Adios Horatio Alger

I recently read an op-ed (How Income Equality Helped Trump, Wall Street Journal, June 25, 2018) by former Senator Phil Gramm and Professor Emeritus Robert Ekelund regarding how income inequality is miscalculated in the United States. They based their editorial on a study by the Cato Institute, Reassessing the Facts about Inequality, Poverty, and Redistribution. The study's author, John F. Early, asserts that income inequality is miscalculated because most of the statistics cited do not include the money and benefits redistributed to poor people by the American social welfare system.

According to Mr. Early, about one trillion dollars worth of benefits that are redistributed annually to poorer Americans are not included in the income inequality statistics. Using the standard statistic the lowest quintile (lowest 20%) of households only earned about 2.2% of all income (actually market income as defined by the Congressional Budget Office). With these same figures, the second lowest quintile earns 7.0% and the third quintile earns 12.6%. So, combined, the lower 60 percent of households in the US only earn a little less than 22 percent of all income. How unfair! Continuing with this calculation, the top quintile earns 57.7% of all income – 26.6 times what the lowest quintile earns. Man, that’s really unfair!

But if you add all the benefits that the lower quintiles receive you see a very different picture. Adding in all those benefits the lowest quintile received 12.9% of income while the second and third quintiles received 13.9% and 15.4 %, respectively. Two things stand out; 1) the lower 60 percent of US population received about 42.2 percent of all income (not equal but not too unfair), and 2) the three lowest quintiles all received about the same amount of income.

The standard statistical analysis not only did not include benefits it also did not include the taxes paid by the upper quintiles to help pay for the benefits of the lower quintiles (with the balance covered by debt). Using after tax income, the portion of income attributable to the top quintile drops from 57.7% to 39.3%. They still have more income than the lowest quintile but only about three times (39.3 to 12.9) as much instead of over 26 times (of course the one-percenters –like Oprah and Bruce Springsteen- skew the income of this quintile upwards).

Senator Gramm and Professor Ekelund believe that a backlash from the hard-working middle quintiles against all the benefits given to the largely non-working lowest quintile helped propel Donald Trump into the White House. And that may, indeed, be the case. But I want to focus on all the harm that these benefit programs do to the recipients in the lowest quintile.

Prior to the Enlightenment, the vast majority of human beings on the planet were slaves, serfs or peasants bound by a rigid hierarchy to the lowest echelons of society. Ruled by nobles or warlords (pretty much the same thing) their lives were a constant misery at the mercy of their lords and rulers. Enlightenment philosophers such as John Locke said no, each person has natural rights and that these rights need to be respected by all members of society.

The United States was the first country to attempt to put these natural rights to the test. The Declaration of Independence boldly proclaims, “that all men are created equal, that they are endowed by their Creator with certain unalienable rights”. Although America was never perfect and often failed to live up to its Enlightenment ideals, the Founders created an aspirational and transformative society. Never in history had people been so free and equal. Many were poor and had hard, difficult lives but they all believed that with hard work and ingenuity they could achieve the “American Dream”.

Americans are now taught that they need government assistance to get ahead in life. Despite the fact that current redistributive payments nearly level the playing field community activists, minority leaders and progressive socialists like Bernie Sanders continue to insist on an ever-increasing redistribution of wealth extending the reach of government even further into our daily lives. The redistribution is also extending beyond the poor into the upper quintiles that receive redistributed benefits such as Social Security and Medicare from debt and taxes less the administrative costs of the Government bureaucracy.

People no longer read Horatio Alger stories about honest youths working hard to rise from rags to riches. The people in the bottom quintile have no incentive to work hard. As they work hard and begin to earn some income their welfare benefits decrease. Rising from the bottom quintile to the next provides only a paltry 7 ¾ percent increase on average in money to spend. And rising to the third quintile only provides an eleven percent increase. Why knock yourself out for these pitiful gains.

So what is the fate of Americans (rich and poor) in this new redistributive social democratic paradise? Instead of being free they are becoming enslaved to the government handout. Progressives and do-gooders are urging Americans into the condition of subservience from which the Enlightenment sought to raise them. They spout that these government programs reflect American values while they are destroying the most essential of all American values. Freedom!