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Poverty, Income, and Wealth Examined

ISSUE:  Winter 1977
Wealth and Want. By Stanley Lebergott. Princeton. $6.95.
The American Economy: Income, Wealth and Want. By Stanley Lebergott. Princeton. $17.50.

THERE are several consolations the harassed taxpayer is supposed to get from living in the welfare state. These are derived from the beliefs, sometimes called liberal, that despite all the financial pain and suffering, at least we have made great progress since the 1930’s. We have relieved the poor. We endure a tax system which encourages progress and greater equality, and our economic system is designed at least to facilitate the spread of some kind of social equity. The reasons we believe such things lie in our heritage of economic fables. There is a catechism about the progress of American society taught in our schools, in our newspapers—a roll call of hopeful fables. The catechism is amended periodically to meet new needs, and we receive a steady barrage of political and social propaganda from special interest groups to support such amendments, We are virtually without critical defenses against this barrage because the background facts are the mass of data generated by government agencies which are of such overwhelming volume and complexity that their meaning cannot be realistically comprehended except by experts. We pay up and hope it all works.

In two carefully constructed volumes Stanley Lebergott cuts through several major sets of these unquestioned beliefs. He explains what has gone wrong and recommends improvements. He has presented a cool analysis of what we can actually know about the distribution of income and wealth in this country and the taxation and expenditure policies that influence it. His conclusions are surprising, in large part, and devastating to the conventional wisdom regarding American social policy. The books are models of clear and concise economic writing. They are free of jargon and obfuscation. These books are impressive work. It is a pity our leaders cannot be forced to read them before the tax laws are amended or the next set of social programs is proposed.

The first great fable we receive from the propaganda cosmos around us is that poverty is “plight,” and can be abolished by purposeful public expenditure policies. Lebergott argues that our lifestyle inexorably generates our conception of poverty. Those families we defined as poverty families are not poor compared either to the rest of the world (41 per cent of our official poor have autos) or to the living standards of our grandparents (99 per cent of our poor have refrigerators). They are suffering poverty compared to 90 per cent of the American population now. If the lower 10 per cent of income receivers are to be classified as poor, then without absolute income equality, we will always have poverty. The great nostrum of liberal policy has been to tax the rich and give the money to the poor. Lebergott’s analysis leaves nothing but the burlap of such arguments. Suppose redistribution worked? If we defined the “rich” as that 4 per cent of families in 1971 with incomes of $25.000 and above (an official poverty family of four that year had an income of $3.968; Congressmen, in the very rich top 1 per cent, got $42.500 plus perquisites) and confiscated them all and could magically give the take to the poor, all of it, each family would receive a mere $350. As Lebergott points out, the government-induced inflation of 1973 reduced the real income of the poverty family receiving $3.500 by more than that amount. But if the confiscated incomes had to reach the poor as part of the normal proportion of Federal money that goes for that purpose from annual revenues, each poverty family would get twelve dollars. Redistribution would hardly seem to be a solution to poverty despite all the hot-eyed speeches of our statesmen. Governments in this country rake off 37 per cent of the gross national product, and redistribute 2 per cent of it to the poor. Government income redistribution is a leaky sieve indeed.

One should not place great hopes in those policies to end poverty. What can be done? Lebergott follows the unpopular course of actually examining the characteristics of poverty and the poor. He concludes that there are eight certain ways to perpetuate poverty, to guarantee it, and we actively pursue seven of them. The eight ways to ensure the continuation of poverty are: (1) raise the standard of living, (2) separate the domiciles of the generations of American families, (3) continue to allow men to abandon their families, “Men’s Lib. ,” (4) pay the aged not to work, (5) keep children below 18 out of the work force, (6) forbid domestic crowding by taking lodgers, (7) lower the infant mortality rates of the poor, (8) continue to have large families. As Lebergott emphasizes, the first seven in this list (Men’s Lib apart) represent what we believe to be social progress. Since our notions of the material necessities of life rise as incomes rise, economic growth itself constantly creates a greater range of absolute income called poverty. Hence “. . .the more successfully American capitalism operates, the more surely will poverty remain among us.” The freedom of American males to abandon their families is a prolific source of poverty. The difference when males are present or not as heads of families is staggering. The proportions in poverty rise from 7 per cent to 26 per cent for whites, and from 17 per cent to 53 per cent for blacks. The opposite of the middle five poverty sources were traditional forces that reduced it. The large family itself virtually guarantees poverty for all those who receive $10.000 a year or less and have more than four children.

What about a guaranteed minimal income? We have heard much in recent years of this proposal. How much might that be? Lebergott points out that for more than a century Americans, judging by the figures, have thought that adequate poor relief ought to be in the neighborhood of one third, or less, of a common laborer’s weekly wages. But unemployment compensation today averages only about 35 per cent of that standard, and Old Age and Survivors Insurance ranges around 40 per cent of it. This surprising consequence of Lebergott’s examination of historical evidence and current practice suggests that our basic idea of guaranteed income is sufficiently parsimonious to suppress conservative fears that generosity to the poor is getting out of hand. A guaranteed annual income of conventional American dimensions would hardly pay the poor not to work.

The evidence on racial discrimination is surprisingly ambiguous, given the beliefs and policies of the past 15 years. The data show that discrimination against unmarried individuals is far more severe than against family heads of whatever color. The racial group most severely discriminated against in our era, the Japanese (in camps in World War II, and rising from there since 1945) have the lowest proportion of families in poverty. The proportion of native Negro families in poverty is far higher than the poverty proportion of Negro families from the Carribean resident in this country, The legacy of black slavery alone cannot account for American Negro poverty. Evidence of rental contracts in Southern agriculture compared to the number of lynchings in the South in 1906-1918 by state (taken as an ultimate measure of racial discrimination) indicates that economic exploitation in the South and racial discrimination are not easily or uniformly associated with each other at all. As for the charge that poverty causes malnutrition, the data show that malnutrition comes from what all classes of American society eat, not its cost. Lebergott argues that the cheapest and most effective cure would be direct provision of nutritional correctives. For example, half a pound of peanuts eaten per head each week would wipe out protein deficiency among the poor (and the rich too),

What about the axiom that greater equality of income distribution is desired by most Americans? There is little factual evidence of any sort to support the idea. Nor is there good evidence to indicate that greater equality of consumption of goods and services increases welfare, well-being in aggregate. The axiom is apparently a harmless substitute for a confrontation with the facts and appropriate policies to support what are the revealed preferences of American society.

Lebergott on the distribution and taxation of wealth is a revelation. Wealth distribution is a murky subject about which extraordinary beliefs prevail. The data on it have not been good (Lebergott analyzes new data produced for 1969-70) and apart from the axiom on the virtues of equality, there has been no real agreement among economists, or anyone else, regarding the social benefit of any given distributions. Lebergott illuminates astounding irrationalities in our beliefs as revealed by actual wealth taxes. For example, a given sum received by one heir from a single benefactor is taxed at a far higher rate than is the same sum received by a single person from more than one benefactor, raising the question of whether wealth equalization is thought to be more desirable for the dead than for the living. Similarly, Federal inheritance taxes go into the general revenues and from there go largely into military expenditures. This makes little sense if the rationale for wealth taxes should be to guarantee a fairer competition for new generations of youth: “A program to give “an equal start” to severely disadvantaged youth would draw upon all the resources of an affluent society and would reallocate to such youth, not to the Defense Department.”

Analyses of wealth data show a far higher wealth mobility, both up and down, in American society than has been widely believed in recent years. Wealth distribution is more unequal than is income distribution—not surprising when one experiences the differences in a high mass consumption society between earning and saving. Inheritances, even great ones, are dissipated far more rapidly than one might imagine, and of the top wealth holders of 1969 (estates of $60.000 or more owned by those over 55 years of age), 85 per cent had “arrived” in that category since 1953. The evidence shows, incidentally, that wealth is more evenly distributed here than in the USSR, Poland, or East Germany. Toleration of unequal wealth distribution in the United States Lebergott believes is largely due to the lottery mentality: we hope for ourselves even though we know the mathematical chances of winning are slim. People do not become addicted to games of chance by mathematical probabilities of winning.

Social policy in this country is a hodge-podge of historical artifacts, produced over a long period piecemeal. They survive scarcely evaluated from decade to decade. Taxes which maintain our social policies have consequences on income and wealth creation and distribution. Those consequences are not the ones we are taught in our little catechism of conventional wisdom. Lebergott’s books provide a rare opportunity for the nonspecialist to examine this whole vital area of American life. It is both enlightening and appalling to see how poorly our social non-system of policies survives his probing questions and analyses. One can appreciate the magnitude of the irrationality created by our insensible drift into our present circumstances by considering the profound changes Lebergott’s recommendations for reform would make. Revolutionary is a much-abused word, or I would use it.

* The specialist will want The American Economy for the wealth of data and detail. The nonspecialist will get the major theses and general supporting data in Wealth and Want. The publishers thus hope to reach two separate markets.


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