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Capitalisn’t: Poverty and Inequality in America (Part 1)
- June 15, 2023
- CBR - Capitalisnt
In their book The Myth of American Inequality, former US senator Phil Gramm and his coauthors challenge conventional wisdom on the state of income inequality in the United States. They argue that the gap between the rich and the poor is not as wide as often claimed because it is measured incorrectly, thus biasing public policy debates.
On this episode of the Capitalisn’t podcast, Gramm joins hosts Bethany McLean and Luigi Zingales to discuss the evidence behind these claims, as well as implications for the pursuit of equality of opportunity, the “war on poverty,” and the role of government in shaping economic outcomes.
Phil Gramm: The thing I want you to understand is, I want to reform this system not because I’m trying to be mean to people, but because I love people, because I think the current system is keeping people down.
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Bethany: So, Luigi, here’s a simple question for you. What’s the most prominent argument against capitalism?
Luigi: I think if we try to synthesize all the arguments we have heard in the last few decades, two words come immediately to mind: poverty and inequality.
Bethany: Everyone has read Thomas Piketty’s Capital in the 21st Century. OK, well, many people at least have it on their bookshelf and pretend to have read it, me among them. The core of the argument is that inequality in the United States and Europe is rising back toward pre-World War I levels. The core idea is that income is stagnant for those in the bottom 50 percent, while it’s exploding for those at the top.
Luigi: But it’s not just Piketty and Saez. Even the Census Bureau reported that the poverty rate in 2021 in the United States after . . . You remember all the child tax credits that we paid, all the money we paid with the stimulus package for COVID, et cetera. After all of that, our poverty rate was still 11.6 percent, meaning that 37.9 million people in the United States were living in poverty. That’s almost like four New York Cities of people living in poverty. At the same time, according to the Congressional Budget Office, the richest 1 percent made 84 times as much as the bottom 20 percent in 2019.
Bethany: But what if that’s all completely wrong? So argue former U.S. Senator Phil Gramm and economists Robert Ekelund and John Early in their book, which is entitled The Myth of American Inequality: How Government Biases Policy Debate. That’s a big title, The Myth of Inequality, but the argument is actually pretty simple. It’s not a bunch of complicated economic tinkering or funny econometric modeling. It’s simple.
It turns out, in the way the Census Bureau measures poverty and inequality, it doesn’t count noncash transfers, such as Medicare and Medicaid, food stamps, refundable tax credits, and more. In 2017, the last year with all the data available, according to Gramm, households in the bottom 20 percent of the income distribution actually received a full $45,000 in government transfers, more than a lot of people receive as their annual salary. Of course, that money comes from the richest people, with the top 1 percent paying $42,000 of that number.
Luigi: Again, using the official Census Bureau numbers, if you just look at the income of the top 20 percent of the income distribution, and you compare it with the income of the bottom 20 percent of the income distribution, the ratio is 17:1. But then, if you add in all the transfers that mostly the bottom 20 percent will see and all the taxes that mostly the top 20 percent of the income distribution pay, you end up with a gap that is only 4:1.
The authors argue that, thanks to this payment, the percentage of people living in poverty in the United States has plummeted from 32 percent in 1947 to 15 percent in 1967 to only 1.1 percent in 2015. They argue that 94 percent of households in 2017 would have been at least as well off as the top quintile in 1967.
The grand conclusion is that income inequality has fallen, not risen, in postwar America, and poverty has declined dramatically and almost disappeared, not remained largely static for half a century, as many people claim.
Bethany: Their book is also, in part, a policy prescription. The authors write this: “The explosion of transfer payments following the War on Poverty has caused a significant number of prime work-aged persons to become detached from the economy. That disengagement from the world of work has denied them the opportunity to benefit from the extraordinary economic progress that has occurred in the last 50 years and is also the single largest cause of income inequality in post-war America.”
In other words, people who are getting these transfer payments just need to get off their butts and work more. They also write that the second-largest source of income inequality has been differences in both the quantity and quality of educational attainment.
Luigi: Their prescriptions are very simple and, if you want, old-fashioned. It’s to remove the government disincentives to work by, among other things, having states implement a work requirement for public-assistance programs and reforming elementary and secondary education to make sure that it maximizes the chance of success for people.
Bethany: Just so our listeners know, this is part of a two-part series we’re going to do on poverty and inequality. We’re going to bring in the sociologist Matthew Desmond next for a different perspective.
It seems to me that there are two separate arguments in your work, right? One is about inequality, which is nowhere near what people think, and the other is about poverty, which is also nowhere near what people think. Let’s start with poverty. Can you explain that one to our listeners?
Phil Gramm: Well, part of the problem is, in 1947, when the Census Bureau started measuring household income, which is the fundamental statistical building block of our measure of poverty and our measure of inequality, they didn’t have the statistical ability to measure the value of in-kind payments, so they counted only cash and cash-equivalent payments.
Since 1947, especially with the coming of the War on Poverty, there has been an explosion of in-kind payments; for example, food stamps. Another in-kind contribution would be where government pays for Medicaid or government pays for rent subsidies. There are over 100 federal programs where government pays bills, but the Census Bureau does not count the value of those transfer payments as income to people who receive them. Also, the Census Bureau does not take into account taxes, including tax credits, so in total, for poor people, about 88 percent of all transfer payments from the government are not counted as income in measuring the poverty rate.
When you count that income, and you count taxes as income lost, then the picture changes completely in terms of the poverty rate and in terms of income inequality. The value of transfer payments going to the bottom 20 percent of income earners has risen from $9,700 a year to $45,400 a year between 1967 and 2017, and there have been a series of studies. Bruce Meyer at the University of Chicago has probably done the seminal study, where he looked at what people who were in poverty consumed in 1980 and compared that to what they consumed in 2017 and concluded, based on consumption, only between 2 percent and 3 percent of Americans in 2017 were poor, by the definition of poverty that we had in terms of consuming power in 1980.
The Bureau of Labor Statistics numbers show that the bottom 20 percent of income earners in America consume roughly twice what their income is. Now, how is that possible? Well, it’s possible because the Census Bureau is not counting much of the transfer payments that are occurring.
Luigi: Now, one of the reasons why these programs have expanded so much is because there’s been a concerted effort to reduce the stigma associated with them and make sure that people who are in need actually use them. For example, now we use credit cards and not the old food stamps that older people, like Bethany and I, remember. You seem to be kind of unhappy with this effort. Why?
Phil Gramm: No. I take no position whatsoever on the amount of welfare payments. I take issue with the fact that we don’t count their value in measuring poverty. I’m not taking a position one way or another whether they’re too high, whether they’re too low. All I’m saying is that we’re getting a totally misleading picture of the number of people in America who are poor.
Now, look, 2 percent to 3 percent of the population is not an insignificant amount of the population. There are poor people in America, but in many cases, the poor people have fallen through the cracks because of mental illness or drug addiction. If you’ve got people that have fallen through the cracks, you’ve got to find out what their problem is and try to help them deal with their specific problem. Simply adding more food stamps or more rent subsidies or more refundable tax credits won’t reach those people. It simply increases the amount of transfer payments going to people who, by the definition that we use for poverty, have not been poor in a very long time.
Bethany: So, your argument, in effect, collapses the difference between cash and a transfer payment, but isn’t there a difference in the sense that a person has a choice of how to spend the first one and no choice at all with the second one? I keep thinking a little bit about the famous Marie Antoinette quote that she didn’t actually say, “Let them eat cake.” Isn’t this a little tiny bit of let them eat Medicaid?
Phil Gramm: No, you can argue that the benefits government provides are not worth what they cost, but you can’t argue that food stamps aren’t worth anything, which is what the Census Bureau is, in essence, arguing.
Luigi: Let’s now move to inequality. It seems that you are suggesting that, even on a pretax basis, income inequality has not gone up from 1980 to 2017. Is that correct?
Phil Gramm: No, we argue that the pretax inequality has risen substantially, in part because the labor force participation rate among the bottom 20 percent of income earners has declined from 68 percent to 36 percent, so earned-income inequality has grown, but transfer payments have grown faster than earned-income inequality. Taxes are more progressive today than they were in 1967, so that the level of inequality is actually lower today, very slightly, than it was in 1967, and in fact, slightly lower than it was in 1947.
When people are saying that one of the greatest problems in America is income inequality, they’re talking about statistics that don’t count most transfer payments at the bottom of the income distribution and don’t count any taxes toward the top of the income distribution. If you take both into account, income inequality has actually fallen slightly.
Now, I know that’s very different than the conventional discussion. You’ve all heard Bernie Sanders saying that income inequality in America is growing and that that growth is obscene and unsustainable, but the reality is, if you look at the numbers, it actually has declined slightly over the last 70 years.
Bethany: So, if you believe in the dignity of work, isn’t it still a problem that earned income has diverged so dramatically, even if we agree transfer payments have compensated for much of it? Isn’t there a problem with how our modern economy is structured?
I’d point to a 2020 GAO report about federal social safety-net programs, and the headline is that millions of full-time workers still rely on federal healthcare and food-assistance programs. Most of them work for private-sector employers, including some of America’s biggest companies. Isn’t part of the issue dignity of work and the way in which the labor market works these days, such that even people who work full-time have to get federal safety-net benefits?
Phil Gramm: Well, the level of income of bottom 20 percent earners who actually work has risen pretty dramatically in the last 50 years. The value of college education has risen by a very large amount, and the differential between people who have human capital and people who don’t have much human capital, it shows up in the marketplace.
But the two things that I believe, and the book analyzes and presents statistics on, that we could do to eliminate earned-income inequality, or to reduce it is a better way of saying, if you had a mandatory work requirement for welfare to keep people in the labor market, where opportunity is and where skills are developed, and if you had a more effective education system, especially in the inner cities, that made it possible for more people from poor families to go to college and gave them the tools when they got to college that allowed them to major in the areas where income is highest, that we could reduce earned-income inequality.
Look, I think we ought to pursue equality of opportunity as a basic right. Obviously, there are limits to what government can do. If my mother loved me and your mother didn’t love you, there’s no government program that’s going to be able to eliminate that, but providing quality education . . . We present the hard data about school choice. I’m not sure that school choice and competition is the best way to deal with failing schools, especially in the inner cities, but it performs better than the public education system that we have now. The statistics are overwhelming and irrefutable if that’s the case.
Bethany: So, Charles Calomiris wrote this in a very favorable review of your book. He wrote, “Increased earned-income inequality is the natural consequence of redistributive policies. If one can enjoy median household consumption without earning any income, the incentive to work is substantially diminished. This largely explains the growing distance between earned and total income for poor households.” Do you agree with that interpretation, or would you argue there’s a little more to it?
Phil Gramm: Well, I think the correlation is very high. When we had the explosion of transfer payments, we had a precipitous decline in the number of people with relatively low skills who work. The labor-force participation rate fell from 68 percent to 36 percent. There’s no debate about that. Nobody refutes those numbers.
The amazing thing is, when you look at the bottom 20 percent of earners and the second and the middle quintile of earners, the rewards for working are so low that the amazing thing is that 36 percent of poor people in America work, because the returns they get relative to what they can get from all the government programs is relatively small.
The bottom 60 percent of earners in America, when you count all transfer payments and you take away all income paid out in taxes, the bottom 60 percent of Americans have similar incomes, and so the reward for working, if you have a low skill level, is very low. The problem is, of course, if you don’t work, you don’t get on-the-job training, you don’t accumulate skills, and you don’t move up as the economy moves up.
You can think of the economy as an escalator. If you get on it, the escalator is moving up because of the growth in the economy and productivity, but if you don’t get on the escalator, you’re just simply dependent on government transfer payments for income. Unfortunately, many poor people in America today have fallen into that trap.
Bethany: In our discussion so far, we’ve lumped the recipients of transfer payments into one homogenous group, but in reality, they’re really different, because there’s the elderly and there are children, and so there are two big sets of people getting noncash transfer payments who actually can’t work. What percent of the noncash transfers are going to the groups of people who can’t work, and how does a proposal to add work requirements help the people who wouldn’t be able to work?
Phil Gramm: Well, first of all, nobody has proposed work requirements for people who are retired, over 66, I guess the retirement age is now. No one has proposed work requirements for people who are disabled. All of the requirements I’ve ever seen, from President Clinton on, have been requirements that had special provisions for people with young, dependent children. But, basically, the amount of transfer payments going to people who are not elderly, not disabled, is roughly similar to the amount going to people who are elderly and are disabled.
Look, it’s not . . . I want people to work because I think it’s in their interest for them to work. Now, it’s in America’s interest, obviously, because we have more people pulling the wagon, fewer people riding in the wagon, but I just can’t believe that there is not great benefit by getting into the labor market and using your God-given ability. My own view is that there are a lot of people in this country who have real ability that is never discovered. Let me just say, I failed third, seventh, and ninth grades. Neither of my parents graduated from high school. I have often said to my mother, who’s now passed away, that we were lucky that the welfare program didn’t exist when I was growing up, because if it had existed, she might have taken it, and our lives might have been different. Now, she argued she would never take it, but the truth is, everyone she would know would be taking it. People would look down on her for not taking it.
I want people . . . I believe there’s extraordinary ability in ordinary people. I think in the worst school system in this country that there are talented people that are never discovered. I didn’t learn to read until I was in the 10th grade. When I finally learned to read, I could read pretty good. My guess is there are a lot of people out there that are like me.
The thing I want you to understand is, I want to reform this system not because I’m trying to be mean to people, but because I love people, because I think the current system is keeping people down.
Luigi: I agree with your idea of the school voucher, your support for the school voucher, but one of the problems with the school voucher is that not everybody has a great mother like you had, and not every kid has a set of parents who look after him or her, trying to find the best. That makes it very difficult for people who don’t have those parents to actually get a decent education. How would you address this shortcoming of the voucher system?
Phil Gramm: Well, first of all, let me say that I never lost a poor-boy debate when I was in the Senate, but the plain truth is, I had lots of advantages. My grandmother loved me. My mother loved me. My mother was a hardworking person who worked double shifts, and I realize that not many people have mamas like my mama, but it seems to me that the more choices you give to people, the more likely you are for them to find the choice that works for them.
I don’t know what you can do about the fact that some mothers seem more committed to their children’s success than others. I grew up in a generation where most mothers lived their lives through the success of their children. Maybe our generation today is similar; maybe it’s different. I don’t know. I’m not part of it, but I can’t help but believe that giving people a chance to get out of failing inner-city schools will give them, at least, an opportunity to try to find and develop their God-given ability, but none of that will eliminate the fact that some people have good mamas, and some people don’t.
I don’t think anybody in America is proposing taking children away from their parents or their mama. Again, it’s part of what I say. There are limits to the ability of government to create equality. In the areas where we can do it, by getting people in the labor market to discover their ability and giving them access to quality education, or at least competition in education, I think we benefit from it. One thing, like school choice, is not going to solve every problem in America, but I think it’s a movement in the right direction, and I’m for it.
Luigi: Recently, on our podcast, we had David Autor, who is a professor at MIT and studied the effect of the so-called China shock, the impact of getting China into the WTO, on mostly the Midwest of the United States, in the manufacturing areas. His study suggests that, really, the devastation that the China shock brought forced a lot of people in their 40s and 50s out of jobs.
These are not people that don’t want to work. They are people who used to work very effectively and whose opportunities have been dramatically eliminated in a short period of time, and it’s not easy at age 40 or 50 to transform yourself from a productive worker in manufacturing to a nurse or a computer web designer. Are you saying that all these people are just lazy and don’t want to work?
Phil Gramm: No. I never meant such an argument. Trade cuts two ways. Obviously, it creates more competition in producing goods and services, but it also provides more competition in supplying them and affects price. Go to a Walmart if you want to see what competition does in terms of prices of goods and services, so that there are people who have had difficulty adjusting.
We have had a Trade Adjustment Assistance Program since President Kennedy. There’s no doubt about the fact that competition creates winners and losers, but the overwhelming evidence is that America has been a very great beneficiary from trade in that living standards are higher, that wages on average are higher. Not everybody has gained, but the great majority of people have been big gainers.
Now, does that mean there’s no problem if you lost your job in an area that either has been replaced by some modern technology or where you’ve got competition which has competed away your job? It’s a problem for you, but you can’t stop society having the freedom to choose goods that are better and cheaper. That’s part of freedom.
Bethany: Have you heard anything in the various critiques of your book, or in discussions with people, have you heard anything that resonated with you, that changed your mind, that made you say, “I wish we had taken this into account; we missed this”?
Phil Gramm: Well, let me say, I have presented the book at Stanford, at the University of Chicago, at Harvard with Larry Summers reviewing me, and I’ve heard arguments that there are a lot of supplemental measures that, if you use them, they partially deal with the problem I’m talking about, in terms of undercounting income, but the point is, people don’t use them. They use the figures that the Census Bureau puts out as the official number.
I would say this, Bethany. I’ve been surprised that there haven’t been more effective attacks on the book. If I were attacking the book, I would say, “OK, what you say is clearly true. I mean, if you can add and subtract, it’s clear that if you add up all the transfer payments, and you take into account all the taxes, that the numbers are right, but those numbers are misleading in that food stamps aren’t really worth what they cost.” If you went out and said to people, “You’ll get $90 worth of food stamps this week. I’ll give you $85 for the food stamps.” Would they take it? Some of them would, yeah.
Now, I don’t know why people have not made the argument. Maybe if you accept that argument, then you get into a debate that I have had at Chicago and Harvard. That is, should we be doing all of this differently? Given that we’re providing now almost $50,000 for the average household in the bottom 20 percent of income recipients, should we look at whether we need over 100 federal welfare programs? Should we look at whether providing all these things is as valuable as simply finding a way of giving people the money?
Now, I haven’t made a decision about that, as to where I stand on it, but I think it is certainly a subject worthy of debate. Milton Friedman argued for a guaranteed annual income. Now, I can see problems with it, but boy, do I see problems with what we’re doing. That’s an area that should be explored.
All I’m trying to do . . . I’m not trying to end the debate. I’m trying to start a debate. We’re spending a lot of money. We need to admit it. We need to show the figures, and then we need to debate. Could we do this better?
Luigi: Thank you, Senator. That was great.
Bethany: Luigi, what did you think was the most interesting part of our interview? I really liked what one reviewer wrote, and Gramm himself admitted this. The reviewer wrote this. He said, “However clear it is that the official numbers are skewed, unskewing the data is at least as much art as science, with numerous debates about which adjustments to make, and that readers should think carefully about the consequences of each decision that Gramm and his coauthors make.”
But I’d add to that, we should think carefully about the consequences of everybody’s decision as to what they count and what they don’t count, right?
Luigi: Absolutely, but I have to say, and I’m not an expert in income statistics or poverty, that I was pretty surprised by how much money we actually transfer to the bottom 20 percent of the income distribution, but in a positive way, not a negative way. I don’t want to, in any way, sound like I want to reduce it. But the one point—which, by the way, was stated by my colleague, Bruce Meyer, at the Harris School, before he made it—that we don’t factor in in-kind payments is pretty remarkable, because food stamps are clearly sort of money in your pocket, if you want. I know that you are less excited about adding Medicare, but I think that Medicare and Medicaid are real value to transfer to poor people.
Bethany: Oh, I agree with you. I think they’re real value, too, and I agree, transfers in the form of Medicaid are real money. I guess I just questioned whether they’re dollar-for-dollar real money. I think Gramm would admit or agree that that’s a question you can ask. I mean, if I get a dollar of income, and I get to spend that however I choose, and you get a dollar of Medicaid, and you only get to spend it if you’re sick, and in a very specific place, I don’t think that the two dollars are equivalent. I think the dollars you’re getting in Medicaid have value, but I think arguing that they’re equivalent flies in the face of human nature, because people want choice about how they spend their money.
Even if they’re given money, if they’re being told they have no choice how to spend it, and in this case, as one reviewer pointed out about Gramm’s book, the sicker you get, the richer you are, because the sicker you get, the more Medicaid you use, therefore the richer you are? There’s something a little bit screwed up about that. I can’t help thinking over and over again, as I said in our interview with Gramm, it’s . . . Marie Antoinette did not say, “Let them eat cake,” but this is a little bit of let them eat Medicaid.
Luigi: I disagree, because honestly, we are actually trying to force people to get health insurance, right? Part of what Obamacare was about was to force everybody into enrolling in health insurance. Medicare and Medicaid are the most generous health insurance that you can get in the United States. In the private market, you cannot get any insurance with zero deductible and zero copayment. It’s impossible. Medicare gives you that and, by the way, they get doctors to perform at a lower price because they have volume, so at the end of the day, you are getting to poor people an insurance that, if they were to try to buy in the marketplace like we are requiring the others to buy, they would spend a fortune. I think that that’s really actually more than dollar for dollar.
Bethany: I’m going to argue with you about that because, well, first of all, Medicare and Medicaid are really different. Medicare, it’s much easier to find a doctor who will take it. Medicaid, it’s damn near impossible to find a doctor who will take it, because the reimbursements are so low. Even Medicare, my parents just told me this, they’re really grateful that they didn’t get the supplemental insurance that reduces your Medicare premiums to nothing, because if you do that, it’s also almost impossible to find a doctor who will take it.
It’s a great benefit in theory and a little bit less of one in reality, when you actually try to find a doctor who will accept your insurance. But, even so, even if I granted you your point, I would still disagree, because I think that—and I guess this gets into another part of my quibble with Gramm—human nature being what it is, if you have money and you can choose how to spend it versus having money and not being able to choose how to spend it, it feels different. These transfer payments, no matter how you count them, might be making up for some segments of the income gap, but it doesn’t feel as good to the people who are getting them as a dollar of cash would. That matters to the stability of our society.
Luigi: I agree with you that they don’t feel the same, but again, the question is, what are we measuring and for what purpose? If what we are measuring is, for the person who is richer, how many times richer does he feel, or how big is the difference, in that situation, because we are forcing the rich person to have health insurance anyway, he is not free to choose. He has to get health insurance, so for that comparison purpose, I think it’s fine to treat it dollar for dollar. If you are saying, in an abstract sense, if people were given the choice, would they prefer to do something else, absolutely.
Bethany: Yeah, you know, that actually is a fair point that if you’re very well off, you still have to spend the dollars getting health insurance. At least it’s a really bad idea not to do that, so I think that is a fair point. I still would counter with the notion that it is a little bit screwed up to have—and I think this was Tim Noah’s critique of Gramm’s book—the idea that the sicker you get, the more money you have. That’s essentially what the argument is by counting Medicaid dollar for dollar. That doesn’t seem quite right.
Luigi: It’s not, because if you do it at an individual level, I agree with him, but here we’re doing it in groups. In groups, the amount you spend in Medicare for a group of elderly people is tantamount in expectation what they should have paid if there was a fair health insurance with zero cost. It’s tantamount to what they should have paid in premiums exempted, right?
Luigi: It’s not that, on average, they are super rich. No, on average, they benefit from an actuarially fair insurance, which is my point. Do you get an actuarially fair insurance? Never, because number one, there are the transaction costs, which are huge; number two, there are the profits. You are basically giving them something that, otherwise, they wouldn’t be getting.
Bethany: Yeah, you’ve . . . I’m trying to come up with a way to argue, but I think that you have mostly convinced me, with the side point, Medicaid dollars aren’t as easy to spend as you would think, given the difficulty in finding doctors who will take that insurance.
OK, so I wanted to ask you about one other thing that I thought was missing from this analysis, which is that it’s an analysis of income inequality, but it’s not an analysis of wealth inequality. Isn’t wealth inequality . . . It’s in some ways the result of income inequality, but not entirely. There are all these statistics, and I don’t have them at my fingers, but the percentage of the stock-market wealth, for instance, that is held by the wealthiest people, and that’s a number that has gone up dramatically over time. When you’ve had something like the last couple of decades of super-low interest rates and a really rising stock market, it’s the well-off who have benefited in terms of wealth in a way that isn’t captured in a mere measure of income inequality.
Luigi: You’re absolutely right. The problem is that, if we are bad at measuring income, we’re much worse at measuring wealth. In preparation for this, I spent more time than I care to admit actually looking into this literature and, for example, a simple thing is, how do you treat 10 million people who have an income-tax return but are listed as a dependent in somebody else’s income-tax return?
Your kids are still small, Bethany, but imagine you have a 15-year-old kid who does some work during the summer. He or she has to file a tax return, but you cannot assess whether he or she is poor, based on that tax return, because she . . . I know it’s a she who lives with you. That makes a big difference because 10 million people with very low income, they can be considered super poor, or they can actually be considered wealthy kids, or kids of wealthy people, who have summer jobs. The way that you treat them changes dramatically how you think about income distribution.
Bethany: Oh, my goodness. Fun and games with numbers, for sure. Another aspect of fun and games with numbers is that the numbers look really different if you’re talking the top 20 percent, the top quintile, versus the bottom quintile versus the top 1 percent versus the top 0.1 percent.
I was thinking and wondering if you’d agree that that might explain or help explain why Gramm’s analysis seems to fly in the face of observed reality, by which I mean, this analysis seems to imply a very equal America, and yet we have all these stories of 30-year-olds with master’s degrees who can’t buy a home and a single mom working two jobs who can’t afford an emergency medical payment and, perhaps even more to the point, stories about and truth about people being priced out of cities, coastal cities, and even in Chicago, wealthy coastal cities, New York, San Francisco, LA, even Chicago. Those facts just don’t comport with a totally equal America, right?
Luigi: Yeah. Why the debate on income inequality is so pervasive is because the debate or the inequality is really hitting where the educated class is. Most academics, most journalists, most talking heads are not particularly tuned in with the bottom 20 percent of the income distribution. As a result, they don’t know whether they’re doing better or worse. But we are very tuned in from the middle to the upper part of the income distribution, and that’s where the dramatic changes are taking place.
I think that the difference between the 0.1 percent and the 10 percent has increased dramatically over the last three decades. If you were in the top 90 percent of the income distribution, you felt very rich in the past. Today, by comparison to anybody else, you feel poor.
Bethany: The frightening thing about that is that revolutions are often started by those very people, rather than the people at the very bottom end of the spectrum, so it doesn’t mean that society is more stable or there isn’t something very wrong. It might mean that society is actually less stable because it is those people who are feeling inequality in the most . . . who are feeling inequality most acutely.
Actually, Luigi, I ended up thinking that his analysis was a little bit beside the point. Maybe I’m guilty of recency bias, because we just finished our interview with David Autor, but in my view, if we need transfer payments to fix the labor market, then something is going wrong. There’s a GAO report that was done fairly recently that finds that millions of full-time workers in the private sector are relying on federal healthcare and food assistance because they don’t make enough in their jobs.
This isn’t . . . I think Gramm’s view that this is a problem of people who aren’t working is wrong. It’s a problem, also, of people who are working but just can’t make enough money to make ends meet. That seems to me to be the real problem. Do you agree?
Luigi: Yeah, by and large, I agree. I think, first of all, it’s very confusing to mix the pretax distribution with the aftertax and transfer distribution, because your concern is exactly that the pretax distribution at the lower end is too low. That’s a legitimate concern. Also, the fact that a lot of people can’t find a job or can’t find a decent job, that’s a serious issue.
When I challenged him with what happened as a result of the China shock, he was completely untouched. I have a story, and I stick to it, no matter what. I didn’t get a sense that there was any nuance, any willingness to even understand what was going on, nothing. He said, “Oh, there are losers. Too bad for the losers, but then, if they’re losers and they don’t work, it’s their problem.”
I was trying to say, look, especially if you are later in your life, it’s not that easy to readjust. After all, it’s a policy choice to open up to China so fast. There are many policy choices. I don’t think that people need to suffer unnecessarily as a result of those policy choices.
Bethany: I think that it upset me, because his whole point is we need to look honestly at the data. Even when the data isn’t what you want to believe, you need to look honestly at the data, so we can have a real policy discussion. I absolutely agree with that, but then when it comes to looking at data he doesn’t want to believe, which is data showing that people who are working full time and really trying can’t make ends meet, he doesn’t want to acknowledge that, because that’s not convenient with the ideological argument that the only problem with these people is they aren’t willing to get off their butts. That bothers me. It feels hypocritical.
Luigi: Yeah, and I think that he insists very much on the correlation between increasing these payments and increasing prime-age workers who are not working, but he knows better than most that correlation is not necessarily causation, and he doesn’t have any causal evidence of that. I think this is where ideology comes into the picture. I think that he likes to portray a certain picture without really having the data to back it up.
There have been some experiments where people received, for example, some transfer, and we see what impact it had on their willingness to work. I’m not an expert here, but the majority of evidence is in favor that the effect is not that large, because people want to work for other reasons. I think he is right, one point where he’s right, is to say that if you don’t work, you are progressively left out—
Bethany: Yes, agreed.
Luigi: —from the improvement in everything. I think that that’s actually, if you want, the biggest criticism of the universal basic income, that if you think that you are going to solve the problem by letting people stay at home, these people will become increasingly dissatisfied and increasingly marginalized.
I think it’s very important to get everybody the opportunity to work, but the conclusion that people don’t want to work because it’s too costly for them to work, I think, is a perfectly legitimate conclusion in theory. I don’t think it applies so well in practice. We economists are the worst in presuming that people behave according to our model rather than the way we behave.
I was talking with a colleague, and this colleague was saying, “Oh, these days, if I don’t have the right incentives, I don’t do anything.” I said, “Wait. You dedicate most of your time to the school, I hope, and most of your time, you have zero incentives. You have tenure. There’s nothing that pushes you to work, and still, you work your butt off. I think that that’s the proof by example that what you’re saying is wrong.”
Bethany: I would agree with that. I’d also add one wrinkle to it, that economists and maybe journalists, too . . . I don’t know. No, maybe journalists are better at this than economists are. Economists are also the worst at assuming that what is a motivation for one person must be a motivation for somebody else. The truth is people are wildly varied. People’s makeup and their means and the ways they react to things are actually quite individualistic, and so it might be true. He might be right for one person. It might be that they’re making enough in transfer payments that they don’t feel the need to get a job, but to say that that’s true for one person, might be true for one person, is already a guess, but to say it’s true for the population at large, I think, is quite tricky.
Luigi: You know what is funny? We didn’t have time to ask him at the end, but I really wanted to ask whether he recognizes himself in the Republican Party today or not.
Bethany: I did, too. I know.
Luigi: Because you know that he used to be a Democrat.
Bethany: I did not know that.
Luigi: Yeah, and actually, kudos to him. I read this on Wikipedia, so it’s not like I have done so much due diligence, but what I admire is that he ran as a Democrat, he got elected as a Democrat, and then the Democrats left him out of an important committee, and then he resigned in protest. Then, he ran as a Republican for the seat he left open, and he reentered Congress as a Republican, but at least he did not flip inside the House. He resigned, and then asked for the voters to give him a mandate to go back.
The reason why I bring it up, besides this interesting anecdote, is that he’s really a Reagan Democrat, sort of the attitude that you need to work, but also with complete faith in free trade, complete faith in the effect of the incentives of taxes to work, et cetera.
Today, I think you can find more people in the moderate part of the Democratic Party that believe in that stuff, but then you go to . . . Remember when we interviewed Oren Cass? Oren Cass would be completely at odds with him in the Republican Party, and if there is a more idealistic part of the Republican Party that goes behind sort of the Trump slogan, I think he is now connecting more with this disenfranchised working poor, nonworking poor, rather than the traditional Democrats like him.
Bethany: Yeah, that’s really interesting. I also thought, on a slightly different note, what was interesting is how powerful personal narrative is in shaping political beliefs. I had not heard his personal narrative before, which is that he failed three grades and didn’t learn to read until he was a sophomore, I think he said a sophomore, and obviously grew up quite poor, and so he believes strongly in lifting yourself by your bootstraps, because that’s his personal narrative.
I think, if I were to be very kind to him, I would say that he believes this narrative so strongly, not because he’s a bad human being who wants to keep the working poor down, but because that’s his story, and it worked for him, and so he firmly believes that that’s the way to be.
Luigi: It’s interesting. You are right. I think that you are making an excellent point, but what is also interesting is that I said, “Oh, not everybody’s as lucky to have your kind of mama.” Of course, he went on sort of a rant or a tirade.
Bethany: The mama, my mama rant. Yes, he did.
Luigi: Yeah, but then he said something very important. He said, “Oh, we can’t fix that.” At some level, I agree with that, that we can’t fix every difference in the world. However, it’s true that having a loving parent is a gigantic benefit, and people who, for whatever reason, don’t have one, they start in the world at a severe disadvantage. I don’t see any reason why we should not help them, especially in light of his view, because he’s basically saying it should be equality of opportunity, not of outcome, but if you start, really, without parents that take care of you, I think that you are really, really at a severe disadvantage.
Bethany: It’s interesting. It hearkens back to our episodes on meritocracy, right? That most of us who succeed rarely think we got lucky to have a loving parent. We think that we were able to succeed on our own merits without ever taking into account the love that our parents did or didn’t extend to us. That, clearly, is purely a matter of luck. That has nothing to do with one’s innate worthiness, right?
Luigi: Yeah, but he recognizes he was very lucky to have such a mother.
Bethany: He does. Oh, I—
Luigi: The mama rant was precisely about that. The interesting thing is, he was not willing to help the people that are left behind because they are not as lucky as him.
Bethany: Well, he wasn’t unwilling. It was . . . I never would have guessed before we did this recording that Phil Gramm and, according to him, Milton Friedman, were believers in UBI, and the idea that he might be a believer in UBI, it does seem . . . it flies in the face of a lot of what he was saying to me because, per his point and your point, people who don’t work are left increasingly behind, and UBI is hugely problematic in that respect.
Per David Autor’s point about the dignity of work, it doesn’t address that issue at all, but yet, here’s Phil Gramm saying that maybe UBI is better than what we do now . . . which I realize I’m pushing it a little bit by saying he recommended it. That’s not quite what he said. He basically said it might be a better alternative to what we’re doing. I actually did agree with that point of his, that we are spending an awful lot of money, and if we’re spending so much money, we should think about what it’s doing. That was a side point of what he said, but that’s true, too.
Luigi: Yeah, I would say, first, I would give ourselves, and this is ourselves as the U.S. government, a pat on the back, saying we are doing a lot. I think we don’t hear that very much. I think that there is all this criticism about government not doing this, government doing that. In this particular case, the War on Poverty actually worked.
Bethany: Isn’t that interesting? I was thinking, when we were talking to him, that I would have rewritten his book for him, and I would have written it with a very different point, at least at the beginning, which was, look at how successful the War on Poverty has been, and so, rather than a title saying inequality doesn’t exist, I would have put a title on it saying, look at our great success and how well we’ve done. He would have gotten a lot more readers that way, and he could have made all the same points, just in a slightly different order. If you started with the fact that this has been so successful and then went into what it means for the future and what it means for actual inequality numbers, I think he would have gotten a lot more people to agree with him.
Luigi: Yeah, and the point is interesting, because one natural conclusion of your kind of book would be to say, why don’t we do a little bit more and actually eradicate poverty? We have gotten pretty close to doing it, but we need to go the last mile.
Now, his point, which is a little bit more subtle, is that maybe we can’t go the last mile in the same way in which we’ve been going, which is possible, but I’m not seeing any statistic in his book actually making that case in a convincing way. It would be interesting to say, look, we have done 90 percent of the job with 30 percent of the money, but the last 70 percent is really not doing very well. I think that would be a very interesting book. It’s not in his book, as far as I know.
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