Macro Roundup

John Early estimate of poverty spending, “The Census Bureau also fails to count $1.9 trillion in annual public transfer payments to American households. The bureau ignores transfer payments from some 95 federal programs such as Medicare, Medicaid and food stamps, which make up more than 40% of federal spending, along with dozens of state and local programs. Government transfers provide 89% of all resources available to the bottom income quintile of households and more than half of the total resources available to the second quintile. …The average bottom-quintile household receives $45,389 in government transfers. Private transfers from charitable and family sources provide another $3,313. The average household in the bottom quintile pays $2,709 in taxes, mostly sales, property and excise taxes. The net result is that the average household in the bottom quintile has $50,901 of available resources….”

The Truth About Income Inequality

Never in American history has the debate over income inequality so dominated the public square, with Democratic presidential candidates and congressional leaders calling for massive tax increases and federal expenditures to redistribute the nation’s income. Unfortunately, official measures of income inequality, the numbers being debated, are profoundly distorted by what the Census Bureau chooses to count as household income.

The published census data for 2017 portray the top quintile of households as having almost 17 times as much income as the bottom quintile. But this picture is false. The measure fails to account for the one-third of all household income paid in federal, state and local taxes. Since households in the top income quintile pay almost two-thirds of all taxes, ignoring the earned income lost to taxes substantially overstates inequality.

The Census Bureau also fails to count $1.9 trillion in annual public transfer payments to American households. The bureau ignores transfer payments from some 95 federal programs such as Medicare, Medicaid and food stamps, which make up more than 40% of federal spending, along with dozens of state and local programs. Government transfers provide 89% of all resources available to the bottom income quintile of households and more than half of the total resources available to the second quintile.

America’s system of data collection is among the most sophisticated in the world, but the Census Bureau’s decision not to count taxes as lost income and transfers as gained income grossly distorts its measure of the income distribution. As a result, the raging national debate over income inequality, the outcome of which could alter the foundations of our economic and political system, is based on faulty information.

The average bottom-quintile household earns only $4,908, while the average top-quintile one earns $295,904, or 60 times as much. But using official government data sources on taxes and all transfer payments to compute net income produces the more complete comparison displayed in the nearby chart.

The average bottom-quintile household receives $45,389 in government transfers. Private transfers from charitable and family sources provide another $3,313. The average household in the bottom quintile pays $2,709 in taxes, mostly sales, property and excise taxes. The net result is that the average household in the bottom quintile has $50,901 of available resources.

Government transfers go mostly to low-income households. The average bottom-quintile household and the average second-quintile household receive government transfers of some $17 and $4 respectively for every dollar of taxes they pay. The average middle-income household receives $17,850 in government transfers and pays an almost identical $17,737 in taxes, while the fourth and top quintiles of households receive government transfers of only 29 cents and 6 cents respectively for every dollar paid in taxes. (In the chart, transfers received minus taxes paid are shown as net government transfers for low-income households and net taxes for high income households.)

The average top-quintile household pays on average $109,125 in taxes and is left, after taxes and transfer payments, with only 3.8 times as much as the bottom quintile: $194,906 compared with $50,901. No matter how much income you think government in a free society should redistribute, it is much harder to argue that the bottom quintile is getting too little or the top quintile is getting too much when the ratio of net resources available to them is 3.8 to 1 rather than 60 to 1 (the ratio of what they earn) or the Census number of 17 to 1 (which excludes taxes and most transfers).

Today government redistributes sufficient resources to elevate the average household in the bottom quintile to a net income, after transfers and taxes, of $50,901—well within the range of American middle-class earnings. The average household in the second quintile is only slightly better off than the average bottom-quintile household. The average second-quintile household receives only 9.4% more, even though it earns more than six times as much income, it has more than twice the proportion of its prime working-age individuals employed, and they work twice as many hours a week on average. The average middle-income household is only 32% better off than the average bottom-quintile households despite earning more than 13 times as much, having 2.5 times as many of prime working-age individuals employed and working more than twice as many hours a week.

Antipoverty spending in the past 50 years has not only raised most of the households in the bottom quintile of earners into the middle class, but has also induced many low-income earners to stop working. In 1967, when funding for the War on Poverty started to flow, almost 70% of prime working-age adults in bottom-quintile households were employed. Over the next 50 years, that share fell to 36%. The second quintile, which historically had the highest labor-force participation rate among prime work-age adults, saw its labor-force participation rate fall from 90% to 85%, while the top three income quintiles all increased their work effort.

Any debate about further redistribution of income needs to be tethered to these facts. America already redistributes enough income to compress the income difference between the top and bottom quintiles from 60 to 1 in earned income down to 3.8 to 1 in income received. If 3.8 to 1 is too large an income differential, those who favor more redistribution need to explain to the bottom 60% of income-earning households why they should keep working when they could get almost as much from riding in the wagon as they get now from pulling it.

Mr. Gramm is a former chairman of the Senate Banking Committee. Mr. Early served twice as assistant commissioner at the Bureau of Labor Statistics.

Phil Gramm and John F. Early, “The Truth About Income Inequality,”Wall Street Journal, November 3, 2019, https://www.wsj.com/articles/the-truth-about-income-inequality-11572813786

Red Jahncke, "The Surprising Income Equality in America,"CT Examiner, November 15, 2019, https://ctexaminer.com/2019/11/15/opinion-the-surprising-income-equality-in-america/

This is a column about a column.

On November 4, 2019, the Wall Street Journal published a column entitled “The Truth About Income Inequality,” by Phil Gramm, former U.S. Senator from Texas, and John Early, twice Assistant Commissioner of the U.S. Bureau of Labor Statistics.

The column makes a convincing case that the U.S. enjoys remarkable income equality - not inequality.

This reality flies in the face of the almost universal belief that the U.S. suffers from gross income inequality, which notion serves as the foundation of all the extravagant proposals from one side of the political spectrum, ranging from free college and Medicare for All to the wealth tax that Elizabeth Warren and Bernie Sanders advocate.

If the income distribution is only modestly upward sloping from bottom to top, namely those at the bottom have substantially more resources, and those at the top substantially fewer, than previously thought, two natural questions arise. First, can those at the top afford these extreme proposals, and, second, do those at the bottom need them?

Public notions of income inequality range as high as a factor of 60 (income at the top being 60 times that at the bottom). That’s wildly unequal and would be genuinely alarming.

The column authors find a drastically lower differential - a roughly four-times multiple between top and bottom quintiles, a level of relative income equality befitting a free enterprise system, in which achievement is rewarded.

How do analysts arrive at such different results?

We don’t need Sherlock Holmes to solve this mystery. Most conventional measures of income exclude taxes, so income at the top is significantly inflated. The upper fifth pays taxes equal to about one-third of its income. Indeed, it pays more than 80% of all federal income taxes.

At the bottom, most measures ignore a large portion of the safety net which supplements meager income in the lowest quintile. Various official income measures exclude all in-kind transfers, such as the major health care benefit programs Medicare (depressing the measured income of the elderly poor) and Medicaid (reducing the income tally of the poor of all ages) and the $70 billion food stamp program (aka supplemental nutritional assistance program, or SNAP).

Gramm and Early start their analysis with earned income, i.e. wages and salaries (including self-employment), employer-paid benefits, and earnings from savings and investing. The latest year for which comprehensive data is available is 2017, when average household earned income was $296,000 in the top quintile and $4,900 in the bottom quintile. Thus, the 60:1 income differential cited above.

Adjusting the top quintile for $110,000 in taxes paid (federal, state and local taxes of various kinds) leaves after tax income of about $186,000.

The bottom quintile paid virtually no income taxes. Actually, these households received cash from the IRS in the form of the “refundable” Earned Income Tax Credit (EITC). The column’s co-author John Early provided me data showing that the IRS paid an average of $1,900 to each of the 25 million households at the bottom. This offsets most of the bottom quintile’s payment of roughly $2,700 in other taxes, including $1,100 in property taxes and $1,000 in sales and excise taxes.

Clearly, it is impossible to live on after-tax income of less than $5,000. That’s why we have government social welfare programs, aka government transfers plans.

Gramm and Early find about $45,000 in government transfers to the average household in the bottom quintile ($43,100 excluding the EITC which the authors treat as a transfer rather than a tax adjustment). In aggregate, that’s about $1.1 trillion going each year to the 25 million households in the bottom fifth.

So, those at the bottom have about $47,200 in available annual resources to meet their needs - and then some.

Thus, the column authors conclude that the real income differential ratio is about 4 to 1.

Nevertheless, as Gramm and Early say in their column “The published census data for 2017 portray the top quintile of households as having almost 17 times as much income as the bottom quintile.”

Really? Why is that?

The overall reason is that we are still using official data sets and analytics created a half century ago in the 1960s, when government programs and political issues were vastly different. At that time, the focus was on the War on Poverty then being launched.

Then and now, taxes don’t matter much in analyzing income near and below the poverty line. As outlined above, the poor and near-poor don’t pay significant taxes.

In analyzing income disparity, today’s hot issue, taxes are critically important.

Now, why are in-kind transfers not counted? Because, as John Early explained to me, “Before the War on Poverty, most government transfers were paid in cash. So it wasn’t deemed worthwhile to tally and include minor in-kind transfers.”

Non-inclusion has persisted to the present, despite that in-kind transfers now total over a trillion dollars annually. Ironically, the first shot fired in the War on Poverty was not counted. In 1964, in-kind food stamps were introduced to eliminate hunger, the worst symptom of poverty - and weren’t counted, and still aren’t.

This is not simply a saga about statistics gone awry. As the Gramm-Early column warns, the faulty information fueling the hue and cry about supposed income inequality could wind up altering the very foundations of our economic and political system.

Maybe a useful table, $15 An Hour As A Share Of Median Wage By State

Eric Morath, "Biden Wants a $15 Minimum Wage. Here’s What People Say It Would Do to the Economy,"Wall Street Journal, February 3, 2021, https://www.wsj.com/articles/biden-wants-a-15-minimum-wage-heres-what-people-say-it-would-do-to-the-economy-11612348201

Biden Wants a $15 Minimum Wage. Here’s What People Say It Would Do to the Economy.

President Biden says his proposal to raise the federal minimum wage to $15 an hour will lift many low-wage workers out of poverty, but some businesses and economists warn it could cost jobs as the U.S. recovers from pandemic layoffs.

Mr. Biden endorses a plan to more than double the wage in steps over four years, noting that at $15 an hour, a job could support a family of four and it wouldn’t live in poverty. The president’s advisers also say raising the wage from $7.25 an hour, where it has stood since 2009, would show gratitude to essential workers at grocery stores and warehouses who stayed on the job during the coronavirus pandemic and would boost the economy by allowing low-wage workers to spend more.

Several states, including California, Florida and Massachusetts are already on a path to reach a $15 minimum wage in coming years, but Mr. Ramamurti said the floor should apply to areas with a lower cost of living. A federal minimum-wage increase requires congressional approval.

“No matter where you work in America, if you work full time or 40 hours a week, you should not live in poverty,” he said. “A $15 minimum wage accomplishes that.”

Economists are divided on the effects of the $15 minimum wage. Some have looked at the patchwork of state and local increases and found little job loss relative to nearby areas with lower minimums. But others say jobs losses tied to a $15 minimum wage could be more severe, especially in states with a relatively low cost of living.

The impact would be felt in more rural states, such as Mississippi, the opponents say. Half of all workers there earned $15 an hour or less in 2019, according to the Labor Department. That includes dishwashers, cashiers, firefighters and construction laborers. Nearly half of workers in Arkansas, West Virginia and Louisiana made less than $15 an hour.

The previous high point for the federal minimum wage was set in 1968, at about $12.25 an hour, when adjusting to 2020 dollars. If the current rate were adjusted for inflation since it was set in 2009, it would be just less than $9 an hour.

Opponents of a large increase say policy makers should be especially concerned with job losses in low-wage industries, such as the leisure and hospitality sector, which shed 3.8 million jobs last year.

More than 37% of workers who earned the federal minimum wage in 2019 were employed in restaurants, hotels and other parts of the hospitality sector, according to the Labor Department. Retail workers accounted for nearly 23% of minimum-wage earners, and education and health employees, including home health aides, represented 14%.

“It’s a potentially catastrophic policy error,” Kevin Hassett, former President Donald Trump’s top economic adviser, said of the $15 minimum wage. The pandemic, he said, pushed many small businesses to the brink of bankruptcy, but those restaurants and other firms are holding on, expecting profits later this year when the economy can open up. A minimum-wage increase would cut into those expected profits and cause businesses to close, he said. “It’s going to cost a lot of people their jobs.”

The nonpartisan Congressional Budget Office found in a 2019 study that raising the federal minimum wage to $15 an hour by 2025 could cost 1.3 million Americans their jobs. The same study found the higher level could boost the pay of about 27 million workers and lift 1.3 million Americans out of poverty.

Many businesses support increasing the minimum from $7.25 but don’t endorse a $15-an-hour level.

“While we continue to support an increase in the federal minimum wage, we believe that the increase should be thoughtfully designed to reflect regional differences in wage rates and to ensure that the increase does not undermine small business recovery,” said Joshua Bolten, president of Business Roundtable, a lobbying group that represents chief executives of large companies.

The U.S. Chamber of Commerce and Walmart Inc. Chief Executive Doug McMillion have made similar statements. Walmart, the nation’s largest private employer, starts workers at $11 an hour.

Some other large employers, including Amazon.com Inc. and Target Corp. have raised their starting wages to $15 an hour.

Paul Flick, chief executive of Premium Service Brands, said more than doubling the minimum wage would cause franchisees for the brands his Charlottesville, Va., firm, operates—including 360º Painting, Handyman Pro and Maid Right—to raise prices.

“I’m not opposed to an increase, but more than a 100% jump is crippling,” he said. “That can’t be absorbed, so it has to be passed on to the customer…and if they can’t afford to buy the service then that means layoffs.”

While 29 states have raised their minimum wages above the federal floor, worker advocates say a higher mandate is also needed because employees in large cities such as Atlanta, Houston and Philadelphia can be paid as little as $7.25 an hour. Georgia, Texas and Pennsylvania follow the federal rate.

Wanda Lavender, 39 years old, said she earns $12 an hour in Milwaukee, Wis., as an area manager at Popeyes restaurants. She took the position because it offered a raise from the $9-an-hour day-care job she held. Wisconsin is among the states with a $7.25-an-hour minimum.

She works 40 to 60 hours most weeks but said it is still a struggle to pay her rent and electric and phone bills. An increase to $15 an hour would give her more breathing room and allow her to spend more time with her children. Like Ms. Lavender, minimum-wage employees are disproportionately women and Black workers.

“I miss the field trips and the performances and the parent-teacher conferences,” she said. “I can’t take a day off to be with them because otherwise I won’t make my bills.”

Arindrajit Dube, an economist at the University of Massachusetts-Amherst, found little impact on employment in his study of minimum-wage increases, but he saw clear poverty-fighting benefits.

“Raising the minimum wage is going to lift millions out of poverty, and those families won’t need to rely on government aid,” he said.

Going outside those reconciliation procedures would likely prompt a filibuster, which would require 60 votes to overcome. That is unlikely in the closely divided Senate, given widespread Republican opposition to a $15 minimum wage.

Jonathan Meer, an economist at Texas A&M University, said a $15 minimum wage will push businesses to use self-checkout kiosks and other technology to replace workers and will encourage companies to pay workers off the books.

“In rural areas of the country, people will still be working, but it won’t be for $15 an hour,” he said. “They’ll be paid under the table and therefore forgo unemployment insurance, workers’ compensation and not accrue Social Security benefits.”

WSJ notes, "...Most Americans don’t want the government to pit one race against another. In the last two years voters in two of America’s most liberal states—Washington and California—voted down ballot initiatives that would have repealed bans on racial preferences. A 2019 Pew survey found that 73% of Americans believe race should not be a factor in college admissions...."

The Editorial Board, "‘Equity’ for Asian-Americans in Practice,"Wall Street Journal, February 3, 2021, https://www.wsj.com/articles/equity-for-asian-americans-in-practice-11612395057

Equity’ for Asian-Americans in Practice

President Biden last week singled out Asian-Americans as he issued executive orders devoted to “advancing racial equity.” They include an order banning federal use of terms such as “Wuhan virus,” and another requiring the Justice Department to better track hate crimes against Asian-Americans. In pushing these measures Mr. Biden prefers to speak of promoting “equity” rather than equal treatment.

On Wednesday the Justice Department showed us why when it dropped its lawsuit against Yale University over its race-based admissions. Under former Attorney General Bill Barr, Justice had charged that Yale’s racial preferences violate the 1964 Civil Rights Act. Justice acted even before the Senate has confirmed a new Attorney General or head of the Civil Rights Division.

A similar but private suit against Harvard continues, this one brought by Students for Fair Admissions. But it’s likely the government will soon withdraw its supporting brief that scores Harvard for “systematically disfavoring Asian-American applicants.”

So Asian-Americans will be watching. While many will be relieved to see the government rejecting terms such as “China flu,” many also appreciate the real and present harm when America’s most competitive colleges and universities reject their children based on their race no matter their other qualifications.

“I am totally shocked by the Biden DOJ’s hasty decision to drop the Yale lawsuit, only eight days after President Biden signed an executive order claiming to combat anti-Asian discrimination,” says the president of the Asian American Coalition for Education, Yukong Zhao.

This is what “equity” means in practice. Traditionally racial justice meant an insistence that every American be treated equally without regard to race. But the Democratic left, with Mr. Biden’s support, has adopted critical race theory from the universities. The theory attributes every disparity between the races to “systemic racism,” whether or not there’s evidence of specific acts of discrimination. The Biden Administration’s policy goal now is to dictate the racial outcomes that progressives want—even if it means discriminating by race to get them.

Dropping the Yale suit is a blow to equality under the law. But Students for Fair Admissions, which lost its Harvard suit at the First Circuit Court of Appeals in November, has always recognized that its best chance for a victory against racial bias in admissions is at the Supreme Court. Meantime, the group says it will file its own suit against Yale.

Most Americans don’t want the government to pit one race against another. In the last two years voters in two of America’s most liberal states—Washington and California—voted down ballot initiatives that would have repealed bans on racial preferences. A 2019 Pew survey found that 73% of Americans believe race should not be a factor in college admissions.

The Biden Administration has signaled in promoting “equity” that it has abandoned fair and equal treatment. This will lead to further social division and resentment, as it has in every society that has practiced favoritism by race. The resulting injustice and confusion will continue until the Supreme Court stops ducking the issue and rules against racial favoritism once and for all.

Majorities of Americans across racial groups, including backs believe race should not be a factor in college admissions, “…, a new Pew Research Center survey finds that most Americans (73%) say colleges and universities should not consider race or ethnicity when making decisions about student admissions. Just 7% say race should be a major factor in college admissions, while 19% say it should be a minor factor….”

Nikki Graf, "Most Americans say colleges should not consider race or ethnicity in admissions," Pew Research Center, February 25, 2019, https://www.pewresearch.org/fact-tank/2019/02/25/most-americans-say-colleges-should-not-consider-race-or-ethnicity-in-admissions/