Much of our political discourse involves the subject of inequality. Yet that discourse suffers from a lingering misconception. The federal government’s own numbers make the situation worse.
“The problem is that the Census Bureau, in its calculation of household income — on which the poverty rate is based, on which inequality measures are based — counts only cash payments as income.”
Those are the words of Phil Gramm. The 80-year-old economist represented Texas in both chambers of Congress. He served as both a Democrat and a Republican. He helped write the budget that implemented Ronald Reagan’s economic program in 1981.
Now Gramm has co-authored “The Myth of American Inequality: How Government Biases Policy Debate.” The book explains how the government’s data mislead people about the extent of American inequality.
It’s a problem that dates back to 1947. “They don’t count two-thirds of transfer payments as income to the recipient,” Gramm told Carolina Journal in a one-on-one interview. “They don’t count any taxes paid as income lost to the taxpayer. They don’t count refundable tax credits, where you get a check from the Treasury.”
“Food stamps — when you get a debit card — [it’s] not counted as income,” Gramm added. “Medicaid — where government pays your hospital and medical bills — not counted as income.”
The same is true for housing subsidies, along with more than 100 other federal, state, and local programs.
Factor all of those missing pieces into your income calculation, and you see a much different picture of inequality. “Whereas the Census Bureau says the top 20% make 16.7 times as much — or has 16.7 times as much as income — as the bottom 20%, we show that actually it’s 4-to-1,” Gramm said. “The poverty rate is not 12%, but between 2-3%.”
Facts about household income contradict arguments from left-wing politicians like Vermont Sen. Bernie Sanders. He claims that growing inequality is “obscene and unsustainable.” “Inequality of income in America is actually slightly lower today than it was in 1947,” Gramm said.
“We’re having this big debate about remaking the economy to deal with inequality, when it’s actually lower today than it was 70 years ago. I know it’s incredible, but it’s true.”
The government’s calculations create an additional problem. Any new effort to address inequality is unlikely to make a dent in the official statistics.
“Do you remember last year, when President Biden and the Democratic leadership said that if we raised the child tax credit, we’re going to cut child poverty in half?” Gramm asked. “I wrote an article in the Wall Street Journal saying, ‘No, you’re not.’ In fact, when the official numbers came out — guess what? It didn’t really change. Why? Because they don’t count it.”
Other government data show just how much the household income figure distorts the real picture of inequality. While the Census Bureau compiles household income by quintiles — top 20%, bottom 20%, and so on — the Bureau of Labor Statistics calculates household consumption by quintiles.
“Last year, the bottom 20% of income earners consumed twice as much as their income,” Gramm said. “The second 20% consumed 11% more than their income. The top quintile consumed only half of its income, even though there’s no record that people saved that amount of money.”
“How did that happen? Well, they didn’t count two-thirds of the transfer payments as income, which affected their consumption,” Gramm explained. “And they didn’t take taxes into account, so the top quintile never had the money to begin with. It was deducted from their paychecks.”
Gramm and his co-authors are not arguing that American inequality doesn’t exist. They are correcting a record skewed by the government’s own number crunchers.
“We just want to get the facts straight,” Gramm said. “Let’s have a debate based on the facts, not based on numbers that don’t have any real connection to the facts. The census income number leaves out 40% of the gross domestic product of the country. That’s pretty astounding.”
“The debate when the inequality between the top and bottom 20% is 16.7-to-1 and the debate when it’s 4-to-1, you can still have the debate, but it’s a quite different debate,” he said.
Federal numbers present a story that’s more fantasy than reality. The facts tell a different tale. “The picture you get of America is a picture that makes more sense than the picture painted by government statistics,” Gramm said. “If you’ve got a question of whether to believe your eyes or government statistics, believe your eyes.”
Ongoing debates about inequality, tax policy, and the social safety net will all improve with a clear-eyed focus on facts.
Mitch Kokai is senior political analyst for the John Locke Foundation.
