“A meta-analysis of 168 studies covering more than 11 million people found no reliable link between economic inequality and well-being or mental health. In other words, living in a place that has large gaps between the rich and poor does not affect these outcomes, with implications for policy.”

From Nature.

Listen to the podcast or read the full transcript here.

Let’s start with the broader picture. It is my sense that popular narratives about the state of the American worker are much darker than the data support.

Am I terribly wrong in this assessment?

There are surveys that look at economic anxiety or insecurity among Americans. And if you look at a question that has been asked for 25 years or so, about how people feel about their own personal finances, about half the population says their finances are “excellent or good.” We might wish that number were higher, but the main thing is it’s not any lower than it was 25 years ago. It’s been pretty steady over time.

However, if you ask people how they think the American economy is doing, the share of people who say “excellent or good” is really low. So, there’s this misconception about how other people are doing, but if you ask people how they’re doing, they aren’t especially worried.

That is a finding in psychological literature that repeats itself time and time again. It’s called the optimism gap. When people are asked to reflect on their own lives, they are invariably much more optimistic than when they are asked about the situation in the country. The explanation for this phenomenon, according to psychologists, is that people are much better judges of what is happening in their own personal lives as opposed to what is happening to the country as a whole. In the latter case, their opinion is also swayed by the media, which is very negative.

There is also this myth that the American worker has not really seen real progress since the 1970s. What would you say to that?

I was born in 1973, so I don’t have a lot of memories in the 1970s, but it was a period of high inflation, worse than we’ve had in the last five years. And for a longer period of time, there was very high unemployment. There was a lot of terrorism and other violence. There were a lot of drug overdoses. Not a great decade, I think, by anybody’s standards.

People often claim that earnings have stagnated since the 1970s, particularly men’s earnings, but the numbers that I’ve published in the last year suggest that since 1973, earnings among men are up by something like 45 percent, and earnings among women are up by around 120 percent. Hourly wages, annual incomes, and family incomes are all either at all-time highs now or have been at some point in the last five years.

Another major part of your work has to do with mobility and opportunity in the United States. We are told that society is fundamentally stagnant: if you are born into unlucky circumstances, then you are stuck there.

So, how would you summarize your research on economic and social mobility in the United States?

There are two main ways that people talk about intergenerational mobility. One is comparing adult kids to their parents. The way to think about that is “if you start in the bottom fifth, are you able to make it to the middle fifth by the time you’re an adult?” That hasn’t gotten worse over time, but you’d be hard-pressed to find people who say it’s gotten better, either.

The other big way that people think about mobility is “Do you make more money at the same age than your parents did?” The conventional wisdom there is based on the work of Raj Chetty and his colleagues, who found that, if you were born in 1940, you had a 90 percent chance of ending up better off than your parents. For kids born in 1980, that had dropped to about a 50 percent chance. So, a big decline over time.

My colleagues and I are investigating that evidence right now. Preliminarily, it looks to us like if you use a better inflation adjustment, and if you take into account the fact that families have become smaller, it looks to us like in the United States, 70 percent of recent waves of adults are better off than their parents were, down from 90 percent.

Now, everything I said about mobility was comparing individual people to their parents. If you’re just asking how well new generations are doing compared to previous generations, the evidence is that Millennials and Gen Z are already better off at the same age than previous generations in terms of earnings and wealth.

However, student debt levels are higher in younger generations because college graduation rates are higher than they used to be. But for most people, that investment is going to pay off down the road. And Homeownership is lower. Now, I think the reason that homeownership is down for recent generations is that marriage rates have plummeted, and single young adults have never had high homeownership rates. There’s been a case of reverse causality there, where people say, “nobody’s getting married because they can’t afford a home,” but it’s never been the case that a majority of young parents have owned a home. They’ve always tended to be renters, and then after some time, they become homeowners.

What did you find out about income inequality in the United States?

Ten years ago, I was writing a ton on this. I was trying to push back on Thomas Piketty and Emmanuel Saez, who were claiming that there was an incredible increase in the share of income that was being captured by the top 1 percent.

There were a number of problems with their analysis. They used pre-tax and pre-transfer incomes, which miss the effect of progressive taxation and the social safety net. There was a problem where a lot of teenagers and young adults who were living with parents with a summer job were classified as low-income Americans. There were also issues with how they treated capital gains. People strategically time when they receive these gains based on tax law and the state of the economy, so you might have 20 years of gains that show up in the data as one year, which, as you can imagine, tends to inflate the incomes at the top. They also only included taxable gains, and the main way that the middle class gets wealth is through homeownership, which didn’t show up in the data.

Eventually, Saez, Piketty, and Zucman improved on the earlier estimates and found smaller increases in inequality over time. So, the consensus now is that inequality has gone up, but by much less than everybody thought around the time of the financial crisis. And when you take into account redistribution through progressive taxation, there hasn’t been much of an increase in inequality since the 1960s.

You’re a mild-mannered scholar and might not want to endorse what I’m about to say, but reporting pre-tax and pre-transfer statistics seems like intellectual deceit. What does it matter what your pre-tax income is if the government ends up taking 40 to 50 percent of it? And what’s the point of talking about Americans at the very bottom of the income ladder not earning anything if they are getting tens of thousands of dollars in transfers?

Yeah, I agree. Folks on the left would point to the Piketty and Saez numbers and say, “Look how bad inequality is, we need more redistribution,” but they weren’t even counting the redistribution we currently do. If you don’t include redistribution, inequality wouldn’t fall even if we leveled incomes.

Even the official poverty statistics that the US government releases don’t include most of the ways that we have tried to reduce poverty over time. It doesn’t count food stamps, Medicaid, housing subsidies, or refundable tax credits, which are the major ways that we’ve tried to reduce poverty over the last 20 years.

That’s extraordinary.

It reminds me of the finding in the Gramm and Boudreaux book, The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism. They found that once you account for taxes and transfers, the difference between the top quintile and the bottom quintile of American earners decreases from 16 to one to four to one.

One last thing on poverty. We have a relative poverty measure that tends to bump around between 12 percent and 8 percent since the 1960s. But I have seen a couple of papers suggesting that once you measure poverty by consumption, it falls to about 2 to 2.5 percent.

Why would there be such a huge difference between the official poverty rate and the consumption poverty rate? Are people simply not reporting their incomes?

I think a couple of things are going on.

First, you’re absolutely right that people underreport their incomes. If you look at the bottom fifth of families, for instance, people are spending 20 or 30 percent more than the incomes they report. And I’ve talked to folks on the left who say, “Oh, that’s because they’re going into debt.” Bruce Meyer and his colleagues have looked at that, and that doesn’t seem to be the case at all. It’s pretty well known that there’s a lot of underreporting both at the bottom and at the very top, and that underreporting has gotten worse over time.

The second issue is that most of the poverty measures out there, including the official ones, simply don’t count a bunch of sources of income. And they overstate inflation, so the poverty line becomes a more and more difficult threshold to get over. When you measure incomes more comprehensively and when you use a better price index, the income poverty trend tends to look a lot like the consumption poverty trend.

You could argue that poverty lines are ultimately pretty arbitrary. You can set them so that 2 percent of the population is poor, or you can set them so that 10 percent of the population is poor. The important thing is that you hold them constant over time. Rich Burkhauser, Kevin Corinth, and Jeff Larrimore have a paper where they say, All right, let’s take seriously when Lyndon Johnson said in 1963 that 20 percent of the population was in poverty. Let’s measure everything as best we can and see what that implies about poverty today. And it’s 2 percent.

Now, you run into people who say, “How can you believe poverty is at 2 percent? That’s completely unrealistic.” To which I say it’s arbitrary. If you prefer to start today with the official poverty rate of around 10 percent, we can go back to 1963 and see how many people lived under that line. It turns out that was 70 percent.

Good god.

Let me just repeat that for our listeners. If you decided that the poverty rate today in the United States is 10 percent, then, by that standard, 70 percent of Americans were poor in the 1960s?

That’s right.

Michael Green, who I believe is an investor of some kind, posted on his Substack that the real poverty line in the United States today should be $140,000. For reasons that are mysterious to me, The Free Press decided to republish that article on its website, which of course got everybody very excited. And then you stepped in. So, what does he get wrong?

He gets to this number two different ways.

The first thing he did was misinterpret the official poverty line. In the early 1960s, Lyndon Johnson wanted to start the war on poverty, and he wanted to say that a fifth of the population was poor. And there were a number of different researchers who had arrived at a poverty line of around $3,000 at the time. One of those researchers was a woman named Mollie Orshansky, who had gotten there by noting that nationally, Americans at the time spent about a third of their incomes on food. The US Department of Agriculture had this minimally adequate food budget, so she just took that and multiplied it by three, and that got you to a little over $3,000 for a family of four. Eventually, in 1969, they said, let’s just go with Mollie Orshansky’s numbers, except we’re going to adjust them for inflation moving forward. So, we’re not going to get into how much of people’s income they spend on food. We’re not going to change what an adequate diet is. We’re just going to take her line and adjust it for the cost of living over time. And that’s still the official poverty line today.

Green thought he understood how the poverty line was initially developed, and he said, “Okay, let’s look at how much Americans spend on food today.” And it turns out Americans today spend around 5 or 6 percent of their income on food. From there, Green said, “Okay, so let’s not multiply the original food budget by three. Instead, we should be multiplying it by 17. And clearly, if you multiply this number by 17 instead of 3, you get a much higher threshold.

It’s a ludicrous way of calculating poverty. We spend a smaller share of our incomes on food because we are richer, but Green has used that to argue we are poorer. It makes no sense.

The other way that he got to $140,000 was that he took these estimates of how much families of four need to spend on things like food, childcare, health care, housing, transportation, and some other things. He got these from this living wage calculator that someone has created online, which also had a bunch of problems with it. Maybe the biggest one was that he was using Essex County, New Jersey, to represent the United States. Turns out Essex County is one of the four or five richest counties in the country.

The key thing for Americans to understand is that, in general, wages are increasing faster than prices. However, certain parts of our spending, primarily education and healthcare, are becoming more expensive relative to wages.

So let’s finish by talking a little bit about the Baumol effect, which is basically that, even in industries where there is no growth in productivity, we still have to pay people higher wages because of productivity growth in other industries. Basically, nurses and teachers might not be getting much more productive over time, but we still need to pay them more, or we won’t have any nurses or teachers.

However, in the book that I co-wrote with Gale Pooley, Superabundance, we found that plastic surgery prices are dropping like a rock relative to income. So, how much of the inflation in healthcare is thanks to the Baumol effect as opposed to government subsidies? Would the Baumol effect be lessened if we had proper competition?

It’s a great question, and I don’t think there’s been enough research done on it. But clearly, government intervention has been incredibly important.

In every realm except for healthcare, insurance is essentially a tool to pay a little bit in regular amounts to avoid a giant cost that you have a low probability of ever having to pay. That’s why we have car insurance. There’s a small chance that you’re going to get in a big car accident, and rather than risking bankruptcy if that accident happens, you pay into an insurance policy that will take care of it.

In healthcare, largely because of government mandates, it’s not like that at all. Health insurance covers annual checkups, which are completely predictable. By including a bunch of things like that in health insurance coverage, you incentivize people to overconsume health care, which pushes up costs.

The analogy I make is imagine if the government mandated that car insurance had to cover paint jobs. Well, if I’m paying for insurance that includes an annual paint job and I’m not taking advantage of it, then I’m a sucker. Other people are getting these fancy paint jobs with their insurance coverage, so I will too. That’s going to increase the cost of car insurance, and it’s going to increase the cost of paint jobs. That’s what we’re getting in the healthcare sector.

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Summary: Trade has been a driving force behind economic growth, poverty reduction, and rising living standards across the globe. Far from harming the poor, open markets have helped lift billions out of extreme poverty while improving health, education, and life expectancy. History and modern evidence alike show that free exchange expands the economic “pie” for everyone, making prosperity the norm rather than the exception.

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In his book The Rational Optimist, the British science writer Matt Ridley argued that economic progress began when people began to trade. “By exchanging,” he explained, “human beings discovered ‘the division of labour,’ the specialisation of efforts and talents for mutual gain… The more human beings diversified as consumers and specialised as producers, and the more they then exchanged, the better off they have been, are and will be.” For Ridley, “exchange is to cultural evolution as sex is to biological evolution.”

The Scottish father of economics, Adam Smith, recognized the economic potential of trade when he noted that “the liberal system of free exportation and free importation” is “not only the best palliative of a dearth, but [also] the most effectual preventative of a famine.”

While economists disagree on several policy issues, trade is generally not one of them. For example, survey data suggest that 95 percent of economists agree that tariffs tend to reduce economic welfare. Another 90 percent do not think the United States should restrict outsourcing.

You’d never know that by listening to today’s political debates. While protectionism is nothing new, the recent rise in anti-trade policies is an unfortunate setback for the United States and for the world.

Far from a rigged game that exploits those at the bottom, the globalization of the market system has brought global extreme poverty to its lowest levels in human history (Figure 1). That is why the Turkish-American Nobel Prize–winning economist Daron Acemoglu and his coauthors have described the creation of the market system as “one of the greatest achievements of humankind.”

Figure 1. Share of global population living in extreme poverty, including and excluding China.

Note: Extreme poverty is defined as living below the International Poverty Line of $2.15 per day. These data are adjusted for inflation and for differences in living costs between countries. These data are expressed in international dollars at 2017 prices. The data relates to income measured after taxes and benefits, or to consumption per capita.

Furthermore, despite claims to the contrary, the United States’ participation in the global economy has significantly benefited American consumers and workers. Real incomes have not stagnated over the past few decades. They’ve risen, including for those at the bottom of the income distribution (Figure 2).

Figure 2. Real median personal income in the United States

Note: Shaded areas indicate US recessions.

Nor has international trade hollowed out American manufacturing. While employment in the sector has declined as a result of automation and productivity gains, manufacturing output—especially output per worker—has increased.

As Michael Strain from the American Enterprise Institute observes, “America is upwardly mobile, particularly for those nearer the bottom of the income distribution. Incomes aren’t stagnant. Workers do enjoy the fruits of their labor. The argument that life hasn’t improved for typical households in decades borders on the absurd. The game is not rigged. The American Dream is not dead (Figure 3).”

Figure 3. Average real wage at percentiles of the wage distribution

In a 2020 article, I reviewed the scholarship linking trade to economic growth and poverty reduction. Overall, the empirical literature shows that trade reduces poverty predominantly through economic growth. Critics sometimes claim that growth leaves those at the bottom behind. It may improve the average, they say, but only because of large income boosts at the top.

That talking point is simply untrue. Economic freedom, including openness to trade, and growth have been shown to improve incomes across the board. A rising tide truly does lift all boats, not just the yachts of the wealthy. Growth positively touches every tier of the economic ladder. A bigger economic pie means better living standards for everyone involved, making economic growth pro–poor.

The Indian economist Arvind Panagariya has documented trade’s role in the economic success of Hong Kong, Singapore, Taiwan, South Korea, India, China, and other countries throughout Asia, Africa, and Latin America. Across more than 200 jurisdictions and five decades of data, he found a causal relation between trade and per capita income: the countries that experienced intensive growth always maintained a high and/or expanding trade-to-GDP ratio.

In a new review of the literature, Dartmouth’s Douglas Irwin found the same thing. The empirical research on trade liberalization has been “remarkably consistent” in its conclusion that open trade fosters growth in productivity and, therefore, standards of living (Tables 1 and 2). Tariffs, on the other hand, hold growth, productivity and standards of living back. Previous literature reviews have come to similar conclusions. That is why economists from all sides of the political spectrum come together on trade.

Table 1. Selected studies of trade reform and economic growth.

Despite the populist rhetoric about helping the American workers and consumers, those same workers and consumers end up eating the cost of tariffs in the form of higher prices. The negative effects of protectionism also have a disproportional impact on the poor, who tend to gain the most from trade.

And keep in mind that living standards aren’t just about income. Open market economies have higher adult literacy rates, longer life expectancies, lower infant mortality rates, better environmental stewardship, and greater life satisfaction than closed economies do. As Nobel Prize–winning American economist Robert Lucas wrote, “The consequences for human welfare involved in questions [about economic growth] are simply staggering. Once one starts to think about them, it is hard to think about anything else.”

Table 2. Selected studies of trade reform and industry productivity

Note: TFP = total factor productivity.

Income inequality is a major criticism of an open economy, but, interestingly enough, most studies find no relation between greater economic freedom and income inequality (though the findings are somewhat mixed). It’s worth noting that concerns over income inequality are often concerns over inequality within already rich countries. When it comes to inequality, in other words, it tends to be the global rich arguing with the super global rich (and much of that concern is overblown).

But look at the bigger picture. Overall, globalization has led to both a decline in global poverty and global inequality (Figure 4).

Figure 4. Global income inequality: Gini index, 1820–2020

Note: Global inequality, as measured by the global Gini coefficient, rose from about 0.6 in 1820 to about 0.7 in 1910 and then stabilized around 0.7 between 1910 and 2020. It is still too early to say whether the decline in the global Gini coefficient observed since 2000 will continue.

Income is measured per capita after pension and unemployment insurance transfers and before income and wealth taxes.

According to the 2024 “Economic Freedom of the World” report, the share of income earned by the poorest 10 percent in the most economically free countries is about the same as that of the poorest 10 percent in the least economically free countries. In other words, the income distribution—the slicing of the economic pie—looks the same across countries, no matter the level of economic freedom.

Figure 5. Economic freedom and income share of lowest 10 percent

But the amount of income earned by the poorest 10 percent in the most economically free countries is eighttimes that of the poorest 10 percent and slightly more than the average person in the least economically free countries (Figures 5 and 6). The poor’s portion of the economic pie may be the same across countries, but free countries have bigger pies.

Figure 6. Economic freedom and income share of lowest 10 percent

We did not redistribute our way into riches or plunder our way into prosperity. Instead, the historical shifts both institutionally and culturally in favor of a trade economy led to a radical upsurge in material well-being that the American economist Deirdre McCloskey has aptly labeled “The Great Enrichment”:

In the two centuries after 1800 the trade-tested goods and services available to the average person in Sweden or Taiwan rose by a factor of 30 or 100. Not 100 percent, understand—a mere doubling—but in its highest estimate a factor of 100, nearly 10,000 percent, and at least a factor of 30, or 2,900 percent. The Great Enrichment of the past two centuries has dwarfed any of the previous and temporary enrichments.

It’s not that we suddenly figured out how to slice up the economic pie just right. We made the pie 2,900 to 10,000 percent bigger through commercial exchange. When the pie is bigger, there’s more pie to go around. And we’re all richer for it.