Posts Tagged ‘Gini’

Inequality

The latest IMF Fiscal Monitor, “Tackling Inequality,” is out and it represents a direct challenge to the United States.

It’s not just a rebuke to Donald Trump, who with his allies is pursuing under the guise of “tax reform” a set of policies that will lead to even greater inequality—or, for that matter, Republicans in state governments across the country that have sought to cut back on programs targeted at poor Americans. It also takes to task decades of growing inequality in the United States, under both Democratic and Republican administrations.

As is clear from the chart above, the distribution of both income and wealth in the United States has become increasingly unequal since the mid-1970s. The share of income captured by the top 1 percent has more than doubled (from 10 to 20 percent), while it’s share of total wealth has increased dramatically (from 23 percent to 39 percent). Meanwhile, the share of income of the bottom 50 percent has declined precipitously (from 20 percent to 12.5 percent) and it’s share of wealth, which was never very high (at 0.9 percent), is now nonexistent (at negative 0.1 percent).

And what is the United States doing about it? Absolutely nothing. Over the course of the past four decades it’s done very little to tackle the problem of growing inequality—and what it has done has been spectacularly ineffective. Thus, inequality has grown to obscene levels.

What’s interesting about the IMF report is that it raises—and then challenges—every important argument made by mainstream economists and members of the economic and political elite.

Should we worry just about income inequality? Well, no, since “changes in income inequality are reflected in other inequality dimensions, such as wealth inequality.”

redistribution

Doesn’t the United States take care of the problem by redistribution? Absolutely not, since only Israel does less than the United States in terms of lowering inequality (as measured by the Gini coefficient) through taxes and transfers.

But doesn’t tackling inequality through progressive income taxes lower economic growth? Again, no: “There is not strong empirical evidence showing that progressivity has been harmful for growth.”

taxes

Nor is there any justification for low tax rates on those at the top in terms of social preferences. Most Americans, according to a recent Gallup survey, most believe that the rich and corporations don’t pay their fair share of taxes. In fact, the IMF notes, perhaps thinking about the United States, “societal preferences may not be reflected in actual policy implementation because of the concentration of political power in certain affluent groups.”

Clearly, much more can be done to lower the degree of inequality in the United States.

As a sign of the times, the IMF even chooses to discuss the role a Universal Basic Income might play in decreasing inequality.

Proponents argue that a UBI can be used as a redistributive tool to help address poverty and inequality better than means-­tested programs, which su er from information constraints, high administrative costs, and other obsta­cles that limit benefit take-­up. A UBI could also help address increased income uncertainty resulting from the impact of technology (particularly automation) on jobs.

UBI

According to its calculations, a Universal Basic Income in the United States (calibrated at 25 percent of median per capita income, in addition to existing programs) would cost only 6.5 percent of national income and achieve a remarkable reduction in both inequality (by more than 5 Gini points) and poverty (by more than 10 percentage points).

What puts the United States in stark relief is the contrast between the whole panoply of inequality-reducing policies that are available—from more progressive income taxes and the adoption of wealth taxes to reducing gaps in education and health programs—and the fact that the United States is moving in the opposite direction.

The United States is simply not tackling the problem, with the inevitable result: current levels of economic inequality are—by any measure, and especially in comparison to what could be but isn’t being done—grotesque.

Chart of the day

Posted: 17 November 2014 in Uncategorized
Tags: , , ,

FifthBottomFourYear

Frank de Libero makes a reasonable argument: that (at least for the United States) the Gini index is redundant and can be replaced as a measure of inequality by the household income share of the top quintile.

The above chart shows, since the late-1960s, the share of income to the top quintile growing while the combined share of the bottom four quintiles falling. Thus, for example, the fifth quintile averaged over the last few years captured 51 percent of total income compared to a 43 percent average income share in the beginning of the timeline. The combined income of the rest of the households has moved in exactly the opposite direction.

latin+america+5

I often explain to students that Gini coefficients should be used with more than a few grains of salt.

One reason, as Timothy Taylor explains, is that changes in the Gini coefficient don’t tell us where the changes come from.

because the Gini boils down the overall distribution of income to a single number, it also loses some detail. For example, if the Gini coefficient has risen, is this because the share going to the top 20% went up, or the top 10%, top 1%, or top 0.1%? You can see these kinds of differences on a Lorenz curve, if you know what you’re looking for, but the Gini alone doesn’t tell you which is true.

The other reason, which Taylor does not discuss, is that Gini coefficients should not be compared across countries. That’s because it’s blind to different economic and social structures. Thus, a coefficient of .52 in one country, where all goods and services are private commodities, means something quite different from the same number in a country in which many of those commodities (such as education, healthcare, and so on) are provided as public goods.

So, what is the Gini coefficient good for? There are two acceptable uses for that simple, convenient number.

One is to look at the degree of inequality before and after fiscal policy, as in the chart above (from the World Bank [pdf]. There, we can see that fiscal policy in Latin American countries does very little to alter the before-fiscal-policy, or market, distribution of income.

The other acceptable use is to look at the changes over time for the same country, as in the chart below from the same report.

LA-Gini

What we can see, once we resist the temptation to compare numbers across countries, is that there is a wide range of experiences across Latin America: while Honduras’s distribution of income became slightly more unequal (increasing by 2.1 percent between 2007 and 2011), Mexico’s became a bit more equal (falling 2.3 percent from 2008 to 2012) and Bolivia’s fell quite dramatically (by 15.9 percent from 2007 to 2012).

So, yes, go ahead and look at changes in Gini coefficients for individual countries—before and after fiscal policy, and over time—but, by all means, resist the temptation to compare the coefficients across countries. Such comparisons are, at best, meaningless and often can be quite misleading.