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?