Imagine an iceberg. Call it the debt iceberg. The part that is visible above the surface is the federal deficit. The next layer, just beneath the surface is the federal debt. The broad base is the fiscal gap.  The deficit is the difference between revenues and expenses of the federal government in one year. The debt is the accumulated deficits that appear on the government’s balance sheet. The fiscal gap is the net present value of the unfunded liabilities of the government. Only the latter is the real measure of the government’s indebtedness. How so?

The federal deficit and the federal debt as generally reported do not reflect the promises made by Congress that it must fulfill in future years. Why not? Because unlike a private firm which must use GAAP accounting, the government reports on a non-GAAP or cash basis. Under the latter only cash expenses are counted in the deficit and the reported debt includes only cash actually borrowed. But say tomorrow Congress passed a law stipulating that all Americans would get a million dollar check per year for life starting five years out that liability would not show up in the deficit or the debt until actual cash was disbursed. The fiscal gap, by contrast, reflects all promises made.

To give you a sense of the relative orders of magnitude: the federal budget deficit is running at about $500 bn per year currently. The federal debt, on the other hand, is $20 trillion. The fiscal gap is on the order of $200 trillion.

Is the fiscal gap too big? too small or just about right? What yardstick would be appropriate? Well, the net worth of the entire American population, including every billionaire is $90 trillion. So to balance the fiscal gap would be impossible.

To Larry Kotlikoff and other economists that is far too big. For other economists debt is never a problem because future generations are assumed to be much richer than we are and will be able to handle the added interest expense.

To those who do worry, the huge fiscal gap is a form of fiscal child abuse and taxation without representation as it involves passing to future generations the burden of making tough decisions involving raising taxes and cutting spending that the current spineless generation is unwilling to shoulder.

Personally, I think Kotlikoff is right.

Either way, if you don’t know the difference between the federal debt and the fiscal gap and between GAAP and non-GAAP accounting, you can’t possibly understand fiscal and monetary policy.

The most cited statistic on racial discrimination relates to differentials in incarceration rates. Black males are 6X more likely to be incarcerated than white males. But what exactly does that prove?

Males are 10X more likely to be incarcerated than females. Is that evidence of gender discrimination against men? Of course not: the differential in male versus female incarceration rates relates to the differential in crime rates. The same is true for the incarceration of black versus white males.

The most cited statistic on gender discrimination is that women earn $.77 on the dollar. This is often interpreted as meaning that that women are paid 23% less for the same work. That is not what this statistic means. This statistic is generated by dividing total earnings of all men by the number of men and the total earnings of all women by the number of women and comparing the two. But women do not work the same jobs. They prefer jobs in lower paying sectors of the economy such as social service. They also favor jobs with flexible hours. Adjusting for all these very important factors, the gap shrinks dramatically.

The most cited statistic on economic injustice is that the top 1% earn 20% of total income as if on the face of it that is unfair and justifies every higher taxes on the top 1%. The assumption is that the top 1% avoid taxes thanks to clever lawyers and accountants. In fact, the top 1% pay 40% of all income taxes.

If you look at the income distribution by quintile you will find that the top quintile earns 10X as much as those in the bottom quintile. But the top quintile on average work 8X more hours than the bottom quintile and tend to be older and more productive.

To base political arguments on numbers that aren’t appropriately adjusted is a form of fraud. Happily for those who perpetrate it, this form of fraud is protected by the First Amendment.

This is not to say that there race and gender discrimination does not exist or that economic inequality isn’t real. The point is not to be misled by aggregate statistics that seem to mean one thing and don’t.

I will never forget when, as a Berkman Fellow at Harvard Law School, I brought up in the course of an informal weekly discussion groups, the question of family structure. The silence was deafening. It was as if I had proposed infanticide.

At first I didn’t get it. Then I realized that for the Left, family structure and family values are issues of the Right. “Family structure” is “dog whistle” politics and code for racist scorn for black people. The real issue is white racism and economic exploitation. Family is an ideological weapon, a cynical tactical device to distract the attention of the ignorant and the gullible.

This is tragic. The 50 year taboo on family structure originated with the Moynihan report of 1964. A concerned liberal Democrat, Moynihan was denounced as a victim-blaming racist for suggesting that the black family had some issues as the out-of-wedlock birth rate among blacks was 24%, 8X  higher than the white rate of 3%. Today the white rate is 25% and the black rate 67%.

The good news is that the taboo on the left is lifting. Kathy Edin, a professor at Harvard, and a progressive ethnographer has tried to focus attention to what she calls the problem of “complex and unstable families.” In a forum on inequality she said that to talk about inequality without talking about the inequality in family structure is lunatic. Similarly, Robert Putnam, also a progressive has chronicled the tragic consequences of family structure deterioration in his book Our Kids.

Raj Chetty, the economist,  in his study on social mobility in America has found that the most important single variable in explaining differentials in social mobility across all races is family structure.

Most encouragingly, Putnam has teamed up with Charles Murray, a conservative and gone on a joint speaking tour trying to highlight together the severity of the problem and the need for bipartisanship. This ecumenical spirit is also evident in the joint study by the Brookings and American Enterprise Institute on the subject. But in my experience these are still isolated voices of reason in a sea of partisan bickering.

Why has family structure deteriorated so dramatically in the last 50 years?

As with any big historical trend there are multiple causes: technological, economic, political, and cultural. The development of the birth control pill helped de-stigmatize extra-marital sex, welfare eligibility requirements made marriage economically irrational, income-support programs made having children a potential source of income, the women’s movement helped spread the idea that a single mother could do it all herself, technological change and globalization made it more difficult for many men to play the traditional role of breadwinner, the decline of religious faith weakened the fear of divine retribution. Whatever the causes, the result has been the emergence of a caste system: one caste with intact families, the other without.

Let’s start with a little quiz. What do you think the chances are that a child born into the bottom quintile of income rises out of it? a.) 5-10% , b.)11- 20%, c.) 21-30%, d.) 31-40%, e.)41-50%, f.) over 50%. How high would those chances have to be for the American dream to be alive and well? Please make your best estimate before proceeding. 

I have been asking these questions of Harvard undergraduates, graduate students and faculty for the last 8 years. There is an overwhelming consensus that the American dream is not what it used to be, that it is rare for those at the bottom to pull themselves out of the bottom. This decline in mobility is attributed to a rise in inequality. The general feeling is that between 5 and 15% of those born to bottom quintile earners succeed in pulling themselves out of that quintile and that if 30-40% of them did so that the American dream would be alive again. How does your best guess square with the estimates of these students and faculty?

As of 2007, the most comprehensive quantitative study of economic mobility In America was the Brookings/Pew Study.  What did that study find?

In fact, close to 60% of children born into bottom quintile families end up doing better than their parents economically as measured by rising out of the bottom quintile of earners. Conversely, roughly 60% of those who were lucky enough to be born into the top quintile were destined to end in a lower quintile themselves.

When I read this report in 2011, my eyes popped out of my head and my jaw fell to the floor.The data were so at odds with my own assumptions. Where does the colossal gap between current perceptions of the American dream and the reality come from?  Why such a discrepancy between perceptions and reality? A most remarkable thing is that the conclusions of the Brookings/Pew study were at odds with their own data if you assume the common sense view that a 60% figure is a remarkably high number indicating that the American dream is alive and well.

The authors conclusion however was that the American dream is a myth because if it were true 80% of the bottom quintile would rise out! This is the result that would be dictated by pure chance. It is the conclusion of the study not the data itself that got the press.

In 2014 an even more comprehensive quantitative study by Raj Chetty concluded that the American dream is as alive and well as ever and the fact that the rungs of the ladder of opportunity had gotten further and further apart had not made the ladder harder to climb. This part of his study got virtually no press.

Why? Confirmation bias. Partisan agendas – on the Left and the Right. Both parties tell the story that America is going to hell in a handbasket and that they are America’s only hope.

Whether or not the American dream is dead ultimately depends on how you define it. Who is qualified to do so? An historian? an economist? a statistician? a sociologist? Who is trained to separate partisan bias from rigorous science or even truly balanced analysis of this issue? Are all definitions created equal?

As an historian, I would say that the American dream as most widely understood is the chance for a decent life if you work hard, hustle, and have a little bit of luck. The two fundamental forms of the dream are the immigrant version and the native born version. For immigrants the American dream is about having a better chance than they would have had in their home country. This version has never been more a reality than today when the difference between home country standards of living and American standards is wider than ever. With respect to the native born version, there is no doubt that Americans as a rule have decent lives by any absolute historical standard and that technology has made the quality of life dramatically better whether in terms of the quality of health care or accessibility of educational opportunities. The internet has given to even the poorest access more information and world class teachers than even the richest Americans had 30 years ago. Never in human history has it been possible for a motivated child to leverage his talent so rapidly as now.

But, wait. What about other definitions? What about the chances of getting out of the bottom quintile definition used in the 2007 study? Are there others?

In 2016 Raj Chetty came out with a different angle on social mobility in America.

This time he defined the American dream as making more than your parents which he calls “absolute mobility” versus “relative mobility.”  But this is tricky. First, it is clear that you could have a very decent life without making more than your parents because your parents already had a decent life. In the 1950s making more than your parents meant merely escaping the destitution of the Great Depression – a very low bar. Making more than your parents when they lived in the affluent sixties or the roaring 1980s is a much higher bar. The law of diminishing returns is powerful and ineluctable. If you can have a decent life without working at all and instead playing a complex social welfare system, well then why bother? If you are taught that you are a victim of a corrupt system and that it does not make sense to work hard, why should you? If you are taught to follow your dream and avoid the standard rat race and instead of studying to be an engineer or accountant be rock star, athlete, or shoot for the moon and be the next Bill Gates, would it be surprising that your income is not higher than your parents on average?

The gap between common sense and  so-called social science is widening.

I am more and more convinced that social “science” at least to the extent that it touches on policy related issues is really no more than partisan ranting in drag.