Former Senator Phil Gramm began as a professor of economics at Texas A&M, then became a representative in the House, later becoming a senator. And now, he’s written a book with John Early and Robert Ekelund called The Myth of American Inequality: How Government Biases Policy Debate.

We talk today about his book and observations of the system during his time in office, identifying problems with the way the census and other measuring tools bias the data and conversations that follow.

Be sure to read Kevin Lavery's Great Antidote Extra on this episode.





Want to explore more?
Amity Shlaes reviews Gramm's new book for City Journal.
David Lewis Schaeffer reviews Gramm's book for Law & Liberty.
Christopher Martin, Adam Smith on the Rich and the Poor, at Speaking of Smith
Dwight Lee, Should Government Reduce Inequality in Life Spans? at Econlib.

Juliette Sellgren:

Science is The Great Antidote to the poison of enthusiasm and superstition. Hi, I'm Juliette Sellgren and this is my podcast, The Great Antidote named for Adam Smith, brought to you by Liberty Fund. To learn more, visit www.adamsithworks.org.

Welcome back. Today on July 12th, 2023, it is my honor to welcome former Senator Phil Gramm to the podcast. He first began as a professor of economics at Texas A&M. Then he became a representative in the house and later he became a senator. After he left the Senate, he became the vice chairman of UBS Investment Bank, and now he's written a book with John Early and Robert Ekelund called The Myth of American Inequality: How Government Biases Policy Debate. Welcome to the podcast.

Thank you, Juliette.

I also wanted to say before we get started, for my listeners, this is a big day for me because I'm actually at Liberty Fund right now who produces my podcast, so I'm having a great time recording in a different studio, but let's get to it. So the question I always ask, what is the most important thing people my age or in my generation should know that we don't?

I think the most important thing you should know is that many of the things that you think you know about the American economy and its extraordinary achievements are not correct. That there is a general myth that somehow we have in the last 50 years been in a period of relative stagnation that real wages have not grown, that poverty is pervasive, that inequality is a major problem in America. The truth is that the last 50 years have had extraordinary growth. It's been broadly based across all racial and ethnic groups. Real wages have grown rapidly as have fringe benefits and poverty. If you count all government transfer payments as income to people who got the transfer, the poverty rate is now somewhere between two and 3%.

And the people who are poor primarily are people who are not capable of taking care of themselves and all of the increases in food stamps and housing substance, et cetera, aren't reaching them. And finally, with all the talk about growing inequality and what a threat it is, the truth is that when you count all transfer payments as income to people who got them like food stamps, housing subsidies, Medicaid, Medicare, and you count all taxes as income loss to people who paid it, income inequalities is actually lower today than it was in 1947. So we're having a huge national debate about inequality when inequality has actually fallen in the last 50 years and in the last 70 years. I think that's what you need to know and that's what the book is about.

Yes, you've done a lovely job setting the stage and we're going to get into all of that and I'm so excited. But first I want to talk a bit about your career. Before going into politics, you were an economics professor at Texas A&M. What was it like being a professor and why did you make the switch to politics?

Well, it was wonderful being a professor. My wife is an economist. We met at Texas A&M. I loved everything about being an economist. We had a great department. We all got along. Why did I get into politics? Well, I had never had any of the outward invisible signs of somebody who might get into politics. I'd never joined any organization in college. I never had my picture in the annual. I ran out of money at the end of my freshman year and had to go to work for 18 months before I could come back. But what happened to me is we were in the 1970s, I had become a full professor and suddenly I woke up one morning and realized I was an adult. I had two children. I didn't like what was happening in America. We were being told that the joyride was over or that we were going to have to learn to live on less.

That wasn't the America I'd signed on for. And knowing a little bit about energy and economics, I knew it wasn't the America we lived in either. And so to make a long story short, I wrote an article for the Wall Street Journal and I got about 1400 letters back from people who read it. And I had written a lot of academic things and several books and if anybody ever read them, other than my friends and the people who evaluated my academic credentials, I don't know it. And so anyway, I decided to start speaking out on public issues and I then ran and lost the first time. But then I was elected to the House, elected to the Senate.

And what a career you've had. How did your training in economics help you when you were in politics? Did it ever hurt you or make things more difficult for you?

Yeah, it made things more difficult, Juliette, in the following sense. And that is I understood issues and issues were important to me that weren't important to other people. And a perfect example is trade. If you are an economist, you understand that trade promotes the general welfare. That trade promotes the growth of productivity, income, wealth, prosperity and trade is a tough issue politically. And I remember I'd been in the Senate about three months and somebody offered an amendment to impose a protective tariff on oil imports. I was the Senator from Texas. And so you talk about putting your understanding of economics to a test politically. It was clear to me that I wasn't going to be for the amendment, but it was also clear that if I was going to vote against it, I needed to get out front, lead the effort and I did and kill the amendment. And then I had to spend nine months going all over Texas defending that vote.

Someone who was not an economist, who was a Senator from Texas might have passed on that issue, but it wasn't an issue I could pass on. That was sort of the making it harder. Clearly most issues have an economic root. And being an economist and knowing a lot about the economic history of the country was a great asset to me. And ideas are powerful things. And so I think it helped make my career that I had an understanding of the American economy that was very beneficial. I was the author of the Reagan program in the House. Gramm Rudman was an effort to bring the deficit under control. Gramm-Leach-Bliley was a major update of the nation's banking, insurance and securities laws. All those things were made possible by the fact that I knew economics and I'd also learned from my grandmother, start sooner, work harder, no more than anybody else. If you do that, you tend to succeed.

So back to this Texas amendment oil thing quickly. When you say amendment, did you mean actual amendment to the constitution amendment and also what was the outcome of that?

No, no. It was an amendment to a bill that would've imposed an oil import fee. That would've meant that Americans would be paying a higher price for oil than other people in the world. But obviously oil producers would've been at least initially beneficiaries. I killed it. The amendment was defeated. And one of the publications in Houston ran a headline that says, Gramm third senator from Massachusetts.

Okay, first that makes a lot more sense because an amendment to the Constitution that's that specific about oil would not have made ... Yes.

No, no. No. No, it wasn't to the Constitution. There was a pending bill on the floor related to energy, and an amendment was offered to that pending bill that would have imposed an oil import fee. I didn't know the amendment was going to be offered, but it was offered and so I rose in opposition to the amendment and I led the effort to defeat the amendment, but it was the amendment to a bill that ultimately became law that was offered, and I opposed it and defeated it.

You did your job. Congrats. That makes me happy because I think we often, as large critics as people who are cautious about government, it's really easy to just say, "Oh, well things never work out for us or there's no one there working to oppose these sorts of things." But here you are. You've done all of this, so I just want to thank you for that.

Well, listen, I did it because I understood economics and I didn't want one of my grandchildren someday to be taking economics in college and look back at my voting record and say, "Papa Gramm was a dope. He voted for an oil import fee." So anyways, I won't ever have that happen. But the net result was I had to go all over the state and explain to people that while we produced a lot of oil in Texas, that we used more oil than anybody else, that half the petrochemicals in the world were produced on the Texas Gulf Coast and that they would be disadvantaged relative to other petrochemical producers if they had to pay a higher price for oil and that consumers would've to pay a higher price and that Texas would lose from the amendment. That was counterintuitive to most people. But I went into refineries all over the state. I debated it. I took on all comers and ultimately the people accepted it. I was reelected three times, so I was elected three times. So obviously I convinced somebody.

And you got to teach some economics in the process, which is so awesome. And so if I could say not super present today.

Well, I think it's true. I mean, our biggest problem is that many people do not understand the basic rudimentary principles of economics. And economics is not everything, but it is an important factor in understanding the world we live in. I remember when I took my first economics course, I had thought about becoming a physics major, but my physics professor had told me that unless you love physics, there probably weren't many jobs in physics and that if you loved it more than anything in the world, do it. But it's not. Maybe you shouldn't. And I went to the National Science Foundation office on the campus at the University of Georgia and there was a sign poster on the wall.

It was 1963 and it showed the salaries of new PhDs and number one on the list was economics. And so I thought to myself, well, economics I think has something to do with the stock market, but maybe I'll take an economics course. So I took an economics course, I got the book, I looked at it and I discovered that it explained the world I grew up in. I didn't know people knew those things. And it was obvious to me immediately these were powerful ideas and I was hooked. I never thought about beyond that point, at least to that point in my life doing anything else but studying economics.

That's kind of how I feel about economics. So we talked a little bit about how economics influenced how you were as a politician and life generally, but how did your time in politics influence your understanding of economics? Did it change anything, add nuance?

Well, it gave me a lot of practical experience. It showed me how difficult it is to do things. And I came to understand that the genius of the American system is it's difficult to change things. The founders intended it to be difficult to change things. So when you change something, you've really made progress. You really achieved something. And so looking back on my career, I enjoy ... People come up to me and say, "Now that I'm out of politics and I still work." I lie and tell people I have a young wife and she wants money and I have to work. But the truth is that I like working and I intend to work until I die if I'm capable of doing it.

But people say, "Aren't you glad you're out of that rat race?" Well, no, it was a high calling. I loved being in Congress and in the Senate. It's a great job. I represented the greatest state in the greatest country in the history of the world. If you don't consider that to be a good job, something wrong with you. But when I decided to leave, I'd turned 60 and I thought if I were ever going to do anything else in my life, I needed to do it. And it was a very hard decision. And I made the decision, walked out the door and never looked back.

Yeah. Let's continue along this line of Congress for a minute. There are a lot of people recently, I mean you mentioned some people calling it a rat race and that you got out, it's in particular people like me, cautious right of center or classical liberal people that maybe have a little bit of a public choice persuasion who talk about how Congress is corrupt and there's a principal agent problem and all of these things that truly do exist, but we talk about how it's inherent to the institution and how that's a big problem. And I think this has been a larger conversation from just the classical liberals, especially today. So how did you get that sense of Congress back then and what is your evaluation of Congress today?

Well look, this natural tendency for old people to ... Since we're running down to think the system's running down and to think everything was great when I was there and it went to hell when I left. So let me just talk first about Congress. When I was in Congress, I saw very little signs of classic corruption, amazingly little. There were people who disagreed with me. I thought some of them were sincere. I thought some of them were just political. I admired some people who disagreed with me. I didn't admire some people who agreed with me. If I ever wrote a book about Congress, it would be Congress only as good as the people. I served with people who were great, wonderful people. And I served with some people that I didn't much care for.

Now, I tried to get along with everybody since I wanted to get things done, but I do think Congress is ... The country's changed since I was in the Senate. The country is more polarized. And what when I went to Congress, there was a lot of overlap between Democrats and Republicans. Now there's virtually none. And I do think that the differences are real. I know there are people who think that obviously we need to find compromise, but as Reagan used to say, "If I want to go to Los Angeles and you are going to San Fran ... I mean, and you're going to St. Louis, I'll go along with you, but if you want to go to Miami, why would I want to go to Miami?" And so I think the problem is finding compromises that have a majority.

And as I looked at two major compromises of the last Congress were an infrastructure bill. That's the largest infrastructure bill in history, adopted at a moment where we had massive fiscal stimulus and clearly contributes to the inflation problem. And then the subsidy to chip manufacturing when every chip manufacturer in the world is losing money, makes no sense whatsoever to me, so part of the problem is Congress. I do think people are not as respectful of each other as they were when I was in Congress. People when I was there followed the protocol and dealing with people. Today it's much harsher, which I think is not helpful. But in the end, are we going to have a country that is primarily a country of free people making free decisions with limited government, or are we going to have government play a dominant role in our life and in the life of the nation? And I would say America, at least outwardly, is pretty evenly divided. And I think if people understood the issue, they wouldn't be, but they don't.

So I mean, speaking of majorities and understanding the issues, there are a lot of ideas going around nowadays about the need for government intervention to fix America, not only from the left but from the right in ways that we haven't seen in a long time and in some ways we haven't seen before in the history of America, I think. Where do you think that classical liberals and free marketers have kind of dropped the ball given that we're politically tolerant of religion and sexual orientation, but then we're also fiscally careful with other people's money, especially that of future generations? I would think that that's kind of appealing. We're just very respectful, at least I think in terms of our views. So where have we dropped the ball, I guess?

Well, I don't know that we dropped the ball. I just think that I still believe there is a majority that would be inclined toward your views and my views if they were given a clear cut definition of those views and if those views were rigorously defended in debate, I think people get polarized in their opinion. And obviously we have had with Trump, and now with Biden, we have had sort of polarizing political personalities as President. In fact, going back, I would count Obama as in that same category. But in any case, this is something voters ultimately have to decide and eventually they will. And we'll either be in a country that benefits from American exceptionalism because we're freer and more competitive than any other country in the world, or we'll be like Europe with increasing government influence. And that's the choice. Of course, you've got to pay for government, which the American people have got to come to grips with.

I think you're right when you say it comes down to understanding a clear definition because that has to do with narrative and how you see the world. We can all have the same conversation, but at the same time, not at all be talking about the same thing. I recently interviewed University of Central Arkansas professor Jeremy Horpedahl on the cost of Thriving Index, which was created by American Compass’ Oren Cass. And in that interview we discussed the importance of measurement and getting proper statistics because that's actually how you influence narrative and policy at a very, very early stage. This pretty much takes us straight to your book.

Yeah, that's right.

So what led you to write this book and why do you think it's so relevant to the current moment? 

When I was a young senator, I, for a short period of time was Chairman of Commerce State Justice Appropriations, which had oversight over the census, which puts out our fundamental economic statistics. I was also writing Gramm Rudman and dealing with the federal budget, and it struck me that the funds that were being provided in the budget did not seem to be reflected in the numbers that were being put out by the Census Bureau. And just as I was beginning to look at it, there was no opening on the finance committee and I went to the finance committee and then a University of Chicago professor named Bruce Meyer did a study looking at poverty and looking at what poor people as we define poverty we're consuming in 1980 and then compared it to 2017.

And basically his conclusion was that by looking at what people are consuming, that only about 3% of the population of the country was poor, not the 14% that our official poverty rate showed. And then by 2017, we were at the point where the Census Bureau every year issued a household income figure that gave the average household income of the bottom 20%, second, the middle, the fourth, and the top quintile. And separately, the Bureau of Labor Statistics put out a report of consumption spending by Quinta. And by 2017, the bottom 20% of American earners were spending twice as much as their income. The second 20% were spending 11% more than their income, and the top 20% was spending only about 60% of its income, even though there was no evidence that people were saving 40% of their money.

So anyway, finally I decided to put together this team. And John Early is a mathematical economist, former assistant commissioner of the Bureau of Labor Statistics under two Presidents. He knows these numbers better than anybody in the world. And so what we did is we went back and looked at how the Commerce Department measures household income and basically found that the Commerce Department does not count two thirds of all transfer payments as income to the recipient. And let me just give you some examples. It doesn't count food stamps where you get a debit card and you go to the grocery store and buy groceries and the government pays for it. It doesn't count housing subsidies, it doesn't count Medicaid. It doesn't count over 100 federal programs that are aimed at helping poor people.

And as a result, there is a gross understatement of the income of lower income Americans. The census also doesn't take into account taxes. So there's a gross overstatement of the real income of high income Americans because government doesn't take into account taxes. So when you correct all these things, and this all goes back to 1947 when the Census Bureau started collecting these numbers, but to make a long story short, if you go back and count all transfer payments as income to the people who receive it, only about 3% of the people are poor, not 12.5%, which roughly the official number, which has not changed for 50 years for all practical purposes, even though the amount of government payments to the bottom 20% of households on average has risen from $9,700 to $45,400 in benefits, no change in the poverty rate of any significance occurred during that 50 years.

Why is that possible? Well, it's possible because the Census Bureau is not counting those transfer payments. It's also not taken into account taxes. So when President Biden said If we double the child tax credit, we'll cut the poverty rate among children in half. I wrote an article in the Wall Street Journal saying, "No, you won't. You won't change the poverty rate among children significantly." And sure enough, when the official numbers came out after the tax credit was raised, Census Bureau didn't count the tax credit as income even though you got a check from the treasury. And there was so much brouhaha that the census was forced to issue a supplemental measures saying that if you had counted the tax credit, that the poverty rate would've fallen dramatically and that the income of the bottom 20% was significantly higher than the census number. Finally, the Census Bureau tells us, because it doesn't count most transfer payments are in any taxes that the top 20% of earners has 16.7 times as much income as the bottom 20%.

But if you take into account transfer payments and taxes, it's only four to one, not 16 to one. Now you can say four to one is too much, but 16.7 to one is a different debate than four to one. And finally, we show that if you count all transfer payments as income to people that got the transfer payment and taxes income lost, that income inequality is actually lower today than it was in 1947 and lower than it was when the war on poverty started in 1965. And then we go into a lot of different issues on who are the super rich? Do they pay their fair share? What about opportunity in America? Does it still exist? What happened in the last 50 years? Is the American dream alive and well? And then what are the policy implications of all this?

And that's what the book is about, and it's all documented. It's all based on government data. And while I presented this book at Stanford, University of Chicago, at Harvard with Larry Summers as a master of ceremony, nobody has challenged the figures. So now you've got people who say, "Well, you can't use Medicaid to make ends meet, but the average Medicaid benefit because it's bought with a huge discount because of government power, is less than middle income Americans spend on healthcare, and they can't use that to make ends meet either. So in essence, no one has contested the validity of the argument that is made in the book.

Listeners, to make this kind of come more alive. I have some context that I think really brought this to life maybe. I mean, it's already so important and it's well conveyed, but I'm taking an intermediate macroeconomics class right now and something that we learn in almost all of the models and all of the models that we base policy off of and government spending is that transfer payments are counted as a part of income. So when government doesn't actually count that in their data and in their calculations, how are we supposed to ... I don't know, the model doesn't work anymore.

All of the mathematical economics, all of the more Keynesian spending related stuff that government does with economics is dependent on transfer payments being counted. And so to not do that is a little, I don't know if I want to say hypocritical, but it doesn't work anymore. I mean, Keynesian economics has its problems, but to completely not even use the model the way it's supposed to be used seems a little silly, but the implications are far from silly. The magnitude is way too great to be called silly. It's awful. I guess I'd be willing to say.

Well, look. We don't get into a debate about why the census has done what they've done. They would say, "Well, when we started collecting these numbers in 1947, we didn't know these ..." There were almost no benefits in 1947 paid by the government that weren't paid in cash, okay? Or cash equivalent, but with a war on poverty, almost all the poverty programs are payments in kind. The government pays your rent, the government pays for your food stamps, the government pays for your healthcare, okay? And the census doesn't count any of those things. And then the census never took into account taxes, but yet it takes those same numbers and does income inequality as if rich people keep every penny they earn and as if poor people don't get the great majority of the transfer payments they get. Well, needless say you distort the numbers when you do that and what we're arguing the book, we're not arguing that we're spending too much on welfare.

We're not arguing that there is a wide ratio of income of high income people, low income people. We're just arguing we need to get our facts straight that we can't have a debate and maybe we can't have a consensus unless we get the facts straight. We ought to be debating, in my opinion, Juliette, not more spending on welfare, but are we really getting our money's worth with over 100 federal welfare programs? At what point should we say let's dramatically change this system to be more effective in helping people? I think that's a debate we ought to have, but the debate we have is there are people on the street in San Francisco and we need more food stamps, we need more housing substance. We need lower standards for being eligible for Medicaid. Well, none of those programs are reaching the people on the street in San Francisco. They're on the street because of a drug problem or because of a mental health problem, and none of those programs are affecting or not solving their problems.

I think you're right. We almost need to have this conversation about how we're measuring things. Because we can't talk about if it works, if we don't actually get the right picture because we don't know if it works because we're not looking at the right things.

That's right.

And the book is a really great step towards this in correcting the narrative, but what needs to happen and/or what can we be doing as students, as professors, as politicians, to kind of correct and change this narrative so that we actually start having the right conversations?

Well, I think first, the Biblical admonition, you shall know the truth and the truth will make you free, but first you got to know the truth. So if you hadn't read the book, The Myth of American Inequality, if you Google it, all kinds of ads will come up for the book and reviews. The Wall Street Journal rated is one of the top five nonfiction books of the year. It is an easy read. Don't be put off by the tables and numbers. You can add and subtract. You can get this book. I think that's the first thing. Secondly, I am working to try to get Congress to change the law to require the Census Bureau to count all transfer payments and the measurement of household income and to count taxes so that we can get our facts straight, so that we can have a real debate and also on all these issues that you hear talked about.

When you look at IRS data, the tax system in America, first of all, is the most progressive tax system in the world, which means that in income taxes, the top 10% of earners pay a larger share of all the income taxes paid in America than in any other country in the world. Okay? Also, we show in the book that people that are defined as being poor in America in terms of nutrition and housing and general living standards would be on par with middle income people in the most developed countries of Europe, America transfers more income than any other country in the world other than France. It's as if Bernie Sanders went to bed and dreamed that America became a social welfare state. If he wakes up and looks at the real numbers, he'll see the dream came true. We are a social welfare state. It's just people don't understand it because we're not counting the transfer payments as income.

One final point, I know it gets boring with all these numbers, but from 1947 to 1967 when the war on poverty started up, the poverty rate in America plummeted, and then when the poverty program started, despite the fact that we increased our payments to poor people by over 400% the poverty rate did not change for 50 years because we didn't count the benefits as income, and they're not reported as income by the census, so that when there's a debate on welfare expenditures, people get up, quote the census numbers and say, "Do we really want to live in a country where 14% of the people are poor?" Well, the answer is we don't live in a country where 14% of the people are poor, but we just simply don't count most of their transfer payments, which is why the numbers show that.

Thank you so much for taking the time to share your wisdom and all your findings with us. I have learned so much, and I know that my listeners have as well. I have one final question for you, which is, what is one thing that you believed at one time in your life that you later changed your position on and why?

Say that one more time.

What is one thing that you believed at one time in your life that you later changed your position on and why?

Well, I believed when I went to Congress ... Well, let me put it this way. My mama's brothers were law men, deputy sheriffs, police officers, and so I went to Congress with a strong law enforcement bias that anybody that was accused of a crime was not only guilty of that, but probably a lot more. Over time, I reevaluated that feeling. I also changed my view about the State Department. I thought the state was full of all these Ivy Leaguers who were completely divorced from any kind of real world experience that turned out to be wrong, but what did not turn out to be wrong is that government does not work very well. That freedom and free enterprise and individual initiative worked very well and that we're the greatest country in the world, and we could be so much greater, have so much more prosperity and freedom if we had less government. I went to Washington suspicious of government, and I came away convinced that those suspicions were valid.

Once again, I'd like to thank my guests for their time and insight. I'd also like to thank you for listening to The Great Antidote Podcast. It means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at greatantidote@libertyfund.org. Thank you.