Great Antidote Extras: Phil Gramm on How Government Biases Policy Debate

free trade poverty public choice welfare income inequality transfer payments

January 12, 2024

What happens when a politician's economic knowledge comes up against an entrenched special interest? Lots of work for the politician! Kevin Lavery highlights some stories and sober analysis from Phil Gramm's episode of the Great Antidote with Juliette Sellgren. 
Phil Gramm joins Juliette Sellgren on The Great Antidote podcast to discuss common misconceptions over poverty and inequality, how these misconceptions lead to misdirected policy discussions, and how getting the facts straight can make America more free and prosperous.

Phil Gramm is a former U.S. Senator, House of Representatives member, and Professor of Economics at Texas A&M University. Gramm is also co-author of the book, The Myth of American Inequality: How Government Biases Policy Debate.

You can listen to the episode here: Phil Gramm on How Government Biases Policy Debate

Income inequality is a core issue in American politics. Politicians, particularly on the progressive left, such as Bernie Sanders have repeatedly stated that income inequality in America is rising rapidly and must be halted through policies like higher taxes, raising the minimum wage, and increasing the size of the social safety net. Gramm disagrees, the former Senator believes that inaccurate measurements of poverty have led to  misunderstandings about the American economy and create unjustified pessimism about the future.
There is a general myth that the last 50 years has been 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 that has been broadly based across all racial and ethnic groups, real wages have grown rapidly as have fringe benefits. Regarding poverty, if you count all government transfer payments as income to people, the poverty rate is now somewhere between two and three percent.
According to Gramm, this poor measurement comes from ignoring the government’s role in supplementing or taking away income. When the economic benefit of the social welfare state to economically disadvantaged people is counted as income, combined with the taxes paid by the top earners not being counted as income, it turns out inequality hasn’t risen at all, it’s declined. This also leads Americans to view lower-income people as much more impoverished than truly is the case.
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…it doesn't count food stamps, it doesn't count housing subsidies, it doesn't count Medicaid, it doesn't count over 100 Federal programs aimed at helping poor people. As a result, there is a gross understatement of the income of lower income Americans.
Gramm believes this misconception is far more significant than a simple measurement error. Gramm takes such an issue with this because he’s concerned that Americans are asking the wrong questions and focusing on the wrong problems.
We go into a lot of different issues: Who are the super-rich? Do they pay their fair share? What about opportunity in America? Is the American dream alive? And then what are the policy implications of all this?
Bad questions lead to bad results. To Gramm, the effect of Americans’ poor understanding of the true state of poverty and inequality is misguided policy that doesn’t adequately address the true issues. The overstatement of income inequality and understatement of the economic welfare of low-income Americans leads to an overreliance on ineffective social programs to solve problems, like drug addiction and homelessness.
We need more food stamps, we need more housing subsidies, 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 solving their problems.
Throughout the podcast, the left wing is typically the object of Gramm’s criticism. However, both the left and right benefit from Americans having a poor understanding of poverty. As Scott Winship pointed out in his 2021 episode on Poverty and Welfare of The Great Antidote, the left can use this to advocate for more social programs (as Gramm highlights)but the right wing can also utilize this misunderstanding to say that the U.S. social safety nets are ineffective.

When people demand bad policies, legislators are in a difficult position: support ineffective policies that seem good, or face the risk of losing reelection. This doesn’t just apply to policies meant to address poverty and inequality, it can also apply to issues like trade policy. Tariffs are a policy that all politicians to tout ‘energy independence’ and ‘protecting American workers.’ However, as Gramm’s understanding of economics allowed him to understand, tariffs reduce economic welfare through restricting trade and creating higher prices.
A perfect example is trade. If you're an economist you understand that trade promotes general welfare, that trade promotes the growth of productivity, income, wealth, and prosperity. But also, that trade is a tough issue politically. 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 a senator from Texas, and you talk about putting your understanding of Economics to the 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 and lead the effort. I did, and killed the amendment, but then I had to spend nine months going all over Texas defending that vote.
This reminds me of an article by EconTalk host Russ Roberts titled, If You’re Paying, I’ll Have Top Sirloin. The article claims that congresspeople who wish to maintain fiscal responsibility are forced to vote for the opposite. Here’s Roberts: 
And so we read of the freshman Congressman who comes to Congress eager to cut pork out of the budget but in trouble back home because local projects will also come under the knife. Instead of being proud to lead the way, he is forced to fight for those projects to make sure his district gets its “fair share.”
Though Gramm was able to convince his fellow Texans to remain in office, even after the tariff controversy, many legislators are not so lucky or skilled, and either capitulate to the pressure to vote for bad policy or suffer the backlash at the ballot box.

However, according to Gramm, he isn’t claiming that increased welfare spending is bad policy, only that we can’t conclude what good policy is without understanding the true state of the world.
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 to low-income people. We're just saying we need to get our facts straight. We can't have a debate and maybe we can't have a consensus unless we get the facts straight.
To Gramm, if we do get those facts straight, more Americans would turn to classical liberal solutions focused on maximizing individual freedom. Gramm doesn’t believe classical liberals have “dropped the ball,” liberal arguments are still very strong. The correct information combined with free exchange and defense of liberal ideas will lead to a freer United States.
I don't know that we dropped the ball. I still believe there is a majority that would be inclined toward our views if they were given a clear-cut definition of those views, and if those views were rigorously defended in debate.
To Gramm hope is not lost for America—quite the opposite. The true figures on poverty and inequality are cause for  celebration and are a sign of economic progress, and more progress is possible. But for Gramm, that progress must emanate from the bottom-up, from free individuals, not the top-down authority of the government.
We're the greatest country in the world. But we could be so much greater and 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.


1. As this New Republic article points out, Gramm’s timeline captures a period of rapidly declining inequality from 1947-1979, which accounts for most of the decline in inequality Gramm is referencing. If the timeline recedes to the 1920’s or so or moves up to start in 1979, the large rise in inequality becomes quite clear. Given this, does this timeline give an accurate picture of American income inequality over time?

2. Gramm focuses on disparities in income as the preferred measure of inequality. However, economic inequality encompasses a variety of different variables. Why not choose wealth inequality or homeownership which have grown more substantially?

3. Gramm states that many welfare state measures such as food stamps or the child tax credit don’t solve problems like chronic homelessness or drug addiction. But these are not the only policies that social safety net proponents are advocating for. What would Gramm think about policies such as drug decriminalization, clean needle programs, or free housing for the homeless?

4. Gramm was somewhat of an outlier when he served in government due to his education in economics. Should incentivizing more economists to follow in Gramm’s footsteps be a core aim of classical liberals?

Related Great Antidote episodes
Jeremy Horpedahl on The Real Cost of Thriving Index
Scott Winship on Poverty and Welfare
Yesim Sayin on the DC Life and Policy
Jason Fichtner on Why You Should Save Today
Rachel Greszler on Paid Leave
Chris Edwards on What You Didn't Know About Wealth Inequality

Want to explore more?
Amity Shlaes reviews Gramm's book for City Journal.
Christopher Martin, Adam Smith on the Rich and the Poor, at AdamsSmithWorks
Dwight Lee, Should Government Reduce Inequality in Life Spans? at Econlib.
John Nye, Standards of Living and Modern Economic Growth, in the Concise Encyclopedia of Economics.