"Income Inequality" And Fraudulent Government Economic Data

The government's use of fraudulent economic data to promote its own growth proceeds apace.  The new state-of-the-art is the trendy "crisis of income inequality."  Bill de Blasio showed how it's done by making this "crisis" the centerpiece of his recent hugely successful campaign for Mayor of New York.   A few days ago, Barack Obama jumped on the bandwagon, declaring income inequality to be "the defining challenge of our time."  Then Obama and de Blasio got together with a bunch of other newly-elected mayors in Washington on Friday for a big income inequality confab.  Hey, the public seems to be buying it, so why not?

And then we have the New York Times all last week running an endless five-day, multiple-full-pages-every-day, billion-word, "Hey Pulitzer guys look at us over here!!!!!" piece by Andrea Elliott on the struggles of a teen aged girl growing up poor in the gentrifying neighborhood of Fort Greene, Brooklyn.  The income inequality theme was pervasive, but reached a crescendo with Wednesday's installment, "A Neighborhood's Profound Divide."  How do they demonstrate the "profound divide"?  Yes, with obviously deceptive government income data.  Here is an excerpt:

She routinely walks past a boho-chic boutique on Lafayette Avenue where calfskin boots command $845. Heading north, she passes French bulldogs on leashes and infants riding like elevated genies in Uppababy strollers with shock-absorbing wheels. Three blocks away is an ice cream parlor where $6 buys two salted-caramel scoops.  Like most children, Dasani is oblivious to the precise cost of such extravagances. She only knows that they are beyond her reach. . . .  Such perceptions are fed by the contrasts of this neighborhood, where the top 5 percent of residents earn 76 times as much as the bottom quintile.

"The top 5 percent earn 76 times as much as the bottom quintile."  Wow!  That's quite some inequality!  Or is it?  Actually, it's completely fraudulent.  The only question, as usual with the Times, is whether they are in on the fraud and using the data for the own intentional deception of their readers, or whether they have themselves been fooled by the government's fake data.  Neither option is good.

What is the real income differential between the bottom quintile and top 5% in gentrifying areas of Brooklyn?  My estimate would be not a factor of 76, but rather a factor of 2 or 3 at most.  And for some families deemed "poor" by government data, definitely including the family that is the subject of the Times piece, it is likely that their income honestly measured would put them in the top 20% rather than at the bottom.

Why do my calculations differ from those of the Times?  Simple.  The Times relies on data from the Census Bureau that measures what they call "income."  Under Census Bureau definitions, "income" is (1) pre-tax, and (2) pre-handouts.  If you just take account of taxes and handouts, the Times's 76 times factor quickly goes to my 2 to 3.

Now think about this for a minute:  Haven't our progressive taxation system and benefit programs for the poor been put in place precisely to address the issue of income inequality?  Could it really be that our government takes the progressive taxes and pays out the benefits and then purports to measure "income inequality" as if none of this had ever occurred?  Yes, that is exactly what they do.  And worse, the likes of de Blasio and Obama are now proposing to solve the income inequality problem by yet more progressive taxation and yet more benefits, without ever mentioning that none of that counts at all in the measures of inequality.

Let's apply this to the specific Census data from Fort Greene, Brooklyn.  Here is the closest I can find on the Census Bureau website to the data the Times appears to be relying on from zip code 11238, Fort Greene.  (You need to input the 11238 zip code to get the Fort Greene data.)  They don't draw the exact lines the Times draws, but these data do show that 22.6% of families in the 11238 zip code have incomes of $24,999 and down, while 5.8% of families have incomes of $200,000 and up.  Hard to say how Ms. Elliott derived her "76 times" from that, but the 1,318 households in Fort Greene with the $200,000 + income could well include a few multi-million dollar earners.  If you assume that the average income of that bottom 22.6% is around $12,000 and the average of the $200,000+ group is $400,000, you could get a factor of about 33.  Maybe that's close enough for government work.

Now, apply income taxes.  The $400,000 average family of the top 5% is going to lose about a third of that off the top to federal, state, local, and FICA income taxes.  The $400,000 becomes $267,000.  The $12,000 family gets a refund of about $5000 from the EITC.  The $12,000 becomes $17,000.  Suddenly the factor of 33 between the two has become less than 16.

Now let's count up the handouts.  The family that is the subject of the Times piece lives in a homeless shelter.  According to New York City data here, it costs the city on average $100.74 in 2013 to house a homeless family for one day in a shelter.  That's $37,000 per year.  Medicaid costs over $10,000 per year per beneficiary in New York.  That's $40,000 for a family of four.  Food stamps for a family of four at this income would be about $8000 per year.  Free cell phones add another at least $3000 per year.  We're well over $100,000, and we haven't even considered whether this family gets a cash welfare grant.

The ratio between the $267,000 after tax of the "top 5%" family and the $100,000+ combination of income, EITC and handouts for the "bottom 20%" family is between 2 and 3.

By the way, the family that is the subject of the Times article is a family of ten.  Their Medicaid benefits alone cost the taxpayers well over $100,000 per year.  Their shelter, which may well be squalid, undoubtedly costs the taxpayers well in excess of the $100 per day average for a homeless family.  They clearly get a lot more than $8000 in food stamps.  This family is likely costing the taxpayers more than $150,000 per year, and perhaps as much as $200,000.  How much of it counts in the government's "income inequality" statistics?  None.  They may not be able to buy an $845 pair of boots, but in overall use of resources they are consuming as much or more than many families deemed by the government to be in the top 5%.  Why can't we recognize that fact?

So what remedies were proposed at the big White House confab to fix the income inequality?  The big two were an increase in the minimum wage, and universal pre-K.  An increase in the minimum wage will clearly increase, rather than decrease income inequality as measured by the existing statistics.  Reason:  by making additional people unemployed, it will add zero earners at the bottom of the income scale.  Zero earners make the multiple between the lower and upper income tiers soar.  Universal pre-K?  If you believe it works to reduce income inequality (I am a skeptic) its effect will be measurable 20 years from now, if at all.  So go ahead and implement these programs, and, if you want, add other new handouts.  They will not decrease measured income inequality.  The only way to decrease income inequality as measured by the current data is to get rid of the high earners.  How can that be a good idea?

You can be sure that when the current round of proposals is enacted and yet measured income inequality somehow goes up again, the likes of Obama and de Blasio will be back with the same fraudulent data advocating for another round of counterproductive remedies.  There will only be a hint of honesty in this process when they start publishing and using post-tax, post-handout income data.  Don't count on that ever happening.

[Originally posted December 13, 2013.  Updated December 15, 2013.]