“Animal Farm”, by Jim Conte (jimconte.com)
Economists use a measure called the Gini coefficient to describe, in mathematical terms, the inequality in a population. It’s an imperfect measure, and only one of many tools, but it provides useful insight into the mathematical distribution of income (or any other quality, say, bolt sizes).
Basically, if we assume income distribution should be a normal distribution (i.e., bell-shaped curve), then the Gini Coefficient tells us how fat the tail at the far right end of the distribution is. A Gini coefficient of zero means everyone makes the same amount of money (“all animals are equal”). A Gini coefficient of one means that one pig has all the dough.
Andy over at the blog Organizing Entropy has helpfully plotted Gini coefficients based on Organization for Economic Coöperation and Development (OECD) data (that is, data from developed, first-world countries). He’s gone a step further, and sorted the bar graphs by total income (red bars) and by income after taxes and transfers (blue bars). His graphs are shown after the jump.
Note that before taxes are taken into account, the United States has a fairly middling income inequality, with a Gini coefficient of 0.46, just above the OECD average of 0.45. Because of abnormally low taxation, especially of the wealthy, the U.S. is now sandwiched between Poland and Portugal, with the second-highest Gini coefficient of all OECD countries, once taxes are taken into account.
According to the New York Times, Portugal just “joined the swelling ranks of Europe’s discontented, following Greece and Spain, after the government tried to take one step further up the austerity path last month.”
An article entitled “True Progressivism” in last week’s Economist piqued my interest.
The lede hooked me:
By the end of the 19th century, the first age of globalisation and a spate of new inventions had transformed the world economy. But the “Gilded Age” was also a famously unequal one, with America’s robber barons and Europe’s “Downton Abbey” classes amassing huge wealth: the concept of “conspicuous consumption” dates back to 1899.
Thorsten Veblen coined the phrase in the title of his book of the same name.
The rising gap between rich and poor (and the fear of socialist revolution) spawned a wave of reforms, from Theodore Roosevelt’s trust-busting to Lloyd George’s People’s Budget. Governments promoted competition, introduced progressive taxation and wove the first threads of a social safety net. The aim of this new “Progressive era”, as it was known in America, was to make society fairer without reducing its entrepreneurial vim.
Modern politics needs to undergo a similar reinvention—to come up with ways of mitigating inequality without hurting economic growth.
Their special report accompanying the lead article argues that “inequality has reached a stage where it can be inefficient and bad for growth.” The Economist places the United States just behind non-OECD countries China and South Africa in third place for income inequality.
While many Americans complain about supposedly crushing taxation, The Economist pointedly reminds us that
Social spending is often less about helping the poor than giving goodies to the relatively wealthy. In America the housing subsidy to the richest fifth (through mortgage-interest relief) is four times the amount spent on public housing for the poorest fifth.
Why should you care about income inequality, especially if you’re a follower of a political blog? Well, here’s why, according to The Economist:
Some of those at the top of the pile will remain sceptical that inequality is a problem in itself. But even they have an interest in mitigating it, for if it continues to rise, momentum for change will build and may lead to a political outcome that serves nobody’s interests. Communism may be past reviving, but there are plenty of other bad ideas out there.
Within the United States, the Census Bureau has released a map (and chart) that shows Gini coefficients by state.
Do you agree with The Economist that income inequality needs to be addressed? If so, how should we approach it?
Related articles
From the article:
There’s another reason, too. People below the median spend nearly every dollar they get. This creates consumer demand. All economies are driven by demand. Putting more money into the hands of consumers means, automatically, more economic activity, thus more economic growth. Since the wealthy benefit more than the poor regardless of what we do, economic growth makes the rich richer, as well as creating more jobs. QED.
The Gini-by-state is an interesting map. Where I live, Minnesota, is in the bottom half in income inequality (that is, low Gini, or more equal). Yet our state is toward the top in the number of per-capita millionaires. We also tend to have much-lower-than-the-national-average unemployment. We also have a very strong social safety net in the form of things like great healthcare for the poor. Plus lots of parks and museums and other state-supported cultural activities. We clear the streets when it snows. And we have great public schools. All of which means we’re doing it right; a strong economy means one that helps the poor — and it clearly benefits the wealthy to do so.
Yes, I think income inequality is a big problem. As to how I’d start to address it (in the US), some possible ideas:
Cap tax relief (including mortgage etc). Actually a good suggestion of Romney’s, although the way I’d do it is to phase it out above certain levels, so above (say) a quarter of a million in income a year there is no tax relief (exceptions for inheritance as that is dealt with separately).
Raise taxes on the wealthy, whether by letting the upper rate Bush Tax cuts expire, or similar.
Increase the rate at which inheritance taxes take effect. First quarter of a million or so tax free (I believe at the moment this is taxed?), quarter — 1 million taxed at about 20%, 1 million-10 million at about 30%, 10 million + at about 40%. Stepped, so the first quarter of a mil is always tax free etc.
All of these would act to increase government revenues, while increasing the tax burden purely on those who have a lot, or stand to inherit a lot. That reduces the Gini coefficient. The increased government revenues will help stop government having to lay off people. People out of work are pretty much by definition not earning much.…
Next, I’d look at government positions, and set a multiple so that any government employee can only make a maximum of say 20 times the mean income in the country. I would also create legislation that means that for a public limited companies to reward any employee at rates above say 20 times the mean wage of the individual industry, that the company needs to get the express permission of a majority of the shareholders, and that this needs to take place each year (at the AGM maybe?) (it would be industry based not company based as otherwise a CEO has a motivator to raise wages which doesn’t help shareholders, or fire low earning staff to raise the average, or use accounting tricks to take people off the books)
Next, I would raise the minimum wage.
There’s probably more, but those come to mind. Yes, it shows that I have redistributionist leanings. But I don’t see why someone earning a million a year gets any tax relief for instance.
@dawolf
Those are some pretty good ideas. The only quibble I have with your inheritance tax plan is that there needs to be an exemption for family farms. Because of the costs of real estate, a farm can easily be “worth” millions ($5-$7M is not uncommon for a family farm), but only generating income in the 6-figure range each year. When the patriarch dies and the farm goes to his sons/daughters, if they are forced to sell a significant portion of the land in order to pay the inheritance tax burden, that can push the farm into unprofitablity and force the closure of an otherwise productive and profitable farm. The annual costs of the planting and harvesting equipment don’t go down just because you’re only farming 500 acres instead of 1000, for example, and half the land means you’ll only make half the profits to cover those costs. I’ve seen it happen even under the current laws that have fairly generous tax exemptions for family farms. It’s an exemption that makes economic sense, because so much of the “worth” of the farm is tied up in the land itself which is not a fungible resource but which determines the viability of the farm. I’m sure there are other exemptions and exceptions that make sense, but that one just happens to be near and dear to this farm-raised Iowan.
All that said, I agree that the GINI index is something we need to worry about, because expanding inequality is a problem. There will always be inequalities, and I don’t begrudge the rich their wealth. The goal should be to keep those inequalities within reasonable limits of expansion, so that those in the middle and bottom aren’t increasingly left behind. That was the whole point of the New Deal.
@DC
Except for your comment about per-capita millionaires, I had to double-check that you were talking about Minnesota instead of Iowa.
The cultures of our two states are very similar, it seems. Near-bottom income inequality, near the lowest unemployment, high quality social safety net (especially for healthcare), and a focus on education and improving opportunity that has been embraced by both Republicans and Democrats in this state. It does make a difference. A strong economy that helps the poor helps the wealthy, too. Totally agree.
Not particularly surprised that New York is near the top in inequality. Upstate it’s not uncommon to see somebody’s private estate and drive a mile down the road and see some real poverty.
We seem to have entered an era of digital psychlogical warfare. I mention this here, because this underground war using marketing is the counter stroke to freeze the economy as it is.
http://www.guardian.co.uk/world/2012/oct/18/koch-backed-activists-americans-for-prosperity
The Texas 14th (Ron Paul) is apparently in play.
http://www.rollcall.com/news/Holding-Texas-14th-District-Might-Be-Challenge-for-GOP-218305–1.html?pos=htmbtxt
Interesting map of gender pay equity by state that I was looking at in light of the above discussion.
http://www.slate.com/articles/news_and_politics/map_of_the_week/2012/10/gender_income_inequality_maps_by_county_and_by_state.html
Fascinating map, CC. Some real surprises there, not the least of which is the dramatic variation state to state. Given how much things have improved for women in the past 30 years, I had no idea that some states still had average women’s wages at only 55–60 cents to men’s dollar. Wow. Most states fell about where I expected relative to one another, but there were some surprises there, too. What stood out to you?
mclever,
Utah struck me as a particularly interesting state. Some areas are $0.35 on the dollar. It’s a non sequiter, but those areas in eastern Utah are where the gaps are in the Christian Mingle map locations on that TV ad. Hmmm.
What does it say when your pay rate for women is worse than Alabama. I understand that when all factors are included, we should be at ~80% to parity.
The real issue with high Ginis is that they typically precede some form of revolution. Many are violent, but not all of them are.
Interesting Gini Index map.
Dawolf re # 2
I think that in 2012 there was a federal estate tax exemption of infinity for assets passed on to a spouse, or $5.1MM for assets passed on to anyone else who was not a charity. So very very very few estates were caught by the Federal estate tax.
This was a sunseted law, so in 2013 it reverts to an unlimited exemption for a spouse and a $1.0 MM exemption for anyone else. I strongly suspect this will be changed before the end of the year, whoever wins the election.
For the tax year 2010, there were 6,711 estates that had ANY federal tax liability. Since there were about 2.5MM deaths, we’re looking at a very very small percentage of dead people who owe any federal estate taxes.
McClever — re #3. Of these 6711 estates, only 689 had any farm assets. That’s probably not fair, because even a family farm is likely to be incorporated, so the assets would show up as stock. But there were only 1563 returns that had closely held (i.e. non-publicly traded) stock, most of which weren’t farms. So there were at most maybe 1500 farms, and probably a lot fewer, farms that had ANY estate tax liability, let alone enough to cause liquidity problems.
I’m somewhat sympathetic to the idea of allowing legitimate farms a higher estate tax exemption, except that it would cause all sorts of estate assets to be classified as farms. But it still affects a really miniscule number of farms.
I’ve read somewhere that the federal estate tax causes liquidity issues for almost nobody, maybe a couple of hundred estates a year. I’ll research that some more and get back ( or ‘revert’ in corporate speak).
But the bigger issue is that the entire estate tax bruhaha is a complete red herring. The federal estate tax is imposed on maybe 0.2 — 0.3% of all estates (i.e. dead people), and even there, 90% of the tax falls on estates of $5.0MM or more. Considering that, how did the Republicans ever generate this brig groundswell against the estate tax.
Dawolf re #2
I believe the President is the top paid federal employee. His salary of $400,000 is no more than 8 — 10 times the median income. So that suggestion of yours is already easily satisfied. And he’s got a much tougher job.
Most economists agree that raising the minimum wage will reduce the total level of employment. There are some empirical studies that refute this, and a theoretical argument that under certain conditions raising the minimum wage actually increases employment ( the creation of free agency in baseball is shown as an example). But the consensus is still that raising the wage decreases total employment.