Name: The Myth of American Inequality
Rating: 4 (81 reviews)
Author: Phil Gramm, Robert Ekelund & John Early

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.

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.

Key ideas in The Myth of American Inequality

What is The Myth of American Inequality about?

The Myth of American Inequality (2022) corrects widespread misconceptions about inequality in the United States. Taking aim at misleading official statistics, it shows that poverty has all but disappeared in today’s America and that the gap between rich and “poor” isn’t nearly as large as many people assume.

About the Author

Phil Gramm is a former senator who spent years heading up the US Senate Banking Committee. He is currently a visiting scholar at the American Enterprise Institute.

Bob Ekelund is a professor of economics at Auburn University in Alabama. He is the author of over 20 books as well as hundreds of articles on economic history and policy.

John Early is a mathematical economist and former assistant commissioner at the Bureau of Labor Statistics. He has written widely on topics including price change, labor force dynamics, and health care.