Rethinking Poverty and Income Inequality

In recent years, we have been consistently told that income inequality is on the rise and that the war on poverty declared in the 1960’s has been a failure. The Economist magazine stated bluntly that “it is a truth universally acknowledged that inequality in the rich world is high and rising” (“Have the Top 0.1% of Americans Made Out like Bandits since 2000?”, May 7, 2020).

The statistics published by the various statistical agencies of the federal government would seem to support this conclusion. Transfer programs now constitute over 20% of GDP, and yet the poverty rate seems to be stubbornly in the 11-15% range depending on the general state of the economy.

But what if the data behind these assertions is just flat out wrong? A recently published book by Phil Gramm, Robert Ekelund, and John Early (The Myth of American Inequality, 2022) makes a strong case that the American dream remains alive and well, that inequality is in fact diminishing, and that the real rate of poverty as defined in the 1960’s has in fact declined substantially over the past few decades.

The authors point out that the income statistics used to compute inequality and poverty are deficient in two core areas:

• The majority of transfer payments from governmental agencies at all levels are not counted as income – households in the bottom quartile of income received on average $45,389 in government transfer income and at least two thirds of that is not included in income inequality and poverty estimates produced by the Census Bureau.
• Income statistics are not adjusted for taxation, and the majority of the tax system is progressive and structured to avoid taxation on received transfer payments.

The book outlines one hundred different transfer programs that distribute over $100 million annually – and there are thousands of minor programs operated by various levels of government. These transfer payments account for over 20% of national earned income, and yet many of these expenditures are not counted in the published statistics – especially those of the Census Bureau which doesn’t include such major programs as Medicare, Medicaid, the refunded portions of the Earned Income Tax Credit, school lunch programs, and even Section 8 Housing Choice Vouchers. The Census Bureau estimates count only one third of the nearly $2.8 trillion dollars distributed through income transfer programs in 2017 in assembling poverty statistics.

The result? The authors claim that the poverty rate is really 2.5% of households, not the 12.3% reported by the Census in 2017. This is not to suggest that poverty and income inequality are not serious issues which should be matters of public policy concern, but rather that the discussion should be framed on the basis of more comprehensive measures of income.