Playing Fast and Loose with the Economic Facts
Over the past few years, concerns about fake news have taken center stage in news outlets across the country. But as technology allows audiences to further segment and ideological echo chambers have become the norm, less attention has been devoted to the increasingly prolific genre of merely misleading news.
Complaints about ideological bias will always be with us, but there has been a noticeable increase in misleading stories predicting the coming doom of the American economy or the dismal state of the average American. Predictably, radical ideas are now being floated in response to this seemingly depressing state of affairs, but several of the most popular tropes are based on findings that are misleading at best—and outright false at worst.
Take the issue of extreme poverty. The 2015 book “$2.00 A Day: Living on Almost Nothing in America,” from Kathryn Edin and H. Luke Shaefer, garnered sensational headlines as readers learned that the number of American households living on $2 per day or less had reached one and a half million, including nearly three million children. Despite some criticism, the book was selected as a New York Times “Notable Book of the Year,” while the figure was touted by Democratic socialist Bernie Sanders on the campaign trail, and the finding cemented its status as a fact in much of the public discourse.
But new research linking survey data (the source of the original findings) to administrative tax and program data confirms that the original findings have been significantly overstated. Once the researchers accounted for in-kind transfers, replaced survey reported income with administrative records, and factored in ownership of substantial assets, they found that “more than 90% are not in extreme poverty.” Furthermore, the researchers noted that, “Of the households remaining in extreme poverty, 90% consist of a single individual.”
Another frequently repeated talking point is that a substantial number of Americans are unable to handle an unexpected $400 expense. Several presidential hopefuls have pointed to this widely reported “fact” as a reason to significantly increase government spending. In arguing for a new refundable tax credit, Democratic presidential candidate Kamala Harris dramatically declared that, “In America right now today, almost half of Americans are a $400 unexpected expense away from complete upheaval.”
Perplexed by the seemingly widespread acceptance of this pessimistic claim, American Enterprise Institute scholar Michael Strain devoted a Bloomberg opinion column to tracking down its source. Strain concludes that the claim is based on a misreading of a survey question from the Federal Reserve’s annual “Report on the Economic Well-Being of U.S. Households.” He explains:
The report finds, in 2018, that 61% of adults would cover a $400 unexpected expense using cash (or its equivalent). Politicians and many in the media seem to be subtracting 61 from 100, and concluding that 39% of people, to use Warren’s phrase, “can’t come up with” the money they’d need to handle this situation.
Instead, as the Fed report makes clear, though “the remaining 4 in 10 adults” “would have more difficulty covering such an expense,” many of them would be able to make it work by carrying a credit card balance or borrowing from friends and family.
The same report notes that only about 12 percent of adults “would be unable to pay the expense by any means.” That should be troubling enough in its own right, but such a figure is a far cry from the “nearly half of Americans” claim that is now commonplace.
Even broader economic trends have not escaped this kind of declinist misrepresentation. One of the most hotly debated topics among politicians and academics is whether the American dream is dead or fading right before our eyes.
The key metric in debates on this topic is the rate of intergenerational economic mobility—that is, how much a person earns compared with what his or her parents earned at the same age. In late 2016, a team of researchers led by Harvard’s Raj Chetty used tax data to examine the rate of economic mobility in America and found that only half of Americans born in the 1980s out-earned their parents, compared to about 90 percent for those born in the 1940s. Dubbed “the Chetty bomb,” the report’s findings led to numerous headlines declaring the death of the American dream, and raised the broader question of whether upward economic mobility had all but disappeared in America.
However, another study measuring contemporary levels of economic mobility reached a somewhat different conclusion. Scott Winship, now director of the Social Capital Project in the Joint Economic Committee, adjusted for changes in family size, used a different price index to adjust for the rise in the cost of living, and added income from federal cash transfers. These changes move the percentage of those born in the 1980s earning more than their parents up from 50 percent to 68 percent. Furthermore, Winship is quick to note that even this increase is likely understated, as estimates omit other sources of non-cash income like health insurance or housing assistance.
Overall, Winship concludes his study by noting that, “roughly three in four adults—and the overwhelming majority of poor children—live better off than their parents after taking the rising cost of living into account.” Strangely, this conclusion garnered far fewer headlines.
Certainly, it is disappointing that there remain American households, however few, that must survive on less than $2 per day, or that 12 percent of American adults would be unable to pay $400 unexpectedly, or that not every American is likely to earn more than his or her parents. There is an incredible amount of room for improvement, but any attempt to improve the status quo must have a proper grasp on reality. Without careful analysis, trends that are merely concerning quickly become apocalyptic, creating space for radical solutions that risk doing more harm than good.
Originally published in The Hill.