May 272021

Almost every news agency, almost every professor, almost every politician, and every Bernie supporter declares in no uncertain terms that income inequality in America is worse than it has ever been and it is getting much worse each year in recent decades. The rich are getting richer and it is an absolute travesty: the hidden message is that capitalism is bad and socialism should be seriously considered.

I have argued that the wise question everything, but on the topic of income inequality, I have been as guilty of not questioning the statistics as anyone else, because the same discussion has been pervasive, on every channel, on every news media feed, and within every debate. I was wrong to assume that this “must be” right.

As we all know, statistics can be used to distort reality in favor of the person, or party, or movement trying to make the point. British statesman Benjamin Disraeli put it this way, “There are three types of lies — lies, damn lies, and statistics.” Fact checking and truth bending is reaching an all time low.

This week, I read an eye-opening op-ed by former U.S. Senator Phil Gramm. He pointed out two facts that no one is talking about, but facts that matter in the income inequality discussion, if a person wants to be fair and balanced, if a person wants to use common sense. The first fact is that “income” numbers used in the statistics are gross income, before all the taxes and re-distribution to people who get money from the government. The second fact is much of the money given to the less fortunate does not count as income when they receive it!

So, to be clear, let’s say one person earns $100,000 and pays $20,000 in taxes, and compare him to another unemployed person with $0 income who receives $20,000 in government assistance in forms like welfare, food stamps, etc. A common sense view would be that the fortunate person had $80,000 in income (after taxation) while the less-fortunate person had income of $20,000 from government re-distribution, giving us a $60,000 income inequality. But that’s not what the statistics-makers are doing. Instead, we show that there is a $100,000 gap between these two.

This is not a rounding error. It is intentionally, grossly, misleading. Here is a quote from the article:

Americans pay $4.4 trillion a year in federal, state and local taxes. Households in the top two earned-income quintiles pay 82% of the tax bill, although they never see most of this money because it is deducted directly from their paychecks. When measuring income inequality, however, the Census Bureau doesn’t reduce household income by the amount paid in taxes. Had it done so and counted all transfer payments as income, inequality from 1967 to 2017 would have increased by only 2.3% instead of the reported 21.4%. That’s a difference of almost 90%—a rather large error.

Uh, wow.

I’m not saying that income inequality is great. I believe we should strive to help everyone escape poverty. But is our recent “trend” a total catastrophe demanding the end of American capitalism and the call for Nordic socialism? The common-sense gap has increased 2.3% in 50 years, and I’m certain that is skewed by just a few like Jeff Bezos and Bill Gates. This mirage is not harmless. People are running for office and winning elections on this house of cards. The government is making zillion dollar spending decisions based on this illusion. The very fiber of America’s system is being questioned and subverted.

I have no doubt that capitalism, business, personal ingenuity, and freedom are the keys that made America great. Let’s fix what needs to be fix, but we must see the problems accurately to fix the right things. Bending stats to distort the severity and trajectory of a problem does not lead to smart decisions and positive outcomes.

I.M. Optimisman

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