Income inequality in America: How much is there, really?

And is there too much of it or not enough?

This article in Real Clear Politics by J. Peder Zane discusses the findings of Phil Gramm (the former Senator), Robert Ekelund, and John Early in their new book, The Myth of American Inequality: How Government Biases Policy Debate. Gramm and his co-authors argue that the federal government significantly and intentionally misreports income distribution, leading to bad policies and political divisions.

I haven’t read the book. However, on the face of it, the authors appear to have made a compelling case.

Here’s the essence of it:

While the U.S. Census Bureau reports that the average income of the top 20% of American households that year was 16.7 times greater than the average income of the bottom 20% of households, the real number, they argue, is 4.1 times. This massive discrepancy is explained by a straightforward accounting trick: The Bureau didn’t count two-thirds of the $2.8 trillion in transfer payments given mostly to the poor and working class or the $4.4 trillion taken  through federal, state, and local taxes, “82% of which are paid by the top 40% of household earners.

In total, the Census Bureau chooses not to count the impact of more than 40% of all income, which is gained in transfer payments or lost in taxes.

It might be argued that transfer payments for things like Medicaid and housing shouldn’t be considered income. However, as RCP’s Zane observes:

Health insurance and shelter are two major items Americans spend their money on. What is income, after all, except a means to purchase the things one needs?

The transfer payments certainly add up:

The average household in the bottom quintile [lowest 20% of income] received an astonishing $45,389 in government transfer payments annually, more than nine times greater than its earned income. The second quintile received a total of $29,793 in government transfer payments, about two-thirds as much as the bottom quintile, and the middle quintile received $17,850.

The disparities between the amount of income transfers to the bottom quintile and to the two quintiles above it lead to this anomaly:

On a per capita basis the average bottom-quintile household receives over 10% more [income] than the average second quintile household and even 3% more than the average middle income households.

This is “income inequality” that should trouble us. Not primarily for its unfairness, although that’s disturbing enough, but for its implications for participation in the workforce:

The most significant factor in growth of earned-income inequality [not counting transfer payments] in the last 50 years has been the sharp drop in the proportion of prime work-age persons who worked in the bottom two quintiles.

In 1967, 68% of prime work-age adults in the bottom quintile had jobs, but by 2017 that percentage had dropped by almost half to 36%. The percentage working in the second quintile declined from 90% to 85%. At the same time, the proportion of prime work-age persons working in the top three quintiles of households increased by 7%, largely from an increase in the employment of women.

To me, this suggests there’s not enough income inequality in America. To be sure, the question of how much inequality is too much (or too little) is highly subjective. To most of us, the gap asserted by the census bureau (if it were accurate) feels like too much inequality. But without more analysis this is, in essence, an aesthetic judgment.

The much smaller gap found by Gramm and his co-authors feels preferable, aesthetically. But if it’s true that this more facially pleasing gap stems from policies that cause people not to work, then our aesthetic sense should perhaps give way to the more hard-headed view that the gap, in context, is too small. (These days, though, some consider valuing work to be a purely aesthetic judgment.)

I wanted to find a critical response to Gramm and his co-authors. My search was hampered because, as Zane points out, their important book has been ignored by the New York Times, the Washington Post, NPR, CNN and most every other liberal news outlet.

I did find this critical review by Timothy Noah for the New Republic. But Noah’s review focuses on the middle quintile. He doesn’t dispute the findings Gramm and his co-authors present about how the bottom quintile is faring in relation to the top quintile.

They must have gotten that part right.