This review appeared in the February 2007 issue of The American Spectator. To subscribe to the monthly print edition, click here.

Income and Wealth
by Alan Reynolds
(Greenwood Press, 231 pages, $55)

So go out and buy this book. Read it and stick little colored Post-its in among the important pages. Then go out among your friends who still have “Kerry for President” stickers on their Volvos well armed for the two years of struggle that lie ahead. And when the rant starts, “The rich have become too rich, the poor too poor,” you can cough quietly and commence. “Well, actually, that’s not true at all.”

Alan Reynolds has produced an important resource for the political melee that will engulf us between now and November 2008 as the Republican Party scrambles around trying to find its moral compass and the Democrats prescribe solutions for an America that may have existed in 1970 but certainly does not exist today.

That this is a dangerous time should be self-evident even without the turmoil of the Middle East. America is transforming itself in ways that can be fabulously beneficial, but the people to whom we hand our political mandate must have an extraordinarily clear vision lest we drive ourselves right into a ditch.

Clouding that vision is the lie of “two Americas” as it is called. Paul Krugman and other economists on the left have now absolutely fixed in the popular mind that Americans in the lowest income cohort of our population are not only desperately poor but also are rapidly losing ground while a tiny fraction (often described as 1 percent or a fraction thereof) are getting grotesquely richer, unfairly wealthier, and dangerously powerful in the process. The fate of our democratic society is in peril.

What Reynolds has done in Income and Wealth is take a calming breath and walk us through the reality of what is truly going on, and how truly interesting it is. He also shows us how the “two Americas” crowd is messing with our minds with their statistical fabrications. To the old saw that there are lies, damned lies, and statistics — one must add political statistics, which are even more damnable.

REYNOLDS IS AN ACCESSIBLE WRITER so that a reader who patronizes H&R Block for his own fiscal obligations can easily comprehend what is going on in our society.

The first important point Reynolds makes is that one should always look at what makes up a statistic and nowhere is that more important than when considering what kind of Americans live in the lowest income levels of our society — usually called the lower 20 percent (a.k.a. quintile) or 10 percent (decile). Here is where the fantasies begin.

Whereas the income of the top fifth of U.S. households is mostly from two or more people working full time, Reynolds shows that most of the income (77 percent) of the lower 20 percent comes from government transfer payments including supplemental Social Security Income, the Earned Income Tax Credit, disability, unemployment, Medicaid, food stamps, and the like.

But Reynolds also points out that most economists do not count such transfer payments as income because, presumably, they are not earned. This artificially deflates the income levels they cite for the poor since the omission leaves average money income for work and savings for these people at an astonishing and seemingly unsupportable level.

Reynolds notes, “If salaries and employee benefits generally rise faster than inflation, while government transfer payments do not, then the gap between two-earner families at the top and no-earner households at the bottom must necessarily widen over time.”

Then there is the nature of the people themselves, for the lower fifth is heavily weighted to single young people just starting out, older seniors easing into retirement, newly arrived immigrants, in addition to the disabled, the addicted, the unemployed, and those who choose to live on the fringes of our society in one fashion or another. The mobility of these younger and upwardly mobile people also usually means they move into the upper quintiles rather quickly so from one election cycle to the next we are not always talking about exactly the same people.

Then there are the ones called the wealthy. Reynolds demonstrates the important distinctions among households played by job experience, educational attainment, marital status, race, and gender and how many of those ratios have changed. The obvious is still true: the more education one has, the more one earns. The median income of a household headed by someone with a doctorate degree was more than $96,000 while that of a high school graduate was $36,000. Women had median earnings of only 56.6 percent of men in 1973 but that gap closed to 76.5 percent by 2004. So there is change and much of it is for the better.

But the big change in the status of the wealthy 1 percent (1.3 million people, by the way) turns out to have more to do with changes in the tax laws and securities regulations than in any suddenly unfair advantage in grinding the poor. In 1986, a massive overhaul of the federal tax laws altered the way many high-income earners estimated and reported on their returns. Tax-exempt municipal bond income had to be disclosed for the first time in 1987. Other changes caused share owners in Subchapter-S corporations, partnerships, or limited liability companies to shift income that had been reported on corporate returns to their individual tax liabilities-thereby significantly inflating the individual reports without significantly changing the actual amount of income being taken in.

SO THE APPEARANCE OF THE POOR getting poorer while the rich leaped ahead turns out to be something of a canard, but it is a duck that will not be easily killed. The danger is that the myth will lead us into tinkering with wrongs that don’t exist and thereby causing enormous damage while not solving very real problems of those among us who are disadvantaged and in need of help.

Witness Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco. No Krugmanite, Yellen earned her spurs at the Fed in Washington and on President Clinton’s oft-ignored Council of Economic Advisers. Recently in her bank’s economic newsletter she tackled the question of economic inequality, making the correct connection between the broad gains in productivity in the U.S. economy and the current run of prosperity we have enjoyed over the last 25 years.

Like Reynolds, she distinguishes between citizens who have advanced educational attainment and higher incomes and those who do not. She also points to the more recent conundrum of the lowest-income earners (the tenth decile) who have tended to out-earn middle-class management types whose jobs have been outsourced. She even pooh-poohs the European social safety nets that have sacrificed general prosperity and economic growth for rigid employment and welfare systems.

Still, at the end, she can’t help it. Some sort of income intervention to help the poor deserves “high policy priority.” She explains, “Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people.”

You see what Reynolds is up against?