The Myth of America’s “Top vs. Bottom” Economy

If one looks for inequality among human beings, one will find it. To borrow from Thomas Sowell’s Wealth, Poverty and Politics, “gross inequalities in outcomes are rampant in all kinds of human endeavors around the world, including those that can hardly be explained by discrimination, exploitation, or the many other sins of human beings.” The ubiquity of inequality helps to make it an easy political enemy for grievance-obsessed politicians. James Talarico—who won the Democratic U.S. Senate primary in Texas this month—is keenly aware of this. In his victory speech he said, “The real fight in this country is not left versus right; it is top versus bottom.” This message may assist Talarico in the Senate election in November, but it misrepresents the character of the American economy and ignores the reforms likely to lift those at the bottom.

That some authors become bestsellers while others cannot find a willing publisher rarely provokes indignation; nor does the fact that some athletes may train harder than Olympic champions yet never stand out in intercollegiate competition. Yet (to invoke Sowell again) “some see in controversies about economic inequalities a fundamental ‘underlying struggle’ between ‘worlds of plenty and worlds of want.’” It is this flawed intuition that resonates with citizens when they hear Talarico ask: “why do we have a trillionaire when veterans are sleeping on the streets?”

This rhetoric omits important qualifications. For example, America’s 1,135 billionaires hold most of their wealth in productive assets and spend a meager 3 percent on real estate and luxuries. More importantly, this assumption obscures the fact that in the United States—the only country where the net worth of someone like Elon Musk, a self-made man and an immigrant, could reach a trillion dollars—about 70 percent of billionaires built their own fortunes, whereas in Western Europe fewer than half built theirs.

Much of American wealth is not generational or concentrated in a static elite class; it is earned, and it is a byproduct of America’s high social mobility.

Despite many politicians like James Talarico insisting that “our economy is broken” and the system is “rigged,” Phil Gramm (another Texan) and Donald J. Boudreaux illustrate in The Triumph of Economic Freedom that upward mobility in American remains vigorous. Using intergenerational income comparisons, they note that 93 percent of children raised in bottom-quintile households between 1967 and 1971 ended up with higher real household incomes than their parents, and 26 percent rose to what would have been the top quintile of their parents’ generation. They also debunk the myth of rising income inequality, showing that once all transfers and taxes are fully counted, America’s Gini coefficient today appears slightly lower than in 1947. They contend that “we now are having a debate about the threat that growing income inequality poses to both our economic and political systems when, in fact, income inequality has actually declined over the past seventy years.”

Lane Kenworthy—an egalitarian himself—concluded in his recent book Is Inequality the Problem? that it is not. While mistaken in his supposition that income inequality is rising, Kenworthy nonetheless reached the correct conclusion on policy grounds: “Reducing income inequality isn’t likely to significantly boost living standards for the poor or the middle class…It probably won’t make much difference for our health. And it’s doubtful that it will facilitate a rise in happiness.” Evidently, decades of growing outlays for Medicaid and numerous income-security programs—aimed at wealth redistribution—have done little to enable low-income Americans to pursue a dignified life. The solutions lie elsewhere.

Scott Winship, a scholar of social mobility, poverty, and inequality at the American Enterprise Institute, maintains, “Rather than take seriously claims that the American economy is broken, the evidence here suggests that policymakers should look for ways to raise economy-wide productivity, [and] to raise the productivity of working- and middle-class earners specifically.” Analyzing the relationship between economic growth and worker pay, Winship concluded that over 75 or 100 years, aggregate worker pay has closely tracked increases in productivity.

If that is right, then the politicians should not seek to level the respective economic statuses of the top and the bottom. Instead, policymakers and politicians should focus on productivity-raising reforms that improve education and human capital and enable innovative technologies to develop and proliferate. They should implement tax reform, eliminate welfare programs that reduce incentives to work, and liberalize onerous labor regulations that function as barriers to job mobility.

Economic inequality is not a sign of American capitalism’s failure, but a symptom of an economy that rewards its participants based on their productivity—as does any healthy economy. The American Dream never meant that “the top” and “the bottom” would enjoy the same economic outcome; it meant the promise of freedom, economic opportunity, and upward mobility. Preserving the spirit of the American Dream would be a much more constructive and unifying political message than the populist rhetoric of class struggle.