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America’s Enormous Math Mistake

The Truth About Wealth and Poverty in America

July 2023

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America. A country defined by spectacular wealth. But there’s a dark underbelly to all that prosperity.

An aristocratic one percent that’s getting wealthier at everyone else’s expense.

Millions of Americans in grinding poverty they can never hope to escape.

How did we get here?

Was it greedy CEOs?

Was it the failure of our anti-poverty programs?

Actually, a big part of the problem — and this is kind of embarrassing to admit — is that we … did some math wrong.

[OPENING SEQUENCE]

“The rich just get richer and the poor just get poorer.” It’s a phrase we hear all the time. But … is it true?

You can certainly find statistics to back it up.

Government data shows that the gap between rich and poor has been growing steadily in the United States for decades.i

And, according to that same data, government efforts to aid the needy have been a near complete failure, with poverty rates barely budging at all since the ’60s.ii

What’s behind these staggering levels of inequality?

The United States Census Bureau.

Yep. Always the ones you least suspect.

Here’s what we mean: All those numbers are real … but also kinda not real. The government’s data is correct. But, boy, is there some missing context.

Let’s start with poverty. In 1947, government statistics showed that 32.1 percent of Americans fell below the poverty line. By 1966, that number had fallen by more than half, down to 14.7 percent.iii We were making real progress! Which may have been part of the reason that the mid-60s also saw the government launch The War on Poverty, a systematic effort to help the remaining contingent of Americans who were still struggling.

The result? After 50 years and billions of dollars thrown at the problem, the poverty rate that had been at 14.7 percent in 1966, had by 2017, fallen all the way to … 12.3 percent.iv

Whoops.

But here’s where it gets tricky: This isn’t a story about the failure of government programs. It’s a story about — brace yourself for the big sexy reveal — the failure of government accounting.

Here’s the thing: The government’s record-keeping system was set up all the way back in 1947, and the way it counts peoples’ income is by simply calculating how much money they bring inv — which seems obviously correct. But, as time has gone by, it’s actually become pretty misleading.

Why? Because many of the programs we developed in subsequent years to help the neediest Americans — Medicaid, food stamps, housing subsidies, and the like — aren’t actually paid in cash.

When you factor in those benefits, an average household in the bottom 20 percent has an annual total income, after taxes, equivalent to around $50,000 — yet shows up, on paper, as having less than $5,000.vi Because we don’t actually count many of the things we’re doing to keep Americans out of poverty.

And when you do factor them in, our progress on poverty looks a lot more impressive. If we take another look at the year 2017, the proportion of Americans living in poverty drops from 12.3 percent to 2.5 percent.vii

These official statistics, by the way, don’t just mislead us about poverty. They also mislead us about wealth.

A big part of our anxiety about the rich and the poor, after all, is about how big the gap between them is. And you can understand why when you learn that the top 20 percent of Americans have an average annual income more than 60 times higher than those in the bottom 20 percent. viii

But here’s the catch: Not only do the official statistics not count many of the programs we use to keep people out of poverty … they also don’t count what any of us pay in taxes — which is kind of a big oversight considering that’s where over one-third of all the income in the country ends up. ix

So, what happens when you make all the necessary adjustments? When you factor in both the assistance we give to the poorest Americans and the taxes we take from the richest ones? The gap shrinks from the top 20 percent having income 60 times higher than the bottom 20 percent to having income … four times higher.x

So, the rich in America: not as rich as you’d think. And the poor in America: not as poor as you’d think. Which, taken together, kind of screws up everyone’s talking points.

And here’s one more area where the numbers are surprising: the idle rich — the people who’ve just inherited their wealth and about whom there’s a national consensus that they all deserve swirlies.

Those people do exist, but … there’s a lot fewer of them than is widely believed. 79 percent of the country’s millionaires … didn’t inherit any money at all. xi And even the ones who did didn’t get as much as you’d think. Only three percent of the country’s millionaires actually got a million dollars or more worth of inheritance.xii

What’s more, even the biggest fortunes don’t tend to last that long. While there’s a stereotype that rich kids can simply live off of inherited money forever, a study of the wealthiest families in America found that their fortunes tend to fall off by half within around 25 years of the second generation.xiii Not a lot of super-rich Rockefellers or Vanderbilts anymore.

Although, to be fair, Anderson Cooper is a member of the Vanderbilt family. But let’s be honest, those steely blue eyes earned every cent of that money.

Bottom line: context matters. If we don’t get all the details, we can be badly misled about how the world works. It’s not the case that all our efforts to combat poverty failed. It’s not the case that the wealthiest Americans are taking home 60 times more than the poorest ones. And it's not the case that Anderson Cooper is just some spoiled trust fund kid.

After all, no actual super rich dude would have to do this for a living.

Source(s)

  1. Mean Income Received by Each Fifth and Top 5 Percent of All Households: 1967 to 2021 — U.S. Census Bureau
  2. Poverty Status of People by Family Relationship, Race, and Hispanic Origin: 1959 to 2021 — U.S. Census Bureau
  3. The Myth of American Inequality: How Government Biases Policy Debatebook by Phil Gramm, Robert EkelundJohn Early, p. 35
  4. Poverty Status of People by Family Relationship, Race, and Hispanic Origin: 1959 to 2021  U.S. Census Bureau
  5. About Income — U.S. Census Bureau
  6. The Myth of American Inequality: How Government Biases Policy Debatebook by Phil Gramm, Robert Ekelund, John Early, p. 28, table 2.4 
  7. Ibid., p. 37, graph 3.1
  8. Ibid., p.16, table 2.1
  9. Ibid., p. 14
  10. Ibid., p. 30
  11. The National Study of Millionaires: The American Dream Is Alive and Available  Ramsey Solutions
  12. Ibid.
  13. "The Myth of Dynastic Wealth: The Rich Get Poorer" (Robert Arnott, William Bernstein, Lillian Wu) — Cato Journal

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