Doesn’t Appear that Income “Inequality” is On the Rise

by Don Boudreaux on October 30, 2011

in Inequality, Myths and Fallacies, Seen and Unseen

Check out this data-rich analysis of the trend, over decades, of income inequality in the U.S. – for, respectively, individuals, households, and families – over at Political Calculations.  Informative.  And it is strong evidence for a point on this matter that Russ often makes, namely, that changes in the composition of households creates illusions in data carelessly considered.  (HT Mark Perry)

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Jon Murphy October 30, 2011 at 9:47 pm

Interesting. It seems as though income has become more equal among individuals while marginally more unequal among households and families. What do you suppose that means?

Don Boudreaux October 30, 2011 at 9:48 pm

The post to which I link offers a plausible answer to your question.

Jon Murphy October 30, 2011 at 9:54 pm

Right, but I was wondering about other possible explanations.

Ben Hughes October 30, 2011 at 10:28 pm

What’s so ironic is that the very (likely) reason for decreasing household size is the very growth in income that liberals claim isn’t there. As individual income rises, people can set out on their own: own their own cards, houses, etc. – become independent. This bears itself out as more household income “inequality”, but is likely caused in large part by something *good*.

Randy October 31, 2011 at 7:12 am

Exactly.

Dan J October 31, 2011 at 3:00 am

D-I-V-O-R-C-E. Increased rate.
Single, unwed, muthas……

And, yes the gap between the ‘rich’ and the highly unproductive, chronically unemployed, uninspired, unambitious, entitled poor is growing. Yet, the ‘poor’ tend to have luxuries in life of cable tv, cars, cell phones, temperature control devices in their dwellings, running water, toilets, refrigeration, pets (they cost money), etc.,….
Poor???? Trade-offs!!! Choices!!! Individual responsibility!!!

Methinks1776 October 31, 2011 at 7:55 am

I think you will find that a significant number of those in the bottom of the first quintile are new immigrants who imported their poverty when they immigrated. You’ll be hard pressed to find them wallowing in the first quintile ten years later.

Fred October 31, 2011 at 8:46 am

Or fledglings who were just kicked out of the nest.

Methinks1776 October 31, 2011 at 11:17 am

I have less hope for them. Aren’t these examples of these fledglings?

http://www.youtube.com/watch?v=v_ZjWFHjO4Y

Fred October 31, 2011 at 12:14 pm

Not all fledglings are alike (I can’t reach youtube but assume that link is to some OWS types, right?).

Some have parents who instilled upon them, despite the indoctrination from government schools, a sense of pride and personal responsibility.

Methinks1776 October 31, 2011 at 12:53 pm

Fred, I forgot your youtube prohibition. Of course, I agree with you.

Dan J October 31, 2011 at 8:45 pm

Indeed, people are always moving from one income group to the next. And, I assume that 18yr olds to 30yr olds who are often in the earliest years of their income potential and often at their lowest of earning years are included.

Will October 31, 2011 at 10:02 am

And the best part about “cable tv, cars, cell phones, temperature control devices in their dwellings, running water, toilets, refrigeration, pets (they cost money), etc.,….” is that while I have formed my own household separate from my parents, now that my household has existed for 10 years I have gone from a 1 bedroom apartment to a 4 bedroom 2600+ sq ft house that is actually as big as the house I grew up in all while earning 1/2 of what my parents did at this time in their 10 years of being a household. It is a shame that people continually focus on cash (income) without looking to real wealth.

Scott G October 30, 2011 at 11:51 pm

Wish there was a less technical version of this to post on Facebook. (Hint, hint).

Greg Webb October 31, 2011 at 12:02 am

Excellent analysis! It’s good to see that someone looks in depth at this issue rather than letting big-government advocates manipulate aggregates in order to peddle their ideological bias. Truth seeking is not dead!

muirgeo October 31, 2011 at 6:58 am

Greg likes the gruel his leader is feeding him….. it’s pathetic Greg. Gobble it up buddy… there’s lots more where that came from.

Chris Bowyer October 31, 2011 at 2:36 pm

Did you have, like, an actual rebuttal?

Greg Webb October 31, 2011 at 5:53 pm

Of course not, Chris. The facts and evidence never get in muirdiot’s way when it comes to silly personal attacks or advocating stupid big-government propaganda.

Randy October 31, 2011 at 7:17 am

Truth seeking is not dead, but does it matter? If we have reached the tipping point, if a significant part of the population is now invested in dependency, then the truth will not matter until after the crash – and perhaps not even then.

Greg Webb October 31, 2011 at 12:17 pm

George, I see that you are sill making silly, baseless personal attacks and rambling incoherently in order to pretend at knowledge. Do you have anything of value to add to the conversation?

Economic Freedom October 31, 2011 at 12:37 am

Happy Halloween hobgoblins, and librarians!

I looked up Gini coefficient on Wikipedia and the explanation is quite technical and there is an even more obscure (to me) discussion that debunks the usefulness of the technique.

So, what I see is a graph of a horizontal, fairly straight line that claims to show that there is no change in income inequality (however that is defined). I know from math class that the slope of a horizontal straight line is zero, and that is what I conclude here. I will not win any math prize for that conclusion.

I believe that what we have here by Mark Perry is what Russ would appropriately call scientism. It certainly isn’t science, social science, or even intelligible mathematics. You will only conclude from the graphs what you would have thought before you saw the graph. Therefore it is meaningless, just as dividing by zero has no meaning assigned to it. You will not win any prize in economics for this.

I still believe in ghosts, but only on Halloween.

vikingvista October 31, 2011 at 2:43 am

Perry neither invented it nor made it famous. He’s merely speaking to the redistributionists in their own tongue. And sure, as a measure of “closeness” to a uniform distribution, it is crude and at best a heuristic, but it does have the benefit of simplicity.

But its statistical failings aren’t its biggest problem. Its biggest, or certainly most glaring, problem is the same with almost all such popularized measures of income inequality–they mix interevent comparisons with intRAevent comparisons. It is as though someone actually thinks that I am unfair to myself, or stoking envy and unrest in myself, by having higher income at some stages of my life than at others.

vikingvista October 31, 2011 at 2:46 am

Correction–I erroneously accepted your claim that the language was Perry’s at all.

Dan J October 31, 2011 at 2:52 am

How dare you increase your income annually, when there are ‘poor’ people who have not been able to obtain a ‘living wage’ due to your hogging of profits and wages on a finite amount of wealth. Shame on you……..

vikingvista October 31, 2011 at 3:32 am

An unreported portion of reported income inequality isn’t even between me and the poor. It’s between me and myself!

Economic Freedom October 31, 2011 at 4:23 am

I can’t read what you wrote, because it is repetitive, Revolutionary Communist Party USA gibberish, regurgitated by Occupy Wall Street moochers and looters. I’d consider sending you money to get you to stop trolling and spewing left-wing inanities on this classical-liberal blog. Please tell me how much you’d want and where to send the check.

Economic Freedom October 31, 2011 at 5:17 am

Stealing my identity again? Are there no lengths that you fascist billionaire librarians won’t go to to try to destroy the opposition? Is your name Murdoch or Koch? You must work for the Cato Institute as a union-busting thug.

http://en.wikipedia.org/wiki/Union_busting

Jon Murphy October 31, 2011 at 7:56 am

See?! See?! There it is! Chewbacca Defense!

Economic Freedom October 31, 2011 at 12:15 pm

Stealing my identity again?

Pot. Kettle. Black.

Buzz off, commie.

Michael October 31, 2011 at 3:35 pm

What’s with the librarian fetish? Did one slap you with a hardback?

House of Cards & Economic Freedom October 31, 2011 at 5:39 pm

What’s with the librarian fetish? Did one slap you with a hardback?

Yes, the doctor did when he was born . . .

. . . with all 20 volumes of the Oxford English Dictionary.

Jon Murphy October 31, 2011 at 8:00 am

EF, The Gini coefficient is the measurement used internationally to judge the equality of income distribution in a society; a GC of 1 is perfect inequality and a GC of 0 is perfect equality. Regardless of its usefulness (although I agree with you about its dubious creditably for reasons previously stated in other posts), this is the stat quoted when the claim is made that income inequality is on the rise. Thus, to depute that claim, the author looked at the same statistic. So, you cannot claim greater inequality out of one side of the mouth and then decry the metric used out of the other.

Economic Freedom October 31, 2011 at 12:22 pm

What Economic-Freedom-the-Pretender is saying is that the Gini Coefficient is invalid because he doesn’t understand it.

Anything more complex than two-syllable words and second-grade arithmetic is beyond his grasp. That’s part of what makes him the perfect dupe for the left.

dcj125 October 31, 2011 at 3:15 am

That’s a very interesting finding. So from what I understand, the reason why there is increasing income inequality between families/households is because people of similar socioeconomic and educational backgrounds are more likely to hook up and get married. However, let me play devil’s advocate and put forth a reason increasing family income inequality is still problematic.

As the trend continues, the wealthier families will increasingly have more of the income compared to the poor families. Combined with the phenomenon that wealthy families tend to have less children than poorer families, then you’ll end up with less people with more wealth. And then the smaller, wealthier group will be the ones that can afford better healthcare and a better education because there is more money to spend per wealthy person – compared to less money to spend per poor person.

I think if you consider things like inheritances (example: 2 wealthy parents passing $1mil to 2 children vs. 2 poor parents passing $1K to 4 children) and increasing populations (if wealthy people reproduce less, then the population delta will be made up of more poor people), then the income inequality (or maybe it’s more like wealth-inequality, but then it’s easier to make money once you have money) situation can become an economic burden in the long term. What do you guys think about that prospect?

Here’s an analogy that I can think of:
Let’s say you take all the NBA players and you sort them by overall ability. The entire group would represent all the individuals and their incomes. Now, if you consistently form basketball teams all with the best players, and same with the bad players, then only a handful of teams will be successful in the league. (You could make the joke that that’s how the NBA has always been, but I hope you get my point. =] )

Would you say that creates a healthy league (aka economy)? I don’t think so…

kyle8 October 31, 2011 at 7:02 am

It goes beyond what you have stated. In these comparisons I rarely see any compensation for recent immigration.

It stands to reason that if your society is getting wealthier and having fewer children per couple. So then you subsidize your workforce by massive immigration from third world countries that naturally the gap between rich and poor will seemingly increase.

Methinks1776 October 31, 2011 at 8:09 am

dcj,

The downside to your NBA analogy is that in it, the world requires only one skill to get ahead. In reality many skills are rewarded. The guy whose company I hire to do my gardening can’t program a computer, doesn’t understand finance and can’t operate on your brain. Yet, he’s rich. My hairs stylist can’t either (he’s not even a nice person), but he’s extremely good at what he does and earns in excess of $350K per year.

but then it’s easier to make money once you have money

No. It’s easier to make money if you’re really good at something which is in demand. If aren’t, you’ll just lose all the money you had. If you are, there are plenty of people who will want to invest.

dcj125 October 31, 2011 at 12:14 pm

In my analogy, individual productivity is normalized to income, which is then analogized to basketball skill.

“If you are, there are plenty of people who will want to invest.”

This part goes back to what I said originally. More investors = more start-up capital = greater opportunity to make more money. An entrepreneur with more money will be able to afford better facilities, better employees, better advertising, and may be able to afford to make more mistakes compared to someone with less.

Captain Profit October 31, 2011 at 9:42 am

Okay, whatever, but what part of it is burdensome?

dcj125 October 31, 2011 at 11:56 am

Maybe “burden” is not the best word to use, but my case is that a weak middle class means a weaker economy. It is a widely accepted correlation, although I know that doesn’t make it automatically true.

But I could also make the argument that growing income equality will also push more families below the poverty line, which leads to more money spent on social programs, which are a burden to the economy.

Methinks1776 October 31, 2011 at 12:03 pm

But I could also make the argument that growing income equality will also push more families below the poverty line,

How does that work?

dcj125 October 31, 2011 at 12:27 pm

Here’s the scenario that plays out:
Some people in the middle class will jump up to the upper class, while others jump down to the lower class. Some of those middle classers could end up directly below the poverty line. Meanwhile, with a worsening economy (caused by or evidenced by a weak middle class and greater income inequality among families), there will be more lower classers moving below the poverty line than there are moving up above it.

(I’m not an economist or anything, so I’m sorry if my lack of knowledge or understanding is frustrating. I am only trying to learn and am trying to make sense of the things I see with the things I read and hear. I enjoy being challenged and learning different viewpoints.)

Methinks1776 October 31, 2011 at 1:05 pm

That doesn’t make sense. I think you have become too attached to the media’s ignorant wailing about the middle class.

Abandon that for a minute.

Let’s start over.

What do you mean by a “weak middle class” and why would income inequality cause a worsening economy? You’re making a lot of assertions that don’t relate to each other. I’m trying to figure out what you’ve baked into your scenario to better understand our starting point.

dcj125 October 31, 2011 at 1:47 pm

You are right in that my knowledge of the middle class is mostly based on what I’ve “learned” from the mainstream media.

My idea of a weak middle class is a middle class that does not have a lot of spending power. For example, my family is middle class and our money does not go as far as it used to in the early 2000′s. I would consider my family as being a part of a weakened middle class.

I think the economy would worsen if people have to spend all of their money on their needs, as opposed to having enough money to spend on their wants also.

The only thing that I can see that tears my argument down is my assumption of a zero-sum system. It’s a frequent argument used here, but I find that it only ends discussions and never really answers any questions for me. Russ likes to use the “bigger pie” analogy, but just because the pie gets bigger doesn’t necessarily mean that the wealthy minority isn’t eating more of it at a faster rate than the rest of the population.

John Dewey October 31, 2011 at 2:16 pm

dcj125: “just because the pie gets bigger doesn’t necessarily mean that the wealthy minority isn’t eating more of it at a faster rate than the rest of the population.”

It doesn’t matter whether the highest productive minority eats at a faster rate. For all my lifetime (60 years) the pie has been growing so fast that every sector is able to eat more than 20 years ago. The median household income of the U.S. has long been higher than any other developed nation (save a few very small nations which lacked unskilled workers).

You have provided no argument showing why the trend of increasing household income should not continue in the U.S.. The argument that the less-skilled reproduce faster than the skilled ignores that millions of people raised in low-income families have become skilled and more productive than their parents.

Methinks1776 October 31, 2011 at 2:21 pm

dcj,

For example, my family is middle class and our money does not go as far as it used to in the early 2000′s.

If you’re claiming that your dollar isn’t going as far, then what you’re claiming is inflation. If there is inflation, not only the middle class, but everyone’s purchasing power is weakened. The poor would be far worse than the middle class and everyone who has saved is worse off. Inflation is a tax on everyone and makes everyone worse off.

I think the economy would worsen if people have to spend all of their money on their needs, as opposed to having enough money to spend on their wants also.

We’re always better off if we can get more of what we both need and want. But, the economy would be worse off if we were were not producing as much. Before you can consume) you must produce something of value (grow the pie). Of course, you can borrow to spend now, but borrowing only changes the timing of consumption. You must convince a lender that you will produce enough in the future to repay your loan.

Anything that impedes the ability to produce and trade freely with each other (make their own choices that best fit their wants and needs) makes people worse off.

Russ likes to use the “bigger pie” analogy, but just because the pie gets bigger doesn’t necessarily mean that the wealthy minority isn’t eating more of it at a faster rate than the rest of the population.

The way you get wealthier is producing more pie. The wealthy aren’t wealthy because they consume pie, but because they produce it. If they consumed more pie than they produced, the pie would get smaller and they wouldn’t be wealthy. You get wealthier by creating more pie than you eat.

Methinks1776 October 31, 2011 at 2:26 pm

That’s not well written. Sorry.

dcj125 October 31, 2011 at 2:54 pm

John Dewey,

“You have provided no argument showing why the trend of increasing household income should not continue in the U.S.”

My argument was about increasing income INEQUALITY, not overall income. But I think I understand the point you are making.

“The argument that the less-skilled reproduce faster than the skilled ignores that millions of people raised in low-income families have become skilled and more productive than their parents.”

You’re right, I did intentionally ignore those millions of people – reason being that I think there are millions more people that do not become more productive than their parents. I don’t know if there is a study on it, but if you don’t include immigrants, has the number (or percentage) of low-income families decreased over time? If so, then I would have misjudged.

dcj125 October 31, 2011 at 2:59 pm

Methinks1776

I think I understand you OK. I gained some insight and a different perspective on several things. I appreciate yours and the other comments in response to my musings and questions.

John Dewey October 31, 2011 at 3:42 pm

“but if you don’t include immigrants, has the number (or percentage) of low-income families decreased over time? If so, then I would have misjudged.”

The definition of low-income household – the official measure of poverty – has changed over time. If you use the government definition of poverty, I think you will see that percentage of low-income families has not changed much. But that doesn’t tell one anything about whether Americans become wealthier than their parents.

Some low-income households were raised in low-income households. But many were not. Young adults just starting out often earn much less than did their parents. Retirees who came from all socioeconomic sectors often have incomes much lower than they did during working years. Drug addicts and abusers of alcohol who cannot keep a job come from all socioeconomic classes. Many wealthy business owners have occasionally had very low incomes when their businesses were starting or during economic recessions.

The point I’m making is that in any one year, the group of low income households consists of a very wide variety of situations. I’m suggesting that one not try to generalize too much about the makeup of low income households.

Seth October 31, 2011 at 10:04 am

“the wealthier families will increasingly have more of the income compared to the poor families.”

Here’s another way to write this:
…more productive families will increasingly earn more income compared to less productive families.

I do like your NBA analogy because it recognizes the link between value and ability.

What I don’t like about your NBA analogy (and many similar sports analogies) is that it compares a zero sum system (there are only so many W’s in a league and an equal amount of L’s) to a system that is win-win.

cmprostreet October 31, 2011 at 12:26 pm

“As the trend continues, the wealthier families will increasingly have more of the income compared to the poor families. Combined with the phenomenon that wealthy families tend to have less children than poorer families, then you’ll end up with less people with more wealth. ”

If this were the trend, then the individual income disparity would be increasing. The point of the article was that individual disparity is not increasing. Going back to the aggregates and saying they might mean something sinister* at the micro level doesn’t work when the micro-level data clearly refutes that hypothesis.

* I would also disagree that increasing inequality is necessarily a problem.

Corey October 31, 2011 at 4:27 am

While I do find this argument of changing household composition distorting equality measurements convincing it still dosent reconcile the extreme disfunction in the healthcare, finance, and education markets.

I find it strange that both Russ and Don almost never discuss on this blog the stagnating education sector given that they are both in the education business. The barriers to entry that academia are and have been raising on the public are nothing short of extraordinary in my opinion. Tuition prices are incredibly high and keep getting higher, the quality of instruction has at best stayed constant and at worst is falling. The amount of debt that is being asked of students to take on will haunt them for many years and people like me who cant afford it are simply left on the sidelines with minimum wage work getting angrier everyday at the system.

I was really dissapionted when Russ simply glazed over the subject on the recent Bruce Meyer podcast.

John Dewey October 31, 2011 at 2:31 pm

ICorey: “The barriers to entry that academia are and have been raising on the public are nothing short of extraordinary in my opinion. Tuition prices are incredibly high and keep getting higher, “

Price vs non-price rationing has been discussed on this blog. Have you read any of that discussion?

It is not extraordinary when prices rise because demand for post-secondary education grows faster than supply of post-secondary education. As returns to education have increased over the past three decades, demand for education has likewise increased. I’m not sure why the supply of post-secondary education has not increased just as fast. That’s the question one should be asking.

Perhaps the personal investment required to obtain a teaching position is not yet offset by the rewards. Or perhaps the potential educators realize that government-induced distortions in demand are not sustainable.

dcj125 October 31, 2011 at 3:11 pm

I’m not sure how this all ties together, but I know that a lot of colleges in my state are owed a lot of money by the state government (like hundreds of millions).

Lack of funding and support from local governments could result in slower expansion and a throttling of supply.

Stone Glasgow October 31, 2011 at 5:51 am

It’s ironic to claim both that great men create the most wealth (and are rich because they help others the most) , and at the same time claim that rich men don’t earn a boat-load more than others. Of course they do; wealth is gained either by productive action, or by force.

Surveys of relative wealth only show us how effectively force has been applied to steal from productive people.

Darren October 31, 2011 at 1:34 pm

Of course they do; wealth is gained either by productive action, or by force.

Or (occasioinally) by luck.

muirgeo October 31, 2011 at 6:34 am

Doesn’t Appear that Income “Inequality” is On the Rise

WOW! Unreal… sad,sad,sad….

http://www.ritholtz.com/blog/wp-content/uploads/2011/06/f04-1_26002_image001.png

Thomas Bayes October 31, 2011 at 8:55 am

That is a chart about families. What do you think about the statement:

“Obviously, the increasing G for households reflects some changes in their composition, i.e. social processes, but not economic processes as defined by distribution of personal incomes.”

which is backed up by a careful analysis here:

http://arxiv.org/ftp/arxiv/papers/0811/0811.0356.pdf

I’m curious. What about this hypothesis is so threatening to your ideology? If, in fact, it is true that individual income inequality has remained relatively constant while family and household inequality have increased, how does this threaten your position? If we really want to decrease household inequality, then understanding these data will help us implement appropriate policies. To do so, though, we may need to discourage successful people from marrying other successful people.

muirgeo October 31, 2011 at 5:16 pm

Thomas I don’t need a Gini coefficient for individuals when I can see clearly the increased proportion of income going to the top 0.1% amounts too some 5.5% of ALL GDP.

http://scatter.files.wordpress.com/2011/10/us-can-inequality.jpg

But since you apparently understand what the Gini Coeffecient for individuals measures maybe you can explain how it remains flat when the top 0.1% have seen their incomes rise as seen in the graph I linked to.

muirgeo October 31, 2011 at 6:45 am

What total BS Don. It’s sad what you are stooping to deny data. You have really lost all credibility. You are not changing reality with your denial of it. The crowds in the streets will continue to grow. The only people you are fooling are fools. You are a certified defender of the political class.

http://scatter.files.wordpress.com/2011/10/us-can-inequality.jpg

muirgeo October 31, 2011 at 6:56 am

For anyone interested here is what serious capitalist look like when discussing reality;

http://tinyurl.com/3dlx8tl

“I consider myself an ardent capitalist. But what we’ve got now isn’t capitalism — it’s some warped perversion of capitalism that is leading us to a very troubling place. As long as Congress continues to play Jerry Mahoney to corporate America’s Paul Winchell, color me decidedly dour on the outlook. The parasite has almost killed its host.”

Slappy McFee October 31, 2011 at 9:19 am

Did you even read this post before you added a link to it? Did you notice the 5 countries at the bottom of the Gini Index on the included graph?

Here they are:
Turkey
Greece
Ireland
Spain
France

Now, looking at current economic events, what do at least 4 of those countries have in common?

Did you notice that all 3 Scandanavian countries are also in the top half of the graph, including Finland at #2?

Greg Webb October 31, 2011 at 12:19 pm

No, Slappy, George never reads his posts. They often contradicts his big-government views.

Methinks1776 October 31, 2011 at 2:25 pm

C’mon guys. How long have you been skimming TFI’s scribbling?

Here’s how it works: First, he looks at who is saying it. If it’s someone on the left’s ideologically approved list, he rolls with it. It doesn’t matter if he understands anything he reads or if it contradicts everything else he says. He doesn’t understand that’s happening because he doesn’t understand what he’s reading.

Chris Bowyer October 31, 2011 at 2:40 pm

Wait, WHAT?! Follow-up questions? Don’t you see that he posted a link? That should end the debate, right? I mean…it’s a link! Resistance to the link is futile.

Methinks1776 October 31, 2011 at 3:16 pm

:)

muirgeo October 31, 2011 at 7:42 am

“Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it.”

JM Keynes

He said that in 1936. Subsequent improvements in inequality and wages brought forth the greatest economic expansion in all of civilization. Still subsequent policy changes leading to wage stagnation and increased inequality have born out his predictions a second time in dramatic fashion. The second great depression…
Brilliant people have been writing about the dangers of wage stagnation and excessive inequality for years; Keynes in 1936, Krugman in 1995 and Warren in 2005 while others are still denying it exist or that there is any problem to this very day.

Rick Hull October 31, 2011 at 11:11 am

> the dangers of wage stagnation

Are you aware that the goal of inflationists like Krugman and Keynes is to *reduce* real wages?

txslr October 31, 2011 at 11:21 am

Deniers!

/sarc

Walter Clark October 31, 2011 at 11:35 am

No one has complained about how hard this Political Calculations article is to follow. (Perhaps to do so is to bring criticism on the IQ of the complainer.) Would someone take more time using fewer words to explain it. The following is merely an example of the brevity I’d like to see:
If you view families as the important measure of income disparity, we are growing apart. If the important view of things is only the disparity of income earners, there’s little difference. The way both can be true is larger and larger families as time goes by. But is there evidence of that? What about the logic Ben Hughes and others above pointed out? That as society gets wealthier, there’s less need to have large families.

Jon October 31, 2011 at 11:45 am

I agree, Walter. It’s a good article for those who understand economics/mathematics, but for the layman it is a bit confusing. Someone up above made a comment in that vein, too.

blsdaniel November 1, 2011 at 11:18 pm

The following is my attempt at a simple (if long) explanation of what the Gini Coefficient is.

The Gini Coefficient is based on the Lorenz curve. Imagine lining up everyone (or every family, or every household) left to right, going from poorest to richest (when lining up people with the same income, you can order them randomly). The the sake of the explanation, let us say that there are exactly 100 people (or families, or households, or whatever…for the rest of this example, I’ll assume we’re working with individuals).

Now imagine the perfectly equal (though not necessarily egalitarian) society. Everyone makes the same income, so when you look at just the leftmost person, he has 1% of the income and represents 1% of the population. Now look at the two leftmost people. Together, they have 2% of the income and represent 2% of the population. And so on. And so on. We could make the following table out of:

THE LEFTMOST… HAVE REPRESENT
1 1% 1%
2 2% 2%
etc.
99 99% 99%
100 100% 100%

If you were to graph cumulative percent of population on the x-axis (the horizontal axis) against cumulative percent of income on the y-axis (the vertical axis), it would be a 45 degree line, because the poorest N% of the population have N% of the income. This is the Lorenz Curve. In the land of perfect equal-ness (i.e, equality in OUTCOME, not just opportunity), the Lorenz Curve is a 45 degree line.

We can now define the Gini Coefficient as (the area under the 45-degree line minus the area under the Lorenz Curve) divided by the area under the 45-degree line. In the above case, the Gini Coefficient is zero, since the Lorenz Curve IS the 45-degree line. The numerator to the Gini Coefficient (the area under the the 45-degree line minus the area under the Lorenz Curve) is zero, and the area under the 45-degree line is .5. Note: typically when yo do this, you convert the percentage to proportions, so instead of 10% you have .1, instead of 20% you have .2, etc. up to instead of 100% you have 1, so the area under the 45-degree line works out to 1 times 1 times .5 (the formula for a triangle, with a base of 1 and a height of 1).

If this is still confusing, look at another example:

This is the case of perfect INequality (i.e., all money in the economy goes to the income of just Bill Gates). Nobody makes ANY income, except for Bill. So when you look at just the leftmost person, he has 0% of the income and represents 1% of the population. Now look at the two leftmost people. Together, they have 0% of the income and represent 2% of the population. And so on. And so on. We could make the following table out of:

THE LEFTMOST… HAVE REPRESENT
1 0% 1%
2 0% 2%
etc.
99 0% 99%
100 100% 100%

Now if you were to graph cumulative percent of population on the x-axis (the horizontal axis) against cumulative percent of income on the y-axis (the vertical axis), the line would be the same as the x-axis until we reach the rightmost person (Bill Gates), at which point it would shoot to 100%, because the poorest N% of the population have 0% of the income, as long as N is less than 100. This is the Lorenz Curve for this situation. In the land of perfect INequality the Lorenz Curve is x-axis until we get to the rightmost person, and it shoots up to 100%.

We can now define the Gini Coefficient as (the area under the 45-degree line minus the area under the Lorenz Curve) divided by the area under the 45-degree line. In the above case, the Gini Coefficient is (close to) 1, since the Lorenz Curve IS the x-axis until we get to the rightmost person (Bill Gates), where it shoots up to 100%. The numerator to the Gini Coefficient (the area under the the 45-degree line minus the area under the Lorenz Curve) is (very close to) .5, and the area under the 45-degree line is (as always) .5.

One final example? OK. But only because you begged!

This is the case of some inequality but not total inequality, let us say that there are still 100 people, and each are either poor or rich. Poor people don’t have any income, while rich people each have an income of 2% of the total national income. We could make the following table out of:

THE LEFTMOST… HAVE REPRESENT
1 0% 1%
2 0% 2%
etc.
49 0% 49%
50 0% 50%
51 2% 51%
52 4% 52%
etc.
99 98% 99%
100 100% 100%

Now if you were to graph cumulative percent of population on the x-axis (the horizontal axis) against cumulative percent of income on the y-axis (the vertical axis), the line would be the same as the x-axis until we reach the center (i.e., the 51st percentile), and after that, for every percentage point increase in cumulative population, cumulative income would increase by 2 percentage points.

This is the Lorenz Curve for this situation.

We can now define the Gini Coefficient as (the area under the 45-degree line minus the area under the Lorenz Curve) divided by the area under the 45-degree line. In the above case, the Gini Coefficient is .5, since the Lorenz Curve IS the x-axis until we get to the 51st person, climbing by two percentage points in cumulative income for each percentage point in cumulative population thereafter. The numerator to the Gini Coefficient (the area under the the 45-degree line minus the area under the Lorenz Curve) is .25. To see this, break consider the first 50 people separately from the second group of 50. For the former, the Lorenz Curve IS the x-axis, so the area under the 45-degree line minus the area under the Lorenz Curve is equal to the just the area under the 45-degree line, which is .5 times .5 time .5 (the area of a triangle with a base of .5 and a height of .5) = .125. And for the next 50 people, well, if you can’t draw it out and see it for yourself you won’t understand my justification, trust me, it’s also .125. Add the two together and you get .25. Divide by just the area under the 45-degree line (which is always going to be .5, and you get .25 / .5 or, as promised, .5.

, and the area under the 45-degree line is (as always) .5.

blsdaniel November 1, 2011 at 11:21 pm

Crap, this thing messed up my tables.

Sorry.

Each table is supposed to have three columns: “the leftmost”…”have (this percent of income)…represent (this percent of population).

Mark T October 31, 2011 at 11:58 am

“The 1969 to 1996 stagnation in median household income may, in fact, be largely a reflection of changes in the size and composition of households rather than a reflection of a stagnating economy.”- John McNeil, US Census Bureau”

http://en.wikipedia.org/wiki/Household_income_in_the_United_States

Steve October 31, 2011 at 2:26 pm

Good post.

For reference, here is the Census data on composition of households.

http://www.census.gov/statab/hist/HS-12.pdf

In 1950, family households comprised 89.2% of total households, non-family households the remaining 10.8%.

Fast forward to 2000, and family households comprised 68.8% of total households, non-family households the remaining 31.2%.

Just looking at family households, in 1950 78.2% of all households were married couples; in 2000 that had declined to 52.8%.

Invisible Backhand October 31, 2011 at 2:34 pm

I find this graphic informative:

http://i.imgur.com/oU33V.jpg

Steve October 31, 2011 at 2:37 pm

Of course, the government’s wealth statistics are screwed up, significantly understating the wealth of the bottom 90%.

Ken October 31, 2011 at 2:44 pm

Steve,

What’s also left out of that graphic is that the federal government employs about 1% of the population, including the military, controls a budget that is 26.4% the size of the the US’s GDP and owns over 30% of all the land in the US. Truly, they are the 1%.

Regards,
Ken

Chris Bowyer October 31, 2011 at 2:41 pm

And if wealth were zero-sum the way land is, this might actually has a shred of relevancy.

Chris Bowyer October 31, 2011 at 2:41 pm

Er, have.

Invisible Backhand October 31, 2011 at 3:41 pm

I find this graphic informative:

http://i.imgur.com/ywKtt.jpg

Invisible Backhand October 31, 2011 at 4:41 pm

I find this graphic informative:

http://i.imgur.com/fngvR.png

Invisible Backhand November 1, 2011 at 5:23 am

I find this graphic informative:

http://i.imgur.com/y80zy.png

Steve October 31, 2011 at 3:10 pm

And by the way, my suspicion is that the gov’t stats on wealth also overstate the wealth at the top of the scales as well. I’ll have to look into that some more, but that is my educated guess.

So overstate the top, understate the bottom.

Jack Fraser October 31, 2011 at 4:13 pm

I’ve always been curious as to the measurement of financial assets in wealth calculations. Pardon the poor grammar below, the last two weeks have sapped me of my strength due to deal overflow at my bank.

For instance, are corporate bonds held in the name of the DTCC (Depository Trust and Clearing Corp.) for individual investors, as they are owned by DTCC in trust for individuals and thus counted as owned by DTCC (or its equity holders) or by the individual of ultimate ownership? Are equity securities owned by mutual funds counted as owned by just the fund or their ultimate owners, the holders of the shares in the fund or are they counted as two separate assets? Say if PIMCO owns one share of AAPL, is that share counted as owned by the custodian, PIMCO, Bill Gross due to his equity stake or the individual investor? Is the share of the PIMCO fund counted as a separate financial vehicle (when all it represents is a claim on underlying assets)? Unfortunately, the list goes on.

Perhaps all the ownership data is derived from Census data? But even then, you’d see distortions due to the aforementioned ownership of said AAPL share by PIMCO.

I actually do think there is a substantial wealth inequality in this country, even after accounting for technological adjustments, but I am not sure the effects of such a condition do great harm to the population. Instead, I worry wealth inequality represents a lack of savings and investment on the part of large swathes of the population. I feel this lack of savings has been encouraged by dominant social and political ideologies regarding the Paradox of Thrift. In response to a great deal of 1950s social science, the entire political system promoted housing over the last 60 years in a number of subtle ways including, but not limited to the structure of American mortgages (nice cheap financing with low downside risk), zoning restrictions, tax incentives, creating a tsunami of cheap liquidity and overt support of the housing market. Unfortunately, such support partially led to a runup in housing prices over the last 30 or so years and thus locked many people’s whole net worth into their homes. Unfortunately, the return on said investment has been about 3% annualized, while the bond and equity markets have returned much more (5% and 8% annualized, approximately). One economist I have spoken estimated the lost wealth from overinvestment in housing at $21T USD. To make matters worse, houses produce bullet cash flows and one almost has to buy on margin. This, combined with a disdain for saving at every level of society except for the top (if only because the top tend to have ownership in highly productive enterprises and receive diminishing marginal utility from large sums of income) has lead to a system where the bottom of the wealth pile are now virtually dependent on the government, or on cashing out their houses to retire or meet unforeseen obligations.

As an aside, I would note such a lack of savings makes capital quite scarce, and makes finance people like me, even more well-off on a relative basis than we otherwise would be; ironically, probably only on a relative basis.

Jack Fraser October 31, 2011 at 4:13 pm

Oh god that’s a wall of text. I am so sorry, dear readers.

Jon October 31, 2011 at 4:30 pm

Hi Jack,

I am no expert in this matter, so please take what I say with a grain of salt. But here’s what I understand:

Financial instruments such as bonds, stocks, mutual funds, etc are not considered income until they are sold/cashed-in. So, if a bond is owned by a company and it is cashed, it goes to the company’s revenue. If they are owned by an individual and cashed, then they are considered that individual’s income and (depending on the instrument) are taxed as income or capital gains.

I find your hypothesis about income inequality due to saving interesting. In this nation does punish saving (mostly coincidentally, but it still occurs). Income is taxed and, if you save it (even in a bank account) it is taxed again on the interest earned. Also, we do our best to keep saving interest rates low so it’s not worth it to save money in the bank (the interest earned doesn’t cover inflation). Either intentionally or accidentally, our tax system pushes people towards the only methods of saving where interest exceeds inflation: the stock market and real estate (pre-bubble). That would cause the stock market to increase as much as it had and, since the wealthiest do have the most in the market, they would gain the most. Hm…interesting.

Jack Fraser October 31, 2011 at 4:46 pm

Well, the stock market has also increased in value a great deal since the 80s due to a change in management philosphy regarding returns to shareholders (thanks, junk bond kings), massive technological improvements and other fundamental changes. There’s also the Greenspan/Bernanke Put, which persists to this day.

Jon October 31, 2011 at 4:48 pm

Right. I’ll admit, the stock market isn’t my area of expertise. Jack, you deal with it a lot more than I do. I deal with the auto markets and Russia more. And cows…lots and lots of cows. Economics didn’t turn out to be the glamour career I thought it would be :-P

Jon Murphy November 1, 2011 at 5:53 pm

According to the book “The Millionaire Next Door” by Thomas Stanley and William Danko, 80% of America’s millionaires/billionaires weren’t born rich. They are first generation affluent. Go figure.

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