Commentary: The Motivations for American Inequality

by Edward Ring

 

A few years ago, former US Senator Phil Gramm published a book that offers important insights into the status of low-income communities in the United States. Titled “The Myth of American Inequality” and scrupulously researched, the book evaluates U.S. household income by quintiles. It concludes that the bottom quintile (the lowest 20 percent) actually has income virtually equal to that of the second-lowest quintile (21-40 percent), when adjusting for the value of government benefits.

The implications of this explain a lot. America’s working poor, those living in households in the second-to-lowest of the five income groups evaluated, have no motivation to work apart from character and pride. If they did not work or performed minimal work, they would fall down to what is ostensibly the lowest category of household income, but once you count the value of the benefits they receive, they would be better off.

The numbers are not subtle. When only considering earned income, household earnings for the bottom quintile are discouragingly low, only $4,908 per year (2017 data). The second lowest jumps to $30,931, far higher, followed by the middle at $66,148, the second from the top at $112,563, and the top at $295,904.

These are the numbers that stimulate outrage and provide fodder for the rhetoric of resentment; they are used to justify calls for redistribution. But they hardly tell the whole story.

Mostly making use of data collected by the U.S. Census Bureau, Gramm went on to add the value of government benefits and private charity and deducted the value of federal, state, and local taxes. The results were decisively different from the above. Taking all of these factors into account, household earnings for the bottom quintile surged to $49,613 per year, only barely eclipsed by the second lowest at $53,924, with the middle quintile dipping slightly to $65,631, the second from the top falling to $88,132, and the top falling to $197,034.

It doesn’t end there. Gramm then dug up the data on “average hours worked per week” and reported 17.3 hours for the bottom quintile, compared to 32.0 hours for the next lowest. Working upwards, the next three were all between 36 and 38 hours. This means the return for the lowest 20 percent is $55 per hour of work, whereas for the next group of supposedly higher earners, the return is only $33 per hour of work.

Gramm’s book hardly explains everything. When evaluating household income by quintile, he doesn’t differentiate between people of working age versus seniors on fixed incomes that include Social Security and Medicare. It isn’t clear, however, if that were done, that the proportion of those two groups would differ significantly between the lowest and the next lowest quintile. If seniors were more heavily represented in the second lowest quintile, which is quite likely, it would add more weight to his conclusion. This is because the higher the percentage of retired people in any quintile, the more working hours must be turned in by the people still working to achieve the reported average. Either way, the people we are conventionally reminded to regard as the most disadvantaged in the country are actually doing as well or better than the working poor who occupy the next tier on the income ladder.

If you want defining evidence that inequality in America is misrepresented, Gramm’s book does the job. Beyond the scope of his book are factors, however, that should be carefully weighed before jumping to conclusions regarding any alleged indolence on the part of America’s youth or those Americans who fulfill the stereotype of being inherently disadvantaged. In particular, the cost of living.

The peak year of the so-called Baby Boom was 1946. In 1976, when these ’46 babies turned 30 and were starting families, the price of a home was $50,300, equivalent to $284,915 in 2025 dollars.

The peak year for Generation X births was 1970, and in 2000, when these ’70 babies turned 30 and were starting families, the price of a home was $212,100, equivalent to $396,979 in 2025.

Today, a 30-year-old, born in 1995, on average can expect to pay $512,800 to own a home. A recent analysis by economics blogger Nathan Halberstadt illustrates the consequences of the disproportionate rise in home prices. In 1976, nearly half of all people over 30 in America were married and lived in a home they owned. Today, that percentage has fallen below 15 percent.

Halberstadt also compiles data on the ratio of median home price compared to median household income. In 1976, the median home price was barely twice the median household income. Today, the median home price is more than four times the median household income.

The generational shift away from home affordability happened somewhere between late boomers (who faced rising home prices and ridiculous interest rates) and early Generation X’ers (who saw home prices surge further even as interest rates declined).

But why? What happened?

Attempting to answer this uncovers what may be the motivation for true inequality in America—which may be defined as the inequality of making less if you work than if you don’t work and collect more government benefits instead, and the generational inequality of facing a cost for home ownership that is prohibitive for young people today compared to being far more achievable up until the mid-1970s.

To begin with, the population in America has grown from 218 million in 1976 to over 340 million today. It isn’t clear whether these census numbers take into account over 10 million (that’s the low estimate) “unauthorized” immigrants who entered the U.S. in the last ten years. That’s a lot more people who want to buy a home. But wouldn’t the supply have kept up with demand?

Not really. Also taking off in the 1970s was the environmentalist movement, which initially was oriented toward solving urgent problems—genuine, deadly pollution of our air and water. Over the past 50 years, as these challenges were largely solved, new priorities emerged and hijacked environmentalism. Excluding “open space” from suburban development, along with additional building restrictions to address the “climate emergency,” has made it much more expensive not only to get permits to build new homes but also to produce the materials necessary to construct homes.

Finally, more than ever, this politically created shortage of affordable homes has incentivized hedge funds to move into the housing market. This causes two problems for anyone wanting to own their own home. First, mass purchases by institutional investors bid up the price and create an increasingly manipulable and less affordable market for individual buyers. They also drive up the cost to rent. Second, it creates an incentive for politically powerful investment funds to lobby for increasingly severe environmental restrictions on home construction and creates an incentive for them to lobby for more immigration. Reduce supply, increase demand, and realize higher rental income and capital gains as the prices for housing go up and up.

As Gramm makes clear in his book, the system of incentives for working people in America is broken. When taking government benefits into account, people who do minimal work in the formal economy will have higher household income than people who work full-time and more. This not only creates an incentive to work less, but it also makes working under the table a rational choice. The fact that housing prices have now been artificially inflated out of reach for most Americans only adds to Gramm’s point: working people have never had less incentive to be productive. The system is broken.

All of these systemic disincentives are the result of political choices, and all of the solutions to fix them are bipartisan. Don’t blame the older generations. Don’t blame interest rates, which are not that high by historical standards. Look to the underlying causes.

Americans are being pushed out of work in order to create a dependent class. It’s a business model for government bureaucrats, NGOs, and politically connected private sector contractors. At the same time, Americans at almost all levels of income are locked out of a housing market that has been manipulated by environmentalist restrictions, unregulated immigration, and increasingly, by trillion-dollar hedge funds that have discovered an appetite for single-family homes.

You can rail at “boomers,” but that accomplishes nothing.

Real solutions will take hard work. Here they are:

Shrink government headcount and shrink government services. Deregulate housing. Defund NGOs. End subsidies and make private sector contractors compete with each other to, for example, build homes. Stop illegal immigration and enforce reasonable restrictions on legal immigration. Get environmentalism right-sized and refocused on genuine environmental challenges. And get hedge funds out of the housing market.

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Edward Ring is a senior fellow of the Center for American Greatness. He is also the director of water and energy policy for the California Policy Center, which he co-founded in 2013 and served as its first president. Ring is the author of Fixing California: Abundance, Pragmatism, Optimism (2021) and The Abundance Choice: Our Fight for More Water in California (2022).

 

 

 

 

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