Critics on both the left and the right point to widespread poverty, stagnating wages, skyrocketing inequality, and the end of upward mobility in order to explain how capitalism has failed Americans. But it’s important to carefully evaluate each of these claims — to see how accurate they are, and to place them in the proper context. So on last week’s episode of Political Economy, I spoke with Scott Winship about the current state of economic opportunity and poverty in America.

Scott is a resident scholar and the director of poverty studies at AEI, where he researches social mobility and the causes and effects of poverty. Previously, he served as the executive director of the Joint Economic Committee, where he spearheaded the Social Capital Project.

What follows is a lightly edited transcript of our conversation, including brief portions that were cut from the original podcast. 

Pethokoukis: On the day we’re recording this, the Federal Reserve put out their big survey of consumer finances, which they do every few years. There were a couple of real newsy items in there. One of them is that families near the bottom of the income and wealth distribution had been seeing big gains the past few years leading into the pandemic. I don’t know if you had seen that news, but I wanted to get your take on that.

Winship: I haven’t had a chance to play with the numbers yet. I understand there’s a neat little slick, interactive tool that you can use now that I’m looking forward to. It really does kind of confirm some other news that we’ve seen recently. A few weeks ago, some new numbers on food security showed that through December, the food problems that households have experienced have declined for quite a few years now. And then just last week, or a couple of weeks ago, the new poverty numbers came out that showed that poverty was at an all-time low in 2019. That was true for African-Americans. That was true for children. It was true for female-headed families with kids. So it really is kind of another data point showing that pre-lockdown anyway, things were going really well for American families compared with the past.

Do you think people overestimate or underestimate how much poverty remains in America?

I think that people generally have too negative a view of the facts on the ground. I think they believe there’s a lot more poverty than there is. I think they think that middle-class household incomes are not as high as they are kind of across the board. I guess the unemployment figures get revised on a monthly basis. I think people maybe appreciate a little bit more how strong the unemployment figures were in February. Although even there, you get pushback from folks who say, “Well, the unemployment rate doesn’t really mean anything anymore because there are so many people who aren’t even looking for work, and they’re not counted in that data.” That’s actually a pretty bad argument for reasons we can go into also. But in general, I think people do have an overly negative take on things.

That’s not to say we can sit back and not worry about folks. I think we can always do better when it comes to reducing poverty and increasing upward mobility. The trends on upward mobility are not nearly as positive as some of the other trends. There really is a declensionist bias, I think in, the way that people view how the economy was doing even before the pandemic hit.

The Fed study highlighted something that’s continued from previous years. To quote Rachel Siegel from The Washington Post, “Even during the boom-time final stretch of a record economic expansion, the typical white family had eight times the wealth of a typical black family in 2019, and five times the wealth of a typical Hispanic family, a sobering reminder of the country’s vast inequality before those gaps widened during the pandemic.”

How should we think about these racial gaps, particularly the fact that they’ve persisted across many decades?

I’ve tended to try to highlight black and white inequalities as well in my research. The poverty rate is still quite a bit higher among African-American families than white families. There are big economic mobility differences between blacks and whites. That said, wealth numbers are just really hard to think about. And the reason that the racial wealth gap is so large is that levels of wealth are so low among African-American families. And to some extent, again, that does reflect real racial inequalities, but to some extent, it also just reflects how hard it is to measure wealth.

Wealth is just your assets minus your debts. For instance, we count student loans on the debt side which you might think makes a lot of sense, and, in a lot of ways, it does make a lot of sense. But we don’t count on the asset side: the human capital that these student loans or financing. People don’t just take out student loans and incur all this debt without any benefit. If we counted the human capital that’s getting financed by it, those things would cancel out to some extent. That’s important for the wealth gap between blacks and whites, because it would raise wealth levels for blacks and the dramatic ratios would then look a lot smaller. Now, they look so big just because the numbers for blacks are so small.

Similarly, we count a debt that people take on for car loans, but the survey of consumer finances data doesn’t count cars as an asset. So again, researchers tend to make a number of methodological decisions that tend to drive down wealth levels that affect the bottom more than it affects higher-up. And that makes the wealth gaps seem a lot bigger than maybe they are.

I would guess that most people, if they heard those numbers, would say, “Well, that’s because black Americans, they don’t have as much money in the market, or they aren’t as likely to own a home.” I think a lot of people might guess that. Are those factors true? Are they important?

They’re true. There definitely are inequalities in both of those areas. But homeownership rates are surprisingly high, I think, among all groups in the United States. There are a lot of inequalities in terms of equities, mostly for most families. Those are in the 401Ks or other retirement assets. But again, the measurements are really tricky. Over half the population will rely on Social Security for over half of their retirement income. If we didn’t have Social Security — which, by the way, doesn’t get counted as wealth or as an asset — a lot more people would save for their own retirement. And again, that would make the levels at the very bottom look higher, and the ratios would look a lot smaller than an eight-times difference. Even for people like me who care a lot about racial inequalities, I think looking at wealth gaps is just not a super informative way to go.

It seems like we’re talking more about wealth inequality than income inequality these days. So, when I hear numbers like “the top 1 percent owns 40 percent of the wealth and the bottom half owns only 2 percent,” I think I’m supposed to be alarmed and prepared to fight this inequality. How do you think we should react to these numbers?

There is a lot of inequality in the United States. Last year — but blessedly not so much this year — there was a huge debate that took place surrounding three well-known French economists — Thomas Piketty, Emmanuel Saez, and Gabriel Zucman — who argued that we had really massive levels of income concentration and wealth concentration. Zucman and Saez put out a book that caught a lot of attention in which they were pushing some of these claims really hard. Those claims got pushed back against very strongly by a number of folks, and it turns out that a lot of the methods that they were using really are pretty questionable and sort of magically all went in the direction of overstating how much inequality there really was.

Inequality is real. It hasn’t increased as much as Piketty, Saez, and Zucman say, but when you shift from income to wealth, you get this real problem of interpretation in terms of what gets counted as wealth and what doesn’t get counted as wealth. If you don’t think Social Security or even Medicare should be counted as wealth, then what’s the rationale for them being such a giant part of our budget? That is a resource that folks at the bottom disproportionately can rely on for retirement security, yet we don’t count it as wealth. So for all of the people who are saving privately for wealth, their savings get counted as assets and as wealth. It makes the shares look a lot bigger at the top, making the inequality look a lot bigger.

How much are those numbers result from housing and, in particular, very expensive housing in some coastal cities like San Francisco?

On the one hand, for the bottom half of American families, housing really is the most important form of wealth, just because middle-class families tend not to invest in these elaborate financial instruments or invest their money in hedge funds or things like that. On the other hand, at the top, the housing wealth obviously is much higher, but also the wealth from other forms is also quite a bit higher than they are for those lower down in the income distribution. Housing isn’t as important at the top, given the top doesn’t invest heavily in equities and things like that.

So I don’t think that the wealth inequality story overall is just an artifact. For instance, you have a lot of wealthy people living in San Francisco and other places that have a high cost of living. It would still be pretty high, regardless, but the question begged by this is whether that’s a problem or not. What is the level of wealth inequality?

Again, I don’t know what I’m supposed to make of the statistics in the US. I guess I could compare them to other countries. So, for instance, in Sweden, the top 1 percent may own 20 percent of the wealth, though I don’t know off the top of my head. Yet, I feel that — among the same people who are angry that the top 1 percent owned 40 percent in the US — if that number was 1 percent owning only 20 percent, it would still seem like a lot and those people would still be really angry. So, what is the right number?

That’s exactly right. And the other way to think about it is, what if we had the golden days of 1979 before the evil President Reagan took office and before the Piketty/Saez inequality numbers start rising? There was a ton of wealth inequality, based the same way of measuring things, back in 1979. As you say, there’s a ton in Sweden, and if I remember right, I think the cross-national disparities in wealth inequality are not as great as the income inequality disparities between countries. So yeah, it’s really hard to know what the right number or what the just number would be for what share of wealth the top 1 percent should have.

The dominant economic narrative in the media, among politicians on the left, and the populist types on the right is that inequality has exploded, wages have gone nowhere in 40 years, and upward mobility is worse today than it was for our parents. We’ve already talked about inequality, but what about those other two pillars: wage stagnation and economic mobility?

To a remarkable extent, the whole narrative is really wrong. Our colleague, Michael Strain, has a great book out, The American Dream Is Not Dead, where he really focuses on earnings trends, for instance, since the early 1990s. And the story since then is really good, with wage increases since the bottom of the 1990s-recession rising by over a quarter at the median. Now, there’s sort of this lagged impression that men’s pay, for instance, has just done terribly for a long, long time. And it’s so interesting, because there was a period where men’s pay really did stagnate, but it was from roughly 1973 to roughly 1994. That is not the era that millennials or gen Z graduated into. In fact, it hit the boomers more than it hit generation X, even. And so that’s a narrative that just has never been updated. It was sort of propagated by a bunch of researchers 30 years ago, and people have just kind of continued talking that way.

For the economic mobility story, you can make a more plausible case for disappointment in two ways. The first way would be relative mobility — starting at the bottom and ending up at the middle or the top, regardless of what’s happening to everybody else — hasn’t gotten worse, but it also hasn’t gotten better. This is a pretty surprising result given how much poverty has fallen over the last 50 years. And then there’s this other way of looking at mobility called absolute mobility, which is essentially just: Are you better off than your parents were, regardless of where you started out? Raj Chetty’s research famously has shown that fewer and fewer people over time end up better off than their parents.

Well, that’s true. On the other hand, by my own estimates, and by Michael’s estimates too, something like 70 percent of the population still ends up better off than their parents. So this is not a dramatic decline to the point where everybody’s worse off. Second, there are real differences between having a bigger share of the population be better off than their parents, on the one hand, and just absolute levels of material comfort, on the other hand.

China has higher absolute mobility than the United States does, but I’m not sure any of us would trade places with the Chinese. Kids who grow up in the bottom fifth have much more upward absolute mobility in terms of being better off than their parents than people in the top fifth, but I don’t think many of us would choose to be raised in the bottom fifth rather than the top fifth. There was higher absolute mobility in 1945 than there is today, but how many of us would choose the living standards that folks in 1945 had?

So that’s the best case that you can make that things have gotten worse. And it’s just not a very strong case.

If we really want a lot of people moving up and down, people have to move down too, and the people at the top don’t want their kids to move down. So we don’t hear much about banning SAT prep courses or making it harder for people to get their kids great internships at their friend’s company, but what do you think we can or should do about that part of the mobility issue?

Yeah, I think that’s right. At the margin, I would say that there is a group of people at the top who started there and remain there and … let’s just say, it’s probably not the most economically efficient thing that they’re still there. And here, you can talk about things like legacy admissions, as Richard Reeves does, although the importance of that is a little overstated because, lots of times, those kids are have got great test scores anyway. There are other things that happen as well, like, say, a certain real estate developer hiring their children as consultants. So there are some ways at the margin that we can imagine reducing upward mobility from the top that are not necessarily controversial.

I tend to think about it a little bit differently, which is that if we had some world of truly equal opportunity — which we’ll never get this world, and we probably wouldn’t want this world, but if we did — you can imagine a world in which everybody was pushing their kids so hard to get ahead and to get one of those coveted top-fifth spots in adulthood that essentially we just boost outcomes for everybody. In that case, it becomes close to a coin flip who ends up in the top fifth, just because the competition to get there is so strong. And if the opportunity has been redistributed to the extent that it’s more equal than it is, you would then end up with greater downward mobility from the top and greater upward mobility from the bottom. Still, everybody would probably be better off by virtue of having a more competitive race there. In a lot of ways, that would be more economically efficient in terms of economic growth than the world we’ve got now.

You’ve just come over to AEI to be our director of poverty studies. So, what do you want people to understand about poverty in America and what we should be doing about it?

Yeah, I think there are a lot of blind spots, I would say on both the left and the right. I think, on the left and parts of the right, there’s not this appreciation for the extent to which we really have dramatically lowered poverty in the United States. There was a great paper put out by Richard Burkhauser and Kevin Corinth, among others, and they basically said, “All right, let’s take the 1963 poverty line that was drawn, which showed that 19.5 percent of the population was living under that line and therefore poor.” A fairly arbitrary line, but that’s what they found.

And what Rich and his coauthors do is they say, “Let’s fix these measurement problems that the official poverty measure has. And let’s see what happens to poverty today if you just take that line that was drawn in 1963 and you correctly measure inflation and income over the ensuing 60 years.” And when you do that, it turns out that about 2 percent of the population today lives below that line. So that’s a reduction from basically 20 percent of the population to 2 percent of the population. I don’t think people have really recognized this.

And what explains that decline?

So I think a couple of things. Economic growth is probably the first and foremost, the most important factor. The same forces that were pushing incomes up over this period, and then the safety net does come into play. In the 1960s, you see a dramatic drop in poverty among the elderly because of Social Security expansions. And then you see drops among families with kids over the years after that. That got a much bigger boost after welfare reform in 1996. A lot of people, including myself at the time, thought it was going to be a disaster, but it turned out to be really the most effective piece of poverty legislation for families with kids.

We’ve made fantastic progress in terms of reducing poverty. However, the story with the safety net is complicated, because it’s easy to push people below some arbitrary poverty line that you draw. If you just give people more cash, you’re going to have fewer people that live below the line. But at the same time, we can create perverse incentives for folks. That might mean incentives not to work, incentives not to get married, incentives not to save, or incentives not to invest in your own human capital. And so it may very well be that our safety net, which has expanded greatly over the last 50 years, has simultaneously reduced poverty but prevented upward mobility from increasing. And that’s really where I think the next frontier for people who care about the poor really is. In part, it’s about increasing upward mobility from the bottom on the one hand. But the other part of the American dream isn’t economic but social, and it revolves around all these indicators of community and family life and social capital.

Those indicators have all really taken a dive over the last 50 years, whether it’s family stability, or doing things with your neighbors, or going to church, or participating in voluntary organizations, or having trust in the government or in big business. Pretty much across the board, those have all gotten worse. And to my mind, that’s the real set of trends that are behind, say, the opioid crisis, which people mistakenly attribute to terrible wage growth over the last 30 years — which, as we’ve mentioned, didn’t actually happen.

So we ought to acknowledge the progress we have made but then shifting what our focus ought to be, which is in improving some of these lingering problems that could be byproducts of the way that we reduced poverty.

I’m going to wrap up with two questions. First, do you think policymakers care less about the importance of work than they did, say, 15 years ago? I tend to hear more about universal basic incomes and income as a human right these days from the left, for instance.

I think the left just doesn’t seriously consider the possibility that giving people cash without any strings attached to it could have negative repercussions. I’m not sure they ever did, or that enough of them ever did. But I think, regarding the popularity of things like UBI or expansions to the safety net generally, the left just tends to view those as an ambiguous good and that there could be no trade-offs to being more generous. And that, maybe, is the main line that divides conservatives from liberals these days on poverty policy.

Now, I wouldn’t say the right necessarily can point to an overwhelming body of research that shores their side up. However, you can look at welfare reform, where employment among single mothers increased dramatically — particularly among the single mothers with the least education — and never went back down to the levels that it was before. And poverty fell and never rose to the level that it was before welfare reform as well. So I think welfare reform gives us the best evidence that we’ve got in favor of some of the pre-reform assumptions of conservatives about how that welfare was creating a poverty trap. Those really proved to be real, and that was discovered through state experimentation before welfare reform and then through the 1996 law.

Do you think the destruction of social capital that we’ve seen is because of American capitalism being too cutthroat and dynamic, with too much automation and offshoring? Does too much churn, too much dynamism in the American economy ruin families, communities, and all these social capital networks that you value?

My view is that most of the declines in social capital that have happened over time relate very strongly to the increase in affluence that the United States has experienced. When we don’t need our neighbors as much, we tend to make purchases from the market for things like childcare, rather than relying on each other. As we get rich as a society, we can afford a more generous safety net. And that has ended up being damaging to family stability.

For instance, thankfully, women have a lot more economic opportunities than they did 60 years ago. But as more wives have entered the workforce, that has depleted not only the number of homemakers out there, but also our neighborhoods’ community-makers. It didn’t have to be the case that we lost all of them. Men could have worked less and invested more in communities. But we didn’t choose to do that, so the result was much weaker community life over time.

So I tend to think that these declines really reflect affluence, rather than the ravages of capitalism, for instance. These are trade-offs that we’ve chosen, and people don’t like to think that we’ve chosen some things and not chosen other things. Instead, they tend to want to blame evil villains such as American-style capitalism, whereas I think it’s the nature of types of problems that rich countries tend to have.

My guest today has been Scott Winship. Scott, thanks for coming on the podcast and adding to the stock of human knowledge.

Thank you, Jim. Always a pleasure.

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This article first appeared on the AEIdeas blog, a publication of the American Enterprise Institute.

Image: Reuters.