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Tuesday, January 10, 2023
Let's Base Policy on Real Facts, Not Misleading Statistics
From all those lists of best books of 2022, here's one with the potential to change public policy debate and discourse for the better. It's "The Myth of American Inequality," and the three authors are two Ph.D. economists, former Sen. Phil Gramm and his long-ago Texas A&M colleague Robert Ekelund, and former Bureau of Labor Statistics assistant commissioner John Early. Their subject is government statistics -- and how they present a misleading picture of recent economic history.
And the authors' conclusion is that long-standing complaints about the American economy -- that the rich are getting richer and the poor poorer, that we declared war on poverty and poverty won -- are wrong.
How can that be?
The first reason is that Census Bureau statistics on income, on which just about everyone relies, do not include two-thirds of government transfer payments. That made sense in 1947, when Census started reporting the number, and most transfer programs -- food stamps, Medicare, Medicaid, the Earned Income Tax Credit, the child tax credit -- didn't exist.
But today they do, and the bottom two quintiles on the income scale (each quintile is one-fifth of households) get 59% and 24% of their incomes from government transfers.
Second, Census income statistics don't account for taxes people pay. Since the United States has the most progressive national tax system of any advanced economy -- because other advanced countries rely heavily on flat rate value-added taxes -- the bottom two quintiles of Americans essentially pay no income tax, while the top quintile provides 83% of federal income tax revenue.
When we take government transfers and taxes into account, as "Myth" does, then the "government takes and redistributes enough resources to elevate the average bottom quintile household into the American middle class." The bottom three quintiles have incomes that are not that far apart, and the second-highest quintile is not all that far ahead of them.
In dollar terms, the lowest three quintiles post-transfer and -tax incomes range from (rounded off) $50,000 to $66,000, the second quintile is at $88,000, and the top quintile is at $197,000. That's far more equal than the difference in earned income between the lowest quintile ($5,000, since half don't have jobs) and the top quintile ($297,000).
So the ratio of top quintile to bottom quintile incomes from the Census Bureau's 16 to 1 decreases to Gramm, Ekelund and Early's 4 to 1.
And the poverty rate, which government statistics peg at 12%, is only 2% when you cover government transfers. Many of these are people who "lack the basic mental and physical capabilities to care for themselves and their children" and need not income but "specifically tailored programs to address their specific needs."
The authors also expose another myth, the idea that Americans' incomes have been stagnant over the past two generations. The reason again is misleading government statistics -- inflation indexes, especially the oft-quoted CPI-U, that consistently overstate inflation and thus understate real economic growth.
These inflation indexes tend to assume static market baskets of goods and often fail to account for new products and quality improvements. In real life, when apples become too expensive, consumers switch to oranges. And how do you measure the worth of medical care innovations or the capabilities of the latest cellphones?
The argument against adjusting government statistics is that it risks political tampering, which U.S. statistical agencies are proud of having resisted. But using other government statistics to supplement familiar indexes, as "Myth" does to account for government transfers and taxes, is fair game.
If you do that to the average hourly earnings for production and nonsupervisory employees - a statistic that critics seize on to depict a static economy - then "real average hourly earnings would have risen 74% over the last fifty years rather than the official reported number of 8.7%."
Policy implications? One is that we already have plenty of economic redistribution, and maybe too much. Additional spending, such as the Biden COVID package, can cause inflation and encourage idleness. Advocates of universal basic incomes today, like John Maynard Keynes in the 1930s, imagined that people freed from the drudgery of jobs would read great books and enjoy classical music.
Instead, we see jobless men engrossed in video games or mainlining opioids, resulting in reduced life expectancy, family formation and community involvement.
To reverse such trends, Gramm, Ekelund and Early recommend work requirements similar to those in 1990s welfare reforms that increased work effort, earned incomes and family stability. Would there be a backlash for withdrawing such benefits? The lack of blowback from the phasing out of the Biden child tax credit suggests not.
Other suggestions include eliminating unneeded occupational licensing requirements and more school choice, already popular and needed more than ever to repair the damage to disadvantaged children from teacher union-forced public school lockdowns.
There's room here for debate -- and debate conducted based on real facts, not misleading statistics -- to which "The Myth of American Inequality" makes a useful contribution.