It is a “‘a truth universally acknowledged,’ according to the Economist magazine in 2020” that
little progress has been made in raising average American living standards since the 1960s; that poverty has not been substantially reduced over the period; that the median household’s standard of living has not increased in recent years and inequality is currently high and rising
Most of all the last one.
All of this is false. Most of all the last one.
1) Income. The central jaw-dropping, astonishing fact: The statistics you read about income and income inequality ignore taxes and transfers. By doing so, of course, they create a problem that is immune to its purported solution!
Especially on the low end, transfers including in-kind transfers (housing, medical payments, etc.) are a huge part of consumption and properly measured income.
Pay especially attention on the left hand side of the graph. Actual income is essentially flat in the first three quintiles of earned income.
Gramm Ekelund and Early are fond of quintile bar graphs, like this one. The bars are pretty flat from the lowest to third decile, and transfer income is a big part of the story.
More, do just a little bit of adjustment for household size. Single person households are obviously going to have less income than two-earner households. Households with children have less per capita income, but people with kids may be more likely to work. How does it work out? In per capita terms (middle) actual income, including taxes and transfers is almost completely flat in the first four deciles.
Average hours per week 17.3 vs. 38.6; workers per household from 0.2 to 2.0. Sort of mechanically, if you don’t work you don’t have earned income.
Again, the first three deciles are dramatic. The decline in earned income in the top is indeed worrisome but it comes as above from a decline in work. Discuss among yourselves where that comes from.
Oh, and being stuck is also not true. There is a lot of turnover of quintiles, and overall growth does help even those who stay in the same quintile. And, as you might guess, the most likely to underperform their parents are the kids of the super-rich. Elon Musk’s kids are very unlikely to do as well as he did, and there is a lot of luck in being super rich.
There is lots, lots more in the book, including the fortunes of the super-wealthy. There is also a lot on “poverty.” As you can guess official definitions of poverty leave out many transfers.
This book is written in straightforward American English, not in economic think-tank jargon. It shows clearly how each element of the analysis (taxation, transfers, inflation adjustment) contributes to its conclusions. Graphs and tables are comprehensive and comprehensible. The style is lively and lucid…
The analysis probes deeply to demonstrate the robustness of its conclusions..
Most important, the authors don’t clutter their analysis with contentious approaches to measurement, and they limit their policy recommendations to those that flow self-evidently from the facts they document. It is encouraging that three disparate economists can together write an objective book about the measurement of living standards, poverty and inequality without engaging in partisan advocacy that undermines their findings. (“While we each have our opinions and political views,” writes Mr. Gramm in a preface, “we share a desire to get the facts straight.”)
My sense is that the book is not having the impact it should. Economists love complex empirical work, and the mainstream media does not, ahem, appreciate a book that so transparently demolishes the Standard Narrative.
It’s a great read.
Update: Much subsequent discussion here and on twitter revolves around just what’s included and omitted in “income” by various authors. An email correspondent, frustrated with Blogger’s comment feature (me too) sends the following response to Joe Smith, below:
A place to start is a 2018 Cato paper by John Early “Reassessing the Facts about Inequality, Poverty, and Redistribution”. It includes a version of Figure 2.1 above, explanations of major categories, and lists sources.
I went to Early’s very nice paper, and here are some excerpts:
- Census money income estimates explicitly exclude the following:4
- The Earned Income Tax Credit (EITC)
- The monetary value of benefits from the Supplemental Nutrition Assistance Program (SNAP), more commonly known as food stamps
- Free or subsidized medical care such as Medicaid and the Children’s Health Insurance Program (CHIP)
- Free, subsidized, or controlled rent or other “affordable housing” schemes
- Heating subsidies
- Free or reduced-fee social services such as daycare, tax preparation, or meal services
The EITC is given to low-income families with at least one employed person. In 2015, the annual credit was as much as $6,242 per household and was given to households with incomes as high as $53,267. The EITC is a “refundable” tax credit, meaning that if an individual owes no income taxes, money equal to the entire credit is sent to the filer. The EITC has all the characteristics of money income, but it is not counted as such by the Census Bureau.
The government has defined the EITC and other refundable credits as “negative taxes.” Government reports of expenditures are understated because the money paid for the EITC payments is not included. Taxes are also understated by the amount of the EITC because it is subtracted from the reported tax collections.
SNAP funds are paid as money on a debit card, but they are defined as in-kind income and not counted because they can nominally be spent only on food. Rent subsidies, free medical care through Medicaid, and any free social services are also deemed as in-kind income and are excluded from the calculations.
I found the last sentence revealing. Philosophically, the census wants to leave out “in-kind income.” But of course for evaluating people’s standard of living that matters a lot. It’s not wrong, it’s just a definition, useful for some things but not for others. Like, evaluating people’s standard of living.
Interesting as well,
Compared with amounts reported to the Internal Revenue Service (IRS), the CPS underestimates retirement income by at least 60 percent in each income quintile. IRS data show 50 percent more households with private pension income, and for those households reporting pension income the IRS shows 50 percent more income than the CPS does.6 No one would report too much income to the IRS, so the higher IRS comparisons are reliably the minimum limit of underreporting.
There is a lot more in the paper, and I’m perhaps doing the book a disservice, as I recall from reading it last summer that it is very clear and transparent about what the definitions of “income” are and just why they come to such different conclusions from others. But I add this to give a flavor of the issues.