In the current issue of Regulation (Winter 2023-2024), I review the book of Phil Gramm, Robert Ekelund, and John Early, The Myth of American Inequality, which I strongly recommend. My expectation for what is a double review (see pp. 53-57 in the pdf version of Regulation‘s review section) was that I would not find this book interesting. But an expectation is at best a hypothesis, to be refuted or confirmed. I explained:
As I prepared to read these two books, I had different expectations. I thought Branko Milanovic’s Capitalism, Alone would contain some interesting defenses of capitalism, while The Myth of American Inequality by Phil Gramm, Robert Ekelund, and John Early would offer an easy and perhaps banal defense of existing inequality. After all, what should I expect from a politician like the ex‐senator Gramm, even if he pursued some good policy ideas during and after Ronald Reagan’s presidency (when the Texan switched to the Republican side of the Senate aisle)?
To my surprise, I found Milanovic’s ideas rather banal and too uncritical of the zeitgeist of our times. Gramm et al., on the contrary, present deep and interesting statistical and economic analyses of the trumpeted inequality of American society.
More background on the authors of The Myth of American Inequality:
The authors are three economists: Gramm, who at the beginning of his career taught economics at Texas A&M University; Ekelund, a professor emeritus at Auburn University who passed away as I was putting the finishing touches on this review; and Early, a mathematical economist and consultant who, interestingly, was once a legislative assistant of the late Democratic senator George McGovern.
The Myth of American Inequality provides strong evidence that the trumpeted official statistics (1) much exaggerate the growth of inequality in market income (income before taxes and transfers) in the half-century between 1967 and 2017; and (2) show a growth of income inequality after taxes and transfers that did not occur–not totally surprising since the welfare state exploded over that period. The authors prove their claims mainly with other official statistics that are not biased like some reports from the Census Bureau and the Bureau of Labor Statistics are.
It is difficult to summarize the book in a short post and I encourage you to read at least my review. If you are a “chiffrophile” (a neologism meaning “number lover,” used and probably invented by economist Angus Maddison to characterize himself) or are interested in the issue of inequality, you will want to read the book. Let me just give a few examples of the surprises waiting for you, as quoted from my review:
We observe that real wages increased not by 8.7 percent … but by 74 percent during that period [1967-2017]. And the real median household income nearly doubled, instead of increasing by the reported 33.5 percent.
Real earned incomes increased all over the distribution ladder.
If we recalculate the poverty rate by adding all the transfer payments (net of taxes) and using a proper price index, it falls to 1.1 percent in 2017 compared to the official rate of 12.3 percent.
A perverse consequence of the massive transfers to bottom‐quintile households has been to incentivize these people to decouple from the labor force. In 1967, in that quintile, those who had a job represented 68 percent of able‐bodied, working‐age individuals not studying full‐time. In 2017, after 50 years of War on Poverty programs, only 36 percent worked.
[Editor’s note: See also Phil Gramm’s interview with Juliette Sellgren on the Great Antidote podcast.]
READER COMMENTS
vince
Jan 15 2024 at 1:03pm
How does Gramm’s book fit with the Gini index, which hit a low of 35 in 1980 but 40 in 2021? Also, share of total income held by top 1% was 23% in 1990 but 32% in 2022.
These numbers are from FRED.
Pierre Lemieux
Jan 15 2024 at 3:08pm
Vince: Doesn’t my review partly answer your question? Gramm et al. explain the rest.
vince
Jan 15 2024 at 4:02pm
It depends on how all the parties are measuring income. I’m not sure how GINI defines income. My other cite was incorrect. It was the top 1 percent in wealth, not income. (I searched for income, not wealth.)
Here’s another stat: mean family income/median family income was 1.09 in 1958, 1.13 in 1976. In 2022 it was 1.36. Income is per Census, which includes public assistance but apparently that’s just cash assistance. Medicaid alone might make a big difference.
GIGO?
Mark Thornton
Jan 15 2024 at 5:14pm
Vince: They look at income available to spend vs. earned income. This distinction turns all the government stats upside down. Read the book please. Mark
Pierre Lemieux
Jan 15 2024 at 8:27pm
Vince: I think I don’t understand your point or your question. The Gini coefficient (invented by the Italian statistician and fascist Corrado Gini) can be applied to any sort of income or wealth distribution for any units in any population (provided we have the raw data, of course). In my review, I mention the conclusions of Gramm et al. regarding two Gini:
This is explained in some detail in my review and in much detail in Gramm et al. (In these stats, households are the units of analysis.)
vince
Jan 15 2024 at 9:41pm
This all seems to be a good example of the problems with statistics and the adage that the devil is in the details. I’m sure Gramm is on to something, but is Gramm’s correction to the GINI coefficient itself flawed? I doubt that reading his book would answer that question without serious research.
The share of wealth might be a more reliable indicator than share of income. Then again, how is wealth being valued?
Median to mean income might be better. Including in-kind income might even make that ratio more unequal.
Jon Murphy
Jan 16 2024 at 9:31am
vince-
Like the others, I am confused as to what your point is. You ask the question whether their statistics are flawed and state a truism about devil in the details, but you never provide an answer.
Any statistical analysis will have flaws. We are people with access to imperfect data and models that have assumptions. C’est la vie. What matters is whether those flaws are consequential.
vince
Jan 16 2024 at 2:23pm
My point is that there are plenty of stats indicating income inequality has increased. Are they all wrong? I’m concerned that this is an example of manipulating statistics to say whatever you want them to say–on both sides. And maybe that’s what the book shows–you can argue both sides.
Jon Murphy
Jan 16 2024 at 3:07pm
Yes, possibly, if they all suffer from the same problem of excluding transfer payments.
Perhaps, but one needs solid evidence to make that claim. Disagreement is not evidence of manipulation.
Mark Thornton
Jan 15 2024 at 5:15pm
Dear Pierre:
Thank you for your review. Bob would have appreciated them very much.
Mark
Pierre Lemieux
Jan 16 2024 at 11:44am
Thanks for your comments, Mark. Unfortunately, I never met Bob in person.
Craig
Jan 15 2024 at 7:23pm
“trumpeted official statistics”
I would naturally be one to tend to agree with you, but economics in particular seems susceptible to incongruent factual claims. I’m sure Robert Reich would tend to say the exact opposite and that’s kind of a problem to those who are observing from the outside looking in. For example, if you ask me to predict who will win in IA I personally have not conducted any polling. Polls seem to say Trump so beyond that what else do I have to go on? Nothing, now if there were another poll saying Haley, well then one poll would be saying one thing and the other poll would be saying another. Unless I have some reason to give weight to one source over the other, I’d simply be stuck awaiting the results. To expound further let’s say that we are debating law. Well, when debating law its usually best to assume a GIVEN set of facts. There might be circumstances where we can debate facts of course, indeed that’s why there are trials, but its pointless to debate both facts AND law simultaneously because if one changes the facts one changes the result. It seems to me that the economic discipline suffers generally from not agreeing often times on the facts.
And indeed while I tend to agree with you, I must say I have heard anecdotes of the ‘stagnating middle class’ for decades now.
Pierre Lemieux
Jan 15 2024 at 8:46pm
Craig: There is a whole class on epistemology in your comments. Of course, some people think that unicorns exist or that Hillary Clinton was seen at the Pizza-Gate pizzeria or that the 2020 election was stolen (by the opposition party!), or that the earth is 10,000 years old, and so forth. This is why, as discovered starting with the pre-Socratic philosophers, rational analysis is useful. Rational analysis (how do I know things?) is based on theory (logic) and (when possible) empirical verification. Now, you cannot analyze anything without a ceteris paribus, which requires the use of counterfactuals. Moreover, in social (including economic and political) matters. the theory must carefully distinguish between the positive (matters of fact) and the normative (moral opinions). As for predicting, nobody knows the broad future although the test of a good theory is that it can provide limited forecasts ceteris paribus: if the price of EVs increases, the quantity demanded will decrease, ceteris paribus; if the cost of voting increases, fewer voters will vote; given current tastes (that’s part of the ceteris paribus), if McDonald’s puts a layer of castor oil in its hamburgers, demand will decrease; and so on, and so forth.
Pierre Lemieux
Jan 15 2024 at 8:49pm
Post Scriptum–Craig: Also, if your purpose is understanding how the world works, anecdotes are seldom useful–a bit like samples of one (on the empirical side) or the treatises composed by typing monkeys (on the theoretical side).
steve
Jan 16 2024 at 9:54am
Agree with your points here Pierre, and I am a bit fo a numbers obsessed guy, but my concern is that Gramm has always been foremost a political figure and he and his wife exhibited a profound lack of integrity, lack many political people, during their careers. So for me, the SNR just isn’t good enough to read anything he writes. However, from reading other people who I believe to have some innate integrity and are not writing from a political POV, I think there is good reason to believe that income inequality is not quite as bad as some fear, but its still there and probably growing. I note that most people avoid writing about wealth inequality which has also grown. At some level those two are linked.
Steve
Pierre Lemieux
Jan 16 2024 at 11:56am
Steve: Wealth and income are intimately linked. Income is the return on wealth if human capital is included in wealth and if we include utility in the return. Since the value of human capital and non-monetary returns are not observable (and capital is difficult to measure), the definitional relation is not as clear in statistical data. I elaborate a bit on that in my Regulation review of Mark Mitchell’s Plutocratic Socialism.
If you are a chiffrophile, you would learn a lot (and more) from The Myth of American Inequality.
Craig
Jan 16 2024 at 12:00pm
“We observe that real wages increased not by 8.7 percent … but by 74 percent during that period [1967-2017].”
Seems to me to be a very big difference.
Pierre Lemieux
Jan 16 2024 at 6:12pm
Because of two big causes that amount to a 1% difference per year in the estimate of inflation: (1) the use of the ordinary CPI, which does not take into account the substitution effect, as opposed to the chained CPI (also calculated by the BLS); and (2) the use of the CPI instead of the BEA’s Personal Consumption Expenditure index, the former including large delays to incorporate the effect of improved or new goods. (Interestingly, the IRS uses the PCI index to adjust income tax brackets for inflation!) This rapidly gets technical and reading the book helps.
Craig
Jan 18 2024 at 11:10am
““Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ― Albert Einstein”
Proving the above Einstein quote, in this case the impact even a 1% difference in an inflation rate has on the nominal growth rate, over time the real growth rate becomes significantly quite different!
Jose Pablo
Jan 16 2024 at 1:30pm
Why is inequality relevant?
I am always puzzled by the amount of effort dedicated to such an irrelevant indicator.
Jon Murphy
Jan 16 2024 at 1:35pm
I don’t think inequality is irrelevant. I think it can be a symptom. For example, high inequality could indicate a kleptocracy.
Inequality I think can be a signal. But it is not in and of itself necessarily a bad thing.
Jose Pablo
Jan 16 2024 at 2:53pm
For example, high inequality could indicate a kleptocracy.
But then what is “bad” is kleptocracy, not inequality. Particularly taking into account that “inequality” wouldn’t be a reliable signal of kleptocracy. It isn’t difficult to think of both false positives and negatives.
Monte
Jan 16 2024 at 2:20pm
Inequality is relevant. Indeed, as Plutarch observed, “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.” The issue needs to be addressed, however, it is not considered a top priority by most Americans (according to a January 2020 PEW research survey).
Except for politicians and the media constantly shaving their heads and putting on sackcloth because of it, most Americans would live in blissful ignorance of the fact that, as of 2019, the earnings of the top .01% increased by 345%.
Jose Pablo
Jan 16 2024 at 3:04pm
Inequality is relevant
Why is so?
Plutarch also firmly believed in divination and in God direct revelations. I am not very much moved by either of Plutarch’s beliefs
The earnings of any percentage of the population do not contain any useful economic or moral information on the way that particular society is organized.
This percentage being higher can be better, worse or irrelevant and so can that percentage being lower.
Craig
Jan 16 2024 at 3:33pm
“Inequality is relevant
Why is so?”
Its relevant because people not only think its relevant but because as a result of this belief people actually take political action which I can attest is quite relevant to me.
Jose Pablo
Jan 16 2024 at 4:05pm
By this same token whether Jesus is consubstantial of God or merely a reflection of him is extremely relevant, since many people has fought and die because of that. The same can be said on the discussion on whether or not angels are sexless.
My point, on which you seem to agree, is that discussions about inequality belong to this category.
vince
Jan 16 2024 at 5:41pm
Inequality is relevant because people want fairness. Don’t ask me to define fairness.
Jose Pablo
Jan 16 2024 at 7:01pm
“Equal” is not necessarily fair and “unequal” is not necessarily unfair. Even if we only talk about wealth. Equating “equality” and “fairness” is a baseless claim. Actually, nobody claims that (or so I thought until now).
And what people really want is not fairness, it is other people’s money. The cloudy thinking revolving around “inequality” and “fairness” provides an extremely weak justification to get that. Mostly using government coercion on individuals to that end.
Again, inequality is a “consequence” of a way of organizing the means of production in a society. As Jon rightly points out, it could indicate kleptocracy or crony capitalism … or not, who knows.
But even in this case (when it is a symptom of crony capitalism) trying to solve crony capitalism by fighting inequality is like trying to cure your flu by breaking the thermometer.
vince
Jan 16 2024 at 8:33pm
A bit of a straw man. Who equated equality with fairness, or said equal is necessarily fair? People look at inequality as an indicator. An example is the Gini index. As Jon mentioned, it could indicate a kleptocracy.
Really? Sure, some just want OPM, but I believe and hope that most don’t.
Jose Pablo
Jan 16 2024 at 9:02pm
Inequality is relevant because people want fairness
When you say that, you imply that equality and fairness are equal or, at least, closely related. Otherwise, your sentence is equivalent to say:
Inequality is relevant because people want bananas
vince
Jan 16 2024 at 10:11pm
This is really going in circles now. Let me just add a couple things. Implication and inference aren’t the same thing (are not equal;)).
I also said I wouldn’t dare to define fairness. If I believed equality was fairness (and inequality was unfairness), I would have said so.
Jose Pablo
Jan 17 2024 at 7:22am
I am confused. What is your (circular) point?
That equality implies fairness? that fairness implies equality?
Both of these implications make no sense. Are false implications. Part of the “cloudy” thinking I mentioned.
Monte
Jan 16 2024 at 5:08pm
If everyone believed as you did, Jose, inequality would be irrelevant. Unfortunately, many do not, and so the world remains affectively, if not ideologically, polarized and today harbor extreme dislike towards one another, even to the extent of threatening physical violence.
Jose Pablo
Jan 16 2024 at 3:32pm
https://fakenous.substack.com/p/against-equality-and-priority
Huemer on this topic.
Inequality has been made relevant because governments’ main occupation is redistribution (they redistribute around 40% of the GDP every year … that’s a lot of work!) and the existence of inequality provides a populist (but wrong) excuse for redistribution.
So, people that advocate for bigger government / redistribution defend the relevance of inequality and people that advocate for smaller governments defend the irrelevance of inequality. It is a discussion about politics, and it is only relevant to politics.
But all this says nothing about what’s the level of inequality that makes a “society” (whatever it means) better off. Inequality is not the cause of prosperity or the cause of the lack of prosperity. It is a consequence of a certain way of organizing society and this way can be good and result in inequality or be bad and result in inequality or the other way around.
The relevant variable to judge the production relations of a society is the level of wellfare this relations produce, not, by any means, the level of inequality they produce.
It is clear, for instance, that if in society B everybody is better off than in society A, society B should be preferred. Even if society B has much higher inequality. Who cares?
Craig
Jan 16 2024 at 3:41pm
You wrote and posted this one minute before my post just before this one and so I was posting as you were posting. So just to expound….you write:
“Huemer on this topic.
Inequality has been made relevant because governments’ main occupation is redistribution (they redistribute around 40% of the GDP every year … that’s a lot of work!)”
Indeed because people think this is relevant.
“and the existence of inequality provides a populist (but wrong) excuse for redistribution.”
This is where I tend to disagree with libertarians a bit because I do believe that the state, and specifically NOT the federal government I might add, should be involved in some degree of redistribution to mitigate the impact of poverty excused by necessity, genuine legal necessity, not a comprehensive cradle to grave welfare state.
Jose Pablo
Jan 16 2024 at 4:16pm
should be involved in some degree of redistribution to mitigate the impact of poverty excused by necessity, genuine legal necessity, not a comprehensive cradle to grave welfare state.
If you believe redistribution is good, then inequality HAS to be good since redistribution became impossible in its absence. Inequality is a precedent condition for redistribution.
Pierre Lemieux
Jan 16 2024 at 11:15pm
Jose: Oops! Although I sympathize with your general argument, this is a non sequitur. If I believe aspirin is good, it does imply that I think headaches are good.
Jose Pablo
Jan 17 2024 at 4:25pm
Fair enough, Pierre.
But if “redistribution” is the “aspirin”, “inequality” is not the “flu”.
The “flu” can be “poverty” or “the lack of constitutional agreement a la Buchanan from some part of society”.
Then some relief for these illnesses could be achieved through “redistribution”.
But then, in your example “inequality” would be the carbon, oxygen and hydrogen that allow us to produce “aspirin”.
Poverty and band of thugs can be widespread in “equal” societies. But if they are that equal, “redistribution” would be in very short supply.
Pierre Lemieux
Jan 19 2024 at 11:38am
I think that when we say that inequality doesn’t matter, we mean that it doesn’t matter economically and philosophically. For a good discussion of the meaninglessness of equality (although I would say it would not apply to formal equality), see Anthony de Jasay’s Social Justice and the Indian Rope Trick and my review in the Spring 2016 issue of Regulation.
Craig
Jan 16 2024 at 3:50pm
“It is clear, for instance, that if in society B everybody is better off than in society A, society B should be preferred. Even if society B has much higher inequality. Who cares?”
Better to reign in hell than serve in heaven. Let’s tweak your example a bit and say that you could be the richest person in Society A or have 3x as much income but still be the poorest person in Society B. Which would you choose? I’d be the richest person in Society A. Why? Because women are hypergamus, that’s why.
Jose Pablo
Jan 16 2024 at 4:24pm
Why? Because women are hypergamus, that’s why.
I strongly oppose democracies being in the business of “helping” with this problem. Politicians would end up having in their political manifestos mandatory disfiguration surgery for handsome men, and I don’t want to suffer that kind of persecution.
Craig
Jan 16 2024 at 4:37pm
I’m ugly, I need help.
Pierre Lemieux
Jan 16 2024 at 6:46pm
Craig: To defend José, he did write (my underlines):
This is Pareto optimality: by hypothesis, it included your being better off.
Opposed to that is the (your?) hedonistic conception of the state, so much shared by most people that it explains why a minority pays such high taxes: the state is good that is good to me. Let me introduce Princess Mathilde. She defended her late uncle, Napoléon Bonaparte, by explaining that “without that man I should be selling oranges on the wharf in Marseilles.” (Quoting from Anthony de Jasay’s Against Politics.) In a rich and developed society, close to Pareto optimality, she would quite likely not have to sell oranges, or else her selling oranges would give her so much more command over resources that her life would be, according to her own preferences, much more comfortable than in the mid-19th century.
Pierre Lemieux
Jan 16 2024 at 6:54pm
José and Craig: Now, to push a bit toward Craig’s side, it may be that Pareto improvements (moving to Pareto optimality from where we are) would require bribing the poor and less efficient with the sort of mini-welfare state that, I assume, Craig is defending–or rather with the sort of income insurance that James Buchanan and Gordon Tullock (and many others in their mouvance, I think) considered as possible a result of a unanimous social contract.
Jose Pablo
Jan 16 2024 at 7:32pm
bribing the poor and less efficient with the sort of mini-welfare state that, I assume, Craig is defending–or rather with the sort of income insurance that James Buchanan and Gordon Tullock (and many others in their mouvance, I think) considered as possible a result of a unanimous social contract.
Yes, Pierre. This “bribing” could be an improvement. But my point is that no inequality indicator should be in the “scorecard” that would allow us to objectively judge whether or not this “new society” is a better place.
This “better” should be judged, for instance, by:
* the general level of material prosperity of this new society
* the number of individuals worse off in this new society
That this new society has, for instance, a higher level of material prosperity and NO individual worse off is relevant. The “level of inequality” of this new society, on the other hand, is totally irrelevant to judge the success (or lack of) of Buchanan’s bribing scheme.
Exactly the same way that this society would be a better place if the bribing scheme helps to produce something similar to Mahler symphony no 9, Tchaikovsky’s Nutcracker or Grieg’s Peer Gynt.
But the fact that in this new society everybody is equally skillful playing the piano (because the less skillful members were bribed with free piano classes) says nothing about how desirable this new society would be.
Knut P. Heen
Jan 17 2024 at 9:33am
Economic growth will always lead to increased inequality (as commonly measured) because some people want more material goods (measured wealth) while others want more leisure time to pursue other objectives (not measured wealth). If everyone were dirt poor, we would have to spend most of our time trying to feed ourselves. Equality is a symptom of lack of choices.
David Seltzer
Jan 17 2024 at 9:47am
Knut, good point.
Jose Pablo
Jan 17 2024 at 4:14pm
Economic growth will always lead to increased inequality (as commonly measured)
Specialization of labor too.
T Boyle
Jan 23 2024 at 1:31pm
The importance of pre-tax, pre-transfers income inequality becomes clearer when it’s reframed as wealth creation inequality.
As wealth creation inequality rises, our society becomes more dependent on a few people to create wealth, which makes national wealth more fragile. If those few people fail, or the next generation of them fails to appear, we’re all in trouble. Wealth creation is easier when you grow up watching your parents do it: business-family kids grow up seeing deals done and new businesses imagined; Hollywood kids grow up seeing movies get made; middle-class kids grow up seeing white-collar work on a regular schedule; poor-family kids grow up seeing dependency. Not all kids follow their parents – not even close – but it does introduce a bias. If we want a robust source of wealth generation in the long run, we need broad participation in wealth creation. Allowing wealth creation to get more concentrated, and then saying “but we have taxes and transfers, nothing to see here” is not okay; it does not solve the problem.
And that’s even before we get to the human cost of training generations on dependency.
Pierre Lemieux
Jan 23 2024 at 7:31pm
T: A couple of comments/questions: Why say “wealth creation inequality” instead of “wealth inequality”? Of course, the wealth belongs severally to those who created it, if and until it is consumed and disappears–or until it is stolen. Also, I don’t know what is “national wealth.” Who’s the owner? Whom was it stolen from?
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