Poverty in America

What do you know about poverty in America? Probably less than you think. I know that’s true for me; maybe for you, too.

John C. Goodman is a healthcare economist who writes a regular column in Forbes magazine. His latest column has some startling information. Here are five surprising facts:

  • The U.S. welfare state has almost eliminated poverty in this country.
  • Over the last 75 years, income inequality has actually gone down, not up.
  • Since the end of World War II, income has steadily risen for every income group – with the greatest increase among the bottom fifth of the income ladder.
  • Over half of the population gains very little from working under the U.S. fiscal system – as taxable income replaces untaxed transfer benefits. (Now you know why every business seems to be hiring.)
  • The U.S. has the most progressive fiscal system among all developed countries.

 

The source of much of what Goodman is saying is a new book called The Myth of American Inequality by Phil Gramm (former Texas U.S. senator), Robert Ekelund, and John Early. Goodman calls their book “impeccably researched” and strongly endorses reading it.

Poverty

Ronald Reagan once said, “We fought a war on poverty and poverty won.” Most people would agree with this statement, especially if you follow the Census Bureau statistics the media always reports. But the Census Bureau includes only 8 of more than 100 federal transfer programs. (A transfer program is some form of government benefit – which transfers something of value to the population that qualifies.) Among these benefits excluded by the Census Bureau are refundable tax credits, food stamps, Medicare, and Medicaid.

The war on poverty was declared by the Johnson Administration in 1965. Over the past 50 years, the value of taxpayer-funded transfer payments to the poorest 20 percent of American households has risen from an average of $9,677 to $45,389 after adjustment for inflation. Counting these transfer payments dollar-for-dollar as income, the authors estimate the true poverty rate in the U.S. is just 2.5%. But the Census Bureau would have you believe it is 12.8%, based on the same data, but overlooking the other 92 federal transfer programs.

Inequality

A major platform of the Democratic Party is “correcting inequality.” Putting aside the question of whether all people should be equal, regardless of how much they work, let’s just look at how much inequality we have. Are the rich getting richer while the well-being of everyone else is stagnating? The Census Bureau would have you believe so. But in measuring inequality, the Bureau leaves out two-thirds of all government transfer payments enjoyed by those at the bottom of the income ladder and also ignores taxes collected from those at the top.

In other words, the Census Bureau ignores 40 percent of all income that is gained in transfer payments and lost in taxes.

The Census Bureau tells us the income difference between the top 20 percent of households and the bottom 20 percent is 16.7 to 1. But if you throw in transfers and taxes, the difference is only 4 to 1. The Census Bureau would have you believe that inequality has been rising over time, but the authors find that is has actually fallen by 3 percent since 1947.

Income Growth

The U.S. government uses five different price indexes for various purposes. But using hourly earnings and household income are the least accurate means of measuring income growth. The authors show that using the best measure of inflation, and taking account of transfers and taxes, all five income groups have experienced substantial real income growth over the past 75 years – roughly quadrupling on average. (Not so in the last two years of high inflation.)

But here’s the surprise – the greatest growth in real income is among the bottom fifth of households (681 percent) – while those in the top fifth have only grown 456 percent.

Welfare vs. Work

While it is comforting to know that the actual poverty rate is lower than expected, it has come at a significant cost. Welfare has been substituting for work. Since the beginning of the War on Poverty in 1965, the labor force participation rate of the bottom one-fifth of households – who now receive more than 90 percent of their income from the government – has dropped from 70 percent to just 36 percent. That’s why there are about 11 million job openings out there and employees can’t find people who want to work.

But it’s understandable, given that the authors calculate the bottom fifth of households, based on earned income, had an average income of $33,653 per person. The second, and middle fifths, based on earned income, had $29, 497 and $32,574 respectively.

In other words, those who had the least earned income had more actual income than those in the next two higher quintiles! Stated another way, the average household in the bottom fifth (based on income they earned) received 14% more income than those in the next higher earned income category and 3.3% more than the average middle-income family. It pays not to work!

International Comparisons

Most people, especially those on the left of the political spectrum, assume the welfare states of Europe are more progressive than the U.S. system. While it is true that a typical European country has more social insurance than we have, those programs are not mainly paid for by taxing the rich. They are paid for by taxing the beneficiaries.

Compared to our country, Europeans have fewer private goods and more social insurance. The authors note that the top 10 percent of American households earn about 33 perncet of all earned income but pay 45.1 percent of all income and payroll taxes. That’s call a progressivity ratio of 1.35. This is higher than any other country. In comparison, the ratio is 1.10 in France, 1.07 in Germany, and 1.0 in Sweden – all countries thought by most people to be more progressive than us.

The authors also note in a newer study that the U.S. welfare state is actually larger than the European welfare states. The study concludes that “the U.S. redistributes a greater share of national income to low-income groups than any European country.” Don’t expect to hear that statistic reported on CNN or MSNBC anytime soon.

For more on this subject, I suggest you read the book. I know I intend to do so. To quote Mark Twain, “It ain’t what you don’t know that gets you in trouble. It’s what you know that ain’t so.”

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