The Myth of Income Inequality in the U.S.

In a new book, The Myth of American Inequality: How Government Biases Policy Debate, three economists, John Early, Phil Gramm, and Robert Ekelund, assess, using detailed data, whether income inequality in America is as great as everybody thinks it is. They conclude that, by a wide margin, it is not, for surprising reasons.

If you are suspicious (in light of Gramm’s well-known conservative leanings and the anti-government intimations of the book’s title) that this is a biased conclusion based on a selective reading of the data, that suspicion was shattered, at least for me, not only by my reading the book and interviewing Gramm, but by stumbling two days later on a New York Times “The Daily” podcast that concluded the exact same thing.

An honest effort to set the facts straight

Phil Gramm was a U.S. senator from Texas in 1980. He was a Democrat, but right of center and an admirer of President Reagan. He was one of the shapers of the bipartisan1 economic agenda later known as “Reaganomics.” Reaganomics cut government spending – even eliminating some Social Security benefits – and reduced taxes. Gramm switched parties and ran as a Republican in 1984, serving three more terms in the Senate after that. In 1996 he ran for the Republican nomination for president, but was defeated by Bob Dole.

Gramm is an engaging, courtly man, with a refined Southern accent. When I spoke to him, he assured me that the book he co-authored had no partisan agenda and no ideology. It was merely trying to get the facts straight so that debates over wealth transfers from the rich to the poor could be held on a sound basis.

An objective reading of the book confirms that assurance. There is no hint of a partisan or ideological agenda. One of Gramm’s co-authors formerly worked for George McGovern, the liberal Democrat who ran for president against Richard Nixon in 1972. When I interviewed Gramm he mentioned that the co-authors came from different parts of the political spectrum.

Furthermore, when I read the book I sensed no deliberate bending or shading of the data to make an ideological, political or predetermined point. The data are, of course, presented in an organized manner to create and back up the book’s conclusions, but they didn’t seem cherry-picked from among a plethora of data, some of which might contradict the conclusion.

Failing to count everything that counts

The result of the book’s investigations is that income inequality (and, in the case of The Daily’s podcast, poverty) in the U.S. are substantially less than is usually believed and reported, because the data that are reported leave out important details.

To put it simply, income inequality and poverty are measured and reported before most redistributions – transfers – from the well-off to the poor. But those transfers are large and have become much larger over the last 55 years. Failing to measure and report incomes after most of those transfers, while reporting them only before those transfers, is like only reporting investment performance before fees and taxes.