property, and other taxes had been deducted, that household was left with $49,613.

To put this into perspective, the Bureau’s official poverty threshold for a family of four that year was $24,339.

Including transfer payments dramatically reduces the actual (as opposed to official) rate of poverty.

According to the authors’ calculations, under 3 percent of Americans live in poverty – not the 13 percent reported in 2017.

Independent data support this view.

For example, researchers have found that only 2.

5 percent of the population experience a single day of hunger or malnutrition each year.

In 1975, 4 percent of Americans lived in housing that could be characterized as “severely inadequate”; today, just 1 percent do.

Homelessness, including brief periods of homelessness, affects fewer than 0.

5 percent of United States residents each year.

Spending power is another important factor.

The prices of goods which were once regarded as luxuries have fallen so far that they have become widely available.

Air conditioning, for example, is now seven times more common in households in the bottom quintile than it was in 1963.

Similar trends can be observed for vehicles, microwave ovens, personal computers, and video games.

Here’s the bottom line: compared to their forebears and the inhabitants of other countries, most “poor” Americans are actually pretty well off.

In fact, thanks to government poverty alleviation programs and transfer payments, they lead lives that would be considered middle class in other contexts.

Most striking of all the data marshaled by the authors, though, is their calculation that 94 percent of all households in 2017 were at least as well off as the top quintile in 1967!

Ignoring taxes exaggerates the extent of income inequality.

According to a popular misconception, top-quintile households receive 16 times more income than households in the bottom quintile.

As we’ll see, that figure rests on dubious accounting.

The issue, once again, is what official income statistics leave out.

Ready for another nugget of wisdom from Mark Twain?

Apart from death, he supposedly said, there’s only one certainty in life: taxes.

And he was right.

Taxes can go up – at one point the highest marginal tax rate in the United States was 99 percent.

And they can go down – JFK scrapped that rate when he realized hardly anyone was wealthy enough to actually pay it, for instance.

But either way, Uncle Sam always collects.

The basis of those collections is a progressive taxation system – generally speaking, the more you earn, the higher your tax burden is.

Taxpayers’ money funds everything from military spending to keeping national park toilets stocked with toilet paper.

A big chunk of that money, however, goes toward the transfer payments we discussed earlier.

Bookkeeping, famously, has two sides: money coming in and money going out.

We’ve already looked at the money-in side of things.

Transfer payments, we saw, boosted the real income of recipients.

But we also need to make a correction on the money-out side of the ledger.

The thing is, the Census Bureau only records before-tax income.

That’s not necessarily a bad way to collect income data.

But it’s a horrible way of measuring income inequality.

That’s because income paid in taxes is income lost.

It’s cash you never see – often, it’s deducted from paychecks before they land in bank accounts.

The average household in the top quintile of earners loses over 35 percent of its pretax income in this way.

Meanwhile, federal and state governments deduct around 50 percent of the marginal income earned by the top 5 percent of households.

Those are taxes the bottom 40 percent of households don’t pay at all.

For the average house in the bottom quintile, by contrast, it’s 7.

5 percent.

If you want to measure actual income inequality, you have to adjust for these differences.

So let’s crunch the numbers.

Recall that the real income of the average household in the bottom quintile was close to $50,000 after transfers.

Recall, too, that as far as the Census Bureau is concerned the average top-quintile household has an annual income of $296,000.

That includes transfers from Social Security, Medicare, and private scholarships, by the way – those make up around 3 percent of its pretax income.

Now we’ll deduct the taxes paid by that household.

That’s just under $107,000, which leaves $189,000 in after-tax income.

As you can see, this household isn’t anywhere close to earning 16 times as much as its bottom-quintile counterpart.

In reality, it’s left with roughly four times as much once transfers and taxes are taken into account – despite earning over 60 times as much!

That’s a pretty startling correction of the official statistical picture.

Where does it leave us, though?

Here’s the authors’ take.

Debates over questions of justice and redistribution are part and parcel of living in a free society.

Perhaps America’s current way of doing things is as good as it gets; maybe the country could benefit from adopting a more (or less) progressive system.

But current debates simply assume that inequality is out of control and that the wealthiest Americans’ slice of the pie is far too big.

Those views just aren’t supported by the facts.

Final Summary

America isn’t as poor or divided between rich and poor as contemporary debates assume.

Once you smooth out errors in misleading official statistics, it’s plain to see that the country has never been so prosperous.

Poverty has all but disappeared.

The richest households, meanwhile, earn a lot more than households at the bottom of the income scale – but they also pay a lot more taxes.

Those taxes fund a vast program of resource redistribution which flattens out economic inequalities.