## Friday, March 13, 2009

### The Gini coefficient

Note: non-sports post.

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Income inequality is rising in the United States. If you measure inequality by the
Gini Coefficient, which I guess is as good as a measure as any, you get a fairly steady increase from 0.399 in 1967 to 0.466 in 2001. (A higher number means a more unequal distribution; 0.000 means everyone has the same income; 1.000 means one person has all the income.)

Inequality has increased in Canada, too; in fact, what got me interested in this topic was a recent newspaper article complaining about the rise in Canadian income dispersion. These kinds of articles come around all the time, in discussions about how the rich are getting richer.

The stated or unstated assumption is that more inequality is worse, and more equality is better. I don't think that's true. Rather, I think that rising inequality can indeed be worse, but it can also be neutral, or it might actually be a sign of improvement for everyone.

The problem isn't with the measurement itself; as I said above, the Gini Coefficient is a reasonable way to measure what it's supposed to measure. The problem is with the interpretation of movement in the measurement. Even if you think that, all things being equal, more equality is better than less equality, it doesn't necessarily follow that a higher Gini is bad, -- because all things are never equal.

A baseball analogy, perhaps a mediocre one, might be stolen bases. Yes, stolen bases are good for an offense; every additional steal creates about 0.2 runs. But it doesn't follow that an increase in the number of steals is good for offense (in the 60s, steals were up but offense was down.). It doesn't follow that bad offensive teams should try to steal more (they'll just get caught stealing more and score even fewer runs). And it doesn't mean that teams with more steals are somehow better than teams with fewer steals (stolen bases don't correlate well to winning).

The number of steals is just a measurement of – the number of steals. If you want to go beyond that, and draw conclusions from changes in the stolen base rate, you have to justify those conclusions. The naive view -- steals are good so it's bad when teams steal less! -- just isn't true.

It's the same for measures of income inequality. There are dozens of reasons why an increase in income inequality can be a neutral thing, or even a good thing, and you don't have to think very hard to come up with them. I have thirty of them here. I could probably think of ten more. (Some of them, of course, have been thought of before; this Wikipedia page includes several.)

1. First, absolute income matters a lot more than relative income. Would you rather live in the USA where the Gini is 0.46, or in a country where the Gini is zero but everyone earns exactly \$5? That's a contrived example, but there are real-life examples too. Albania has a Gini of 0.27, but a per-capita income only one-eighth of the USA. Would you be willing to sacrifice 87% of your pay in order to be more equal to everyone else?

Obviously, other factors can be more important than income inequality. If you think it would be bad for the USA's Gini to go from 0.46 to (say) 0.48, would you change your mind if a 10% increase in income came with it? How about 20%, or 50%?

The Gini rose from 0.42 in 1991 to 0.47 in 2001. But per-capita income, in inflation-adjusted 2006 dollars, rose 23%, from \$21,102 to \$26,024. Is that a fair trade-off? If you think it is -- and even if you think it isn't -- then complaining about income inequality without mentioning the trade-off isn't very reasonable.

2. The above argument wouldn't be all that persuasive if there weren't a link between the level of equality and the level of income. And there is. If you want to lower the Gini, you have to take income from the rich and give it to the poor. (You could raise income to the poor in other ways, but if those ways were easy, the poor would be doing it themselves already.) Taking income from the rich reduces the incentive to get rich, which in turn reduces overall wealth. Economists could probably tell you what the trade-off actually is -- how much an increase in upper-income tax rates would slow down economic growth. But I think they'd all tell you that there *is* a significant trade-off. More on this later.

3. Suppose that tomorrow, someone comes up with a cure for an untreatable cancer. He sells a million cures at \$1,000 each, and makes a billion dollars. Inequality goes up. But everyone is better off! Everyone has just as much income as before, but now we have the opportunity to buy a cure for cancer -- should we ever get it -- for only \$1000.

So it's good when inequality goes up for reasons like this ... and I don't think it's that contrived an example. Bill Gates got rich creating Windows ... which costs only, what, about \$40 a copy? I get way more than my \$40 worth, and I'm happy that Microsoft succeeded and increased inequality on my behalf. The same is true for most of the products I use. I hope that there are more breakthroughs that make other people rich, even if I don't get richer at all.

4. As a general principle, the way you earn a high income is by doing things that benefit other people. You can cure cancer or create an operating system, but you can also perform appendectomies or write computer programs quickly or give a better haircut. A higher Gini might just mean that more people are figuring out better ways to benefit more other people. Or, it could just be a matter of population growth. Fifty years ago, movies played to only millions of people. Now, a movie of the same quality would be seen by billions. That means directors who would have merely been millionnaires in 1970 might be billionnaires now. That's a good thing, not a bad thing, that those who enrich others' lives have many more "others" to benefit. I'm glad that someone in China can now enjoy "Airplane!", the greatest movie ever made, even if it means that the Zucker brothers get a little richer and the US gets a little more unequal.

5. What's the right value for the Gini coefficient? Is .46 too high? Too low? What should it be?

We know that for incomes, higher is better. We know that for golf scores, lower is better. We know that for room temperature, the closer to 72 degrees Fahrenheit, the better.

What's ideal for the Gini? It's not zero; if everyone had to have equal incomes, that would be more Marxist than Marx -- nobody would want to work, and everyone's income would be very low. It's not 1 -- that means one person has all the income, and the rest of us starve.

So what's the point we're shooting for? Nobody knows. And if nobody knows, how can you draw any conclusions at all about whether 0.46 is too high or too low?

In fairness, there is a counterargument here: that we don't know what the Gini should be, but we know there's too much inequality, so we need to go lower. To which I have two answers: first, suppose we reduce inequality. How will you know when we're done? If there's a way to tell, why not tell us now? And, second, some people may *not* think there's too much inequality now. To those people, the fact that the Gini is rising is irrelevant -- you have to convince them that more equality is essential, in order that they see the rise as a bad thing.

The issue shouldn't be that inequality is rising -- the issue should be that inequality is too high. Is it?

6. The Gini doesn't consider that people could be equal over a lifetime, but temporarily unequal due to age differences. Even if everyone had exactly equal income patterns -- say, zero for the first three years of adulthood while they're in school, then escalating equal salaries until retirement, then equal pensions in old age -- the Gini would be non-zero, because, in any given year, you'd be looking at some zeroes, some low-income, some high-income,and some retirees.

Part of the Gini is simply the effect of differing lifetime income among any given individual. If it turns out that people are voluntarily changing their work patterns to have fewer low-income years and more high-income years, the Gini increases even if inequality hasn't.

7. There's a trend to more years of higher education, which would cause part of that increase. If the long-term trend is for more schooling (meaning more years at zero income) and higher incomes after, that would increase within-lifetime inequality, and therefore the Gini, even if everyone remains exactly equal over their lifetime.

Look at it this way: suppose everyone has three years of school at \$0, then forty years of work at \$50K. They're all equal over their lifetime. But what happens any given year? Of every 43 people, then, three have \$0 and forty have \$50K, which looks unequal.

Now, suppose everyone decides to go to school for five years to make more money: now you have five people at \$0 and thirty-eight people at \$70K. This is more unequal, resulting in a higher Gini -- but it's actually better for everyone.

8. People are living longer. If the trend is to make lots of money between 25 and 65, and take a low pension later, then adding more low-pension years will appear to reduce inequality, even if everyone is still the same.

To oversimplify: the trend used to be that you start work at 18, then earn a fairly low salary until you die (because you can't afford a retirement pension). Now, the trend is: make no money for five years while you're at school. Then make good money until 65. Then get a lower pension. The old way, everyone is fairly equal each year. The new way, everyone is still fairly equal over a lifetime, but income varies considerably each year. The new way is less equal when comparing individuals during any given year, but just as equal over a lifetime. And, of course, more desirable.

9. People have different propensities to work; that's just human nature.

Co-workers Bob and Joe are each offered 50 hours of overtime work. Bob accepts, and makes \$60K that year. Joe declines, preferring more time with his family, and makes \$50K that year. Inequality of income has increased, but that's because inequality of WORK has increased. That's perfectly fair and desirable.

Shouldn't inequality of income be fair to match the inequality of work or effort that created it? And isn't it good that Bob and Joe both have more choices, even though the Gini goes up?

10. People have different ambitions. Ann and Cathy both make \$40K a year and are of equal proficiency at their job. Ann makes an extra effort to climb the corporate ladder into management. Cathy doesn't -- she doesn't like kissing butt and prefers to avoid the hassles of supervising other people. Ann jumps to \$60K a year; Cathy stays at \$40K. Both are happy. Inequality of income goes up, but, again, this is a good thing, as both Ann and Cathy got what they wanted.

11. People have different propensities for risk-taking. Right now, T-bills are paying less than 1%, while other, riskier investments yield 10% and more. Suppose Tom and Jerry have equal jobs and salaries, but Tom is more conservative than Jerry. Tom invests in a CD paying 1.5%, while Jerry invests in real estate yielding 10%. Their incomes suddenly become unequal, but, again, both Tom and Jerry got what they wanted, so the increase in inequality is again a good thing.

12. Even when people have the same propensity for risk-taking, they might just get different results. Jerry and Kevin might be the same in every other respect, but if Jerry invests in mutual fund A, and Kevin invests in mutual fund B, their returns will be different, and their incomes will start to become unequal. Why is that necessarily bad?

Or, take lottery tickets. Everyone who buys a lottery ticket knows that the distribution of incomes among ticket-buyers will be unequal. But they don't mind, and they do it anyway. Is it a bad thing when lotteries increase the Gini? Ticket-buyers probably don't think so.

13. There are other ways to buy security. I work in the IT field, and several of my co-workers, who were on contract, voluntarily took a large pay cut, in some cases close to 50%, to become government employees. Other of my co-workers did not. That created income inequality between the two groups. But did it really make us unequal? Government jobs are very secure. Isn't it reasonable to assume that my friends who took the pay cut simply bought their security, and we're just as equal as we were before? Half of us take our pay in money, and the other half take it in security.

The moral: you can't just consider monetary income; you have to consider things that money can "buy" in the non-traditional sense.

14. There are lots of examples of non-traditional income-substitutes. Suppose you have two identical couples who are neighbors. Helen works, earns \$40,000 a year, and takes her kids to day care. Iris quit her \$40,000 job to take care of her kids at home. Again, is this unequal? I don't think so. It looks unequal to the Gini, which only measures monetary income. But if Iris chose to stay home and forgo her \$40,000 a year, she's obviously benefiting by at least \$40,000 -- or she wouldn't stay home! To me, Helen and Iris are exactly equal, despite what the paychecks say.

15. Here's another one: home ownership. Kevin and Laura both make \$50,000 a year, but Kevin owns his home, and Laura pays \$1,000 a month to rent an identical one. They are equal in money income, but, really, Kevin has more total income -- he "earns" an extra \$12,000 a year by having the use of his home rent-free. In this particular Kevin-and-Laura case, the Gini actually *underestimates* inequality, unlike all the previous examples, where it *overestimates* it. However, for the country as a whole, it might again overestimate it, if low-income earners are more likely to own their homes outright. And retirees are likely to have paid-off mortgages.

16. Here's still another one: children. Oscar has two kids, and has to accept a lower income in order to stay in their town and raise them in a stable environment. Paul has no kids, and can move around looking for higher-paying jobs. Their incomes are unequal, but are they really? Oscar has chosen to have kids and pay the price; he values being a father more than he values the bit of extra money he could earn if he were childless. While it's politically incorrect to compare children to money, the fact remains that children are hugely important to people, and they're not free -- there are real costs and opportunity costs to having children. It seems weird to feel sorry for Oscar because he chose children over money, just as it would be weird to feel sorry for someone who was poorer because they chose to buy a fancier car. You have to count everything that affects income, not just the actual income.

These cases of trading money for non-money might be more frequent now then ever, because, as we get richer, they become more affordable -- it's easier to stay home with the kids when your spouse makes \$80K a year as a computer programmer in 2009 than when she made \$40K (inflation-adjusted) as a programmer back in 1974. As overall wealth increases, the ability to choose to earn less increases. In turn, the diversity of choices increases, and the distribution of monetary income gets wider. Again, this is a most excellent development, in my opinion, and I hope it continues.

17. I quit full-time work a couple of years ago. Right now, I'm not working much, just occasional jobs. If I go back to work, I will earn an above-average income and increase the Gini coefficient. Is that really a bad thing?

18. Small-business owners have incomes that fluctuate from year to year. This year, Al might make \$100K and Bruce \$20K, but the next year it's reversed. Since the Gini is calculated per year, it looks like Al and Bruce are unequal, even though they had exactly the same income over a two-year span.

19. Part of what's measured by "income" is capital gains. But the stock market has up years and down years. If inequality fell last year because of all the capital losses realized in the stock-market collapse, is that a good thing? Should we rejoice because Warren Buffett is poorer, even if we're poorer too? If that's not worth celebrating, then why is it worth complaining when the reverse happens, when Warren Buffett gets richer but inequality goes up?

20. Do the measurements of income inequality take taxes into account? I don't think they do. That defeats the purpose, doesn't it? A large part of what we expect government to do is help out the poor who need it. And they do that by disproportionately taking money from the rich.

So if the point of the Gini is to measure how much money people actually have to spend -- which is the number that actually means something -- you certainly have to adjust for taxes! It's very possible that the pre-tax Gini is up but the after-tax Gini is down.

21. It's not just cash benefits that we get from government; it's services too. Suppose it costs \$10 million to run the public library, and that works out to \$10 per person. Since everyone has equal access to the library, shouldn't we add \$10 to everyone's (after-tax) income before we calculate the Gini? I think we should. (You could argue that the poor don't benefit as much from the library as the rich (or that hungry poor people can't eat books!), but I'm not sure that's the case. Because, if it were, we'd give the library tax to the poor, and pay for the library with membership fees. That would make everyone better off. Since we don't, it's fair to assume that giving the poor free access to the library benefits them more.)

It's not just libraries -- it's police, and fire protection, too -- the poor are served just as well as the rich by police protection. And don't forget public transit (which certainly *does* benefit the poor more than the rich), and all the other services that government provides.

Part of the reason we pay for these services out of taxes is that they're so essential that we want to make sure even the poorest members of society benefit from them. But in that case, we need to figure them into the calculation.

My perception is that the level government services has exploded over the last few decades, while the Gini has increased only moderately. Figure in the value of those services -- and taxation, if you haven't already done so -- and the increase would be substantially lower.

22. It's spending that matters, not income. If I gave you an income of \$1,000,000, but told you you could never spend it, it would be useless. And if I let you have a million dollars worth of merchandise (of your choice), instead of cash, the merchandise would be just as good.

And it's a principle of economics that people work to smooth out their consumption (spending) over their lifetime. That means they borrow money when they're young, to pay for cars and TVs and houses, and pay it back when they're older. And so, consumption is much less unequal than income. (It's theoretically possible for everyone to consume exactly the same, despite differing incomes over time; imagine an insurance company that offers you \$50,000 worth of consumption every year in exchange for your salary every year. That would make everyone equal. Then, imagine doing this yourself -- you borrow in years where you're below \$50,000, and pay back the debt in years when you're above \$50,000.)

I remember seeing a few articles that mentioned that low-income people actually spend a lot more than their income, almost twice as much in some cases. (This might be through tax credits, or welfare, or such.) In that case, measuring income inequality is a pretty crappy way of measuring the differences in how people actually live. We should measure *consumption* inequality.

23. And if we DO measure inequality of consumption, the number goes way, way down. The way the Gini index is constructed, the more money you make, the more effect you have on the Gini. But suppose a highest-income earner makes \$1 billion per year. There's no way that person can, or would, spend that much money. If he's really good at spending, he might consume (say) \$10 million. (I couldn't consume anything close to \$10 million in a year, but let's be conservative.) So if you want to measure spending, rather than income, the Gini is going to be overestimated by the effect of that \$990 million.

As the very-rich get very-richer, they have the potential to stretch the Gini way out of proportion; but, in the most meaningful sense, consumption, inequality won't have changed much at all.

24. The super-rich, the ones that account for so much of the Gini, are also the biggest charitable donors. Bill Gates gives a lot of money to philanthropic causes. Even if they're in Africa, rather than the US, that actually increases worldwide equality, doesn't it? If you gave a million dollars to 100 random people, they'd spend it on themselves. If you give \$100 million to Bill Gates, he'd spend it on some of the poorest people in the world. So greater inequality among the super-rich becomes greater equality overall!

25. Bernie Madoff lowered the Gini a little bit last year.

26. A substantial portion of income comes from savings and investments. And, because of the power of compounding, a small increase in savings today can add up to a huge difference in income in the future.

Ruth orders a pizza every week for a year, at \$1,000. Sarah, having seen those commercials about saving money and living better, buys her pizza at Wal-Mart, for \$400. She invests the \$600 difference at 5% after inflation.

Forty years later, her \$600 has grown into about \$4200. She now pulls in an extra \$300 or so in income from that \$4200. The Gini rises, but there was never any inequality there, just differences in saving patterns.

And differences in savings are HUGE. I know older couples who made incomes I couldn't live on myself, who managed to save enough that they make more in retirement than they did when they were working. And I know people with six-figure incomes who are deep in debt and can't afford to pay their bills. The difference is not inequality of opportunity to earn income -- it's inequality of savings rates.

27. As we get richer and richer, it becomes easier to save. A 20" (tube) color TV now costs \$100; I bought one thirteen years ago for my Dad at \$500. In terms of TVs, you can save \$400 with no change of lifestyle from 1996.

Or, of course, you could use the \$400 to upgrade to a flat panel LCD, which many people do. But there's a choice there now that wasn't there only a few years ago. And because people are different, they make different choices. More choices means more diversity. More diversity means more dispersion in savings rates. More dispersion in savings rates means higher income inequality.

I think all this is a good thing.

28. Again because of the power of compounding, the effect of savings grows the more years you can save. So as life expectancies rise, you'd expect income inequality to rise. Imagine saving \$1000 at age 25, again at 5%. By 65, you'll have \$7,040. But if you can live to 95, you'll have \$30,426. So it follows that the Gini should rise as people live longer and save longer.

If people lived to 200, inequality would be absolutely huge: save \$1000 at 25 and you'll have \$1.5 million by age 175. It wouldn't mean that society was unequal, just that it naturally takes time to build wealth. We don't worry about "inequality of knowledge" between a 25-year-old doctor and a 65-year-old doctor -- why should it be any different for savings?

Or, looked at another way: a 65-year-old has worked, over his lifetime, 40 times as much as a 25-year-old. Why would you expect their incomes to be equal?

29. It's pretty much accepted that we could create more equal incomes if we wanted to, by increasing tax rates on the rich. And it's also accepted that it would slow down economic growth -- say, by reducing it from 3% a year to 1.5% a year -- because of reduced incentive to work or take risks.

Now, suppose that country A decides to follow that route, and grow by 1.5% a year. Country B decides to let the inequality be, and grow by 3% a year.

100 years later, average income in country A has grown from \$30,000 a year to \$132,961. In country B, income has grown from \$30,000 to \$576,559.

So B is four times richer than A.

If you were to combine country A and B into one country, you'd almost certainly measure more inequality than in B alone! Now, if there was a moral obligation in A to increase equality even at the expense of total wealth, then is there also a moral obligation to increase equality *between A and B*? If there is, how would you do it? By force? And wouldn't that be unfair to B, whose population decided that the trade-off favored higher incomes over equal incomes?

30. Suppose that we -- the US and Canada -- had decided to increase equality back in 1908, and raised tax rates on the rich. And suppose that had lowered our growth rate by 1.5 percentage points over the last century. Then, we'd have only 23% as much income as we have now.

Would it have been worth it? Would you be willing, in retrospect, to take a 75% pay cut (and a 75% cut in government services, and probably a huge cut in medical advances) so that previous generations would have been more equal?

I wouldn't, and I doubt if anyone else would.

So then, don't you also have to think it would be a bad thing to make your great-great-grandchildren take a 75% pay cut 100 years into the future? Because that's the trade-off. At 1.5 percentage points difference, we'd seriously be costing the next generations hundreds of thousands of dollars each.

Now, 1.5 percentage points might be a bit high. If we assume only 1.0 percentage points, then instead of a 75% pay cut, it's a 60% pay cut. If we assume 0.5 percentage points, it's a 39% pay cut. At what point are we happy with the trade-off?

It's a legitimate question, but I don't think the Gini coefficient factors into the answer very easily. At least not unless you have an argument about what the Gini *should* be, and how much it's worth paying to get it there.

Absent that, the Gini is not very useful at all.

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UPDATE

Brian Burke reminds me in the comments of another problem with the Gini, an important one.

31. New immigrants to Canada and the US tend to be poorer than average, if only because most countries in the world are poorer than we are. This distorts the Gini. To paraphrase Brian's theatre analogy in the comments:

Suppose that there are five people in the country, with incomes of \$10K, \$20K, \$30K, \$40K, and \$50K. Over the next 10 years, everyone's salary rises \$10K, substantially reducing inequality. But a new immigrant arrives, who earns \$10K.

What do we now have? Six people, earning \$10K, \$20K, \$30K, \$40K, \$50K, and \$60K. This is a higher Gini than before -- but only because of the new immigrant! Within the country, equality is actually increasing.

This is huge, and I'm kicking myself for forgetting to include it. I remember several economists mentioning it in the context of income -- that the reason lower-quintile income hasn't seemed to increase is simply because new immigrants replace the lower-income people who moved up and out of the low-income group. (Here's a post by Arnold Kling, as an example.)

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UPDATE: I'm just going to add more as I think of them.

32. Immigration, which mostly brings in people who start out at low incomes, increases the Gini, as I noted above. However, it *reduces* inequality for the world as a whole -- immigrants usually do much better here than they would in their home countries. Doesn't that suggest that looking at the Gini for a particular country, in isolation, could be misleading?

33. Activists decry the low wages American firms pay employees in poor countries. But if those US companies paid higher wages, they would be well above-market for those countries, increasing inequality there. Does that mean a higher Gini in a poorer country is OK?

Labels: ,

At Friday, March 13, 2009 12:00:00 PM,  willkoky said...

" It's pretty much accepted that we could create more equal incomes if we wanted to, by increasing tax rates on the rich. And it's also accepted that it would slow down economic growth -- say, by reducing it from 3% a year to 1.5% a year -- because of reduced incentive to work or take risks."

Can we get some links that show that to be proven? I have seen opposing arguments on this many times. What kind of increase are you talking about here? How much do I have to hike them to get a massive 1.5% reduction in growth? People claim that higher taxes will spurn growth significantly. I've never seen anyone prove it, and if they did prove it, why wouldn't the tax debates end by showing the proof?

At Friday, March 13, 2009 1:46:00 PM,  doc said...

I don't want to get too deeply into this, because it is, as yousay, complicated. And, yes, changes in the GINI coefficient, by themselves, may not mean much. But I do have two comments:

1. The GINI coefficient in the US fell subatantially between 1950 and 1970, not because we took income from the rich and gave it to the poor, but because the incomes of people at the lower end of the income distribution rose more rapidly than did incomes of people at the top. Conversely, much of the recent rise in income inequality has come from stagnation of incomes at the lower end (below the median), with most of the income growth occurring at the higher end. Clearly, per capita income grew in both these situations.

2. "The Gini rose from 0.42 in 1991 to 0.47 in 2001. But per-capita income, in inflation-adjusted 2006 dollars, rose 23%, from \$21,102 to \$26,024." Yep, that's true. But--median family income did not rise...which is the same as saying that almost all the income growth occurred in the upper tail. For example, if Bill Gates's income had quadrupled, and no one elses income had changed, per capita income qould have increased. But I doubt if we'd think of that as an across-the-board increase in economic well-being. An increase in per capita income without an increase in median ncome means something quite different from a situation in which both are increasing.

At Friday, March 13, 2009 2:32:00 PM,  Brian Burke said...

Awesome. One of the best posts I've ever read online.

In game theory experiments, researchers have found that many if not most people prefer to make \$80k/yr and live in a neighborhood of other people that make \$70k rather than make \$90k and live in a neighborhood of people that make \$100k. It's human nature and can be very self-defeating.

I asked my kids once if they would (hypothetically) rather have:
A. 2 cookies and their sibling gets 3, or
B. 1 cookie and their sibling gets none.

My 6-yr old son struggled mightily, and eventually settled on B. When I asked my 4-yr old daughter, she instantly said 2 cookies. "But your brother would get 3? Is that ok?" "Yeah, I don't care," she said.

Right then I knew how both my kids would vote when they grow up.

A second point: As an economy grows, measures of inequality SHOULD naturally increase due to network effects. There can be only 1 "most popular actor" or "best athlete" no matter how large the market for such services is. And there can be only 1 "Windows OS" because the benefit is that (almost) everybody else has the same thing.

The effect is that more and more wealth is concentrated in the same number of hands. 50 years from now when the US population doubles, there will likely still be a single common computer OS that dominates the market, and whoever invents it will be twice as wealthy as Bill Gates is now.

At Friday, March 13, 2009 3:08:00 PM,  Jeff J said...

A lot of valid points in there - there are lots of ways the index could be improved. That's not news to the UN:

"The Gini Index is at best a partial indicator, and other measures will be needed to complete the picture of how levels of economic welfare are evolving in a society."

1. "absolute income matters a lot more than relative income"

Isn't absolute income a little bit like stolen bases too? What matters is the rate of change in quality of life. Take an arrangement with greater equality producing a quality of life improvement of 4% for the 75th percentile and 2% for the 25th percentile. Compare that to a less equal arrangement that produces a 5% improvement for the 75th percentile and 1% for the 25th. Even though the 25th percentile still sees an increased net income, they suffer a net loss compared to the mean quality of life.

If you want to talk absolutes, the UN has standard indices for poverty. The Gini correlation to poverty in Western countries*: 0.69. When leftish pundits talk about income inequality, this is what they're trying to address - not the gap between upper-middle class and upper class.

3. If you're getting more than \$40 worth out of your copy of Windows, you're probably in the income range that's contributing to the higher Gini.

What about the big firms in the US selling exotic investments? It's clearly bad when inequality goes up for reasons like this. I think it's wrong to assume that, because something happens in a free market, that is is inherently rational and a source of net improvement for all parties involved when human beings, individually and collectively, are so utterly irrational.

4. Disconnect #1: As a general principle, the way you earn a high income is by doing things that other people *believe* benefit them. Subtle but important difference.

Disconnect #2: How does one become able to create an operating system, perform appendectomies or write computer programs quickly in an economic environment where social mobility is little more than a myth? These people are almost entirely the children of wealthy parents. Poverty begets poverty and wealth begets wealth, and that's what income inequality is all about. Although some people believe in craziness like social Darwinism or god-given rights.

5. "if everyone had to have equal incomes, that would be more Marxist than Marx -- nobody would want to work, and everyone's income would be very low"
Another point where economics diverge from reality. I think most people would want to work and contribute even with the hypothetical zero incentive, and some would work just as hard. People aren't rational.

"So what's the point we're shooting for?"
I'd peg it at the point where a person's quality of life is no longer tied to the wealth of their parents, except for some genetic component which (IMO) would be relatively small. But then, I'm probably crazy.

9.-28: Many good points illustrating the fact the Gini merely correlates strongly rather than perfectly with class differences in quality of life. Tradeoffs exist in countries with high and low Gini, so many are a little red-herringish.

29 & 30. It's not accepted that taxing the rich slows down economic growth. Strictly speaking it might be true, but if taxation is done right the disincentive is exceeded by the growth contributed by the recipients of the redistribution. You don't see classical liberal economists anymore, at least not in circles that are taken seriously.

A baseball player will look at a week where he hits .450 and think, "I'm on a hot streak because I'm playing better than the other guys," and not "I'm on a hot streak because I got lucky." Now put the shoe on the other foot: An upper-middle class earner in North America looks at his lot in life and think "I sure worked hard to earn this lifestyle," not "I'm lucky to have been born in a wealthy nation to well-off parents who provided the nourishment and education I needed to get this far." Most people will go to extravagant lengths to rationalize their place in the pecking order before they'll ever credit the dice.

Brian Burke: As an economy grows, measures of inequality SHOULD naturally increase due to network effects.

Just because that's what will naturally happen doesn't mean we as a civilization should let it, a la Lord of the Flies.

*"Western countries:" Ireland, United States, United Kingdom, Spain, Belgium, Australia, Japan, France, Austria, Luxembourg, Canada, Switzerland, Germany, Denmark
Netherlands, Finland, Norway, Sweden. Poverty data unavailable for Iceland and NZ, and Italy excluded because of an off-the-charts poverty rate. It's apt that the Gini index is named for an Italian.

At Friday, March 13, 2009 3:33:00 PM,  Phil Birnbaum said...

I think some of the comments so far reinforce my point, which is that the Gini doesn't really measure something that's important on its own.

As doc writes, if the gini can't tell the difference between the rich getting poorer and the poor getting richer, then why use it?

And as Jeff writes, if the concern is how the poorest are doing, why not just measure how the poor are doing? If you're not as concerned about how the upper middle class is doing relative to the upper class, then why use the Gini at all?

If the concern is social mobility ... well, geez, just measure social mobility! As Brian points out, the Gini could go up just because more people are buying Windows, which tells you nothing about social mobility.

Whatever your issue is -- social mobility, incomes relative to a moving measure, absolute level of poverty ... JUST MEASURE THAT! Don't quote a Gini and expect me to agree with you about what it means for your particular issue, because it doesn't necessarily mean that.

At Friday, March 13, 2009 4:27:00 PM,  willkoky said...

I'd still be cool if anyone could find some material that proves this statement true.

"It's pretty much accepted that we could create more equal incomes if we wanted to, by increasing tax rates on the rich. And it's also accepted that it would slow down economic growth -- say, by reducing it from 3% a year to 1.5% a year -- because of reduced incentive to work or take risks."

At Friday, March 13, 2009 5:39:00 PM,  Claude said...

Wow.... That's a lot of speculation about a topic for which there has been lots and lots of actual, serious empirical research. Bottom line: You do not need inequality to have national economies grow; indeed, it's more likely that inequality slows down economic growth. Therefore, the ideology that we have to put up with inequality to raise absolute wealth is simply wrong.

At Friday, March 13, 2009 6:11:00 PM,  willkoky said...

Well what Claude said sure sounds interesting too! Doesn't anyone have any studies that show any of this stuff?!

At Friday, March 13, 2009 9:37:00 PM,  Brian Burke said...

One thing left out of the discussion is the massive influx of immigrants into the US and other western countries. The US is now estimated to contain 1 ninth the Mexican population (plus their kids).

Imagine a very, very long line to get into a movie theater. People keep moving forward at a steady pace, but even more people are getting in the back of the line. The line is moving, but it keeps getting longer.

If you divide the line into quintiles, there will always be an increasing disparity between the wait for those at the front and those at the back of the line.

That's exactly what income disparity indices measure, especially when there is an influx of exogenous people starting at the zero point.

Jeff J-I think you missed the point. Nothing I wrote has anything to do with Lord of the Flies.

My point is that apparent income inequality (as perhaps measured by the Gini index) increases as a natural artifact of a healthy growing economy. This will occur without any real increase disparity between rich and poor. It's simply a natural mathematical fact.

You sound like a Maoist, jeff. Classical liberal economists are indeed taken seriously. Statist economies on their best day cannot come close to the prosperity of a free market in its worst recession. Statists drunk with arrogance, clinging to silly UN studies, and doing "taxation right" will not help anyone.

I'm going to go eat my 2 cookies now, you're welcome to have 3 if you like.

At Friday, March 13, 2009 10:09:00 PM,  Phil Birnbaum said...

Brian: thanks! The immigration point is one of the most important ... I think Bryan Caplan or Arnold Kling mentioned it on their EconLib site. I'll look it up and add it as #31.

Geez, I can't believe I forgot to put that one in ...

At Saturday, March 14, 2009 12:20:00 PM,  Jeff J said...

"Classical liberal economists are indeed taken seriously."

Well, I suppose that depends on your social circle. Some people take Sharia law seriously. I'm talking about Western gov't policies. I've never seen a serious article in the mainstream media promoting the abolishment of taxes, let alone a politician run on that platform. The rare ones promoting flat taxes are generally disregarded as crankish. Even neoliberals (who accept some role for centralized gov't and wealth redistribution) have generally been backtracking on "free market rule" over the last ~18 months.

Ever met a poor libertarian? It's a rich man's rationalization.

At Saturday, March 14, 2009 12:47:00 PM,  Phil Birnbaum said...

Just to clarify: I am NOT arguing any point of economics here. If you guys want to argue about economics and rich and poor and liberals and conservatives and libertarians, I won't stop you.

But my only argument is: measures of income inequality are misleading and not very useful.

And the ONLY economic assumption I'm making is that higher marginal tax rates reduce growth. Moreover, I'm only making that assumption in about three of the 33 arguments. If you disagree with that single assumption, you've got 30 arguments left.

At Saturday, March 14, 2009 2:57:00 PM,  willkoky said...

"And the ONLY economic assumption I'm making is that higher marginal tax rates reduce growth."

I absolutely don't want to argue about it. I want to get informed. I've never seen anyone be able to prove that so I have no idea why you would write it.

At Monday, March 16, 2009 2:40:00 PM,  theBA said...

Wow, just found this site. Great work, I will be back.

At Thursday, March 19, 2009 5:02:00 PM,  Jason said...

I’ve been a lurker on this blog for a few months and am a big fan. So it pains me a little to make my first comment to this entry – because the analysis here is frankly rather wretched, and a good deal of effort seems to have been expended to little effect.

First of all, the blog entry is oriented around a basic strawman fallacy – it attacks a purported claim that a rising Gini coefficient in itself is indicative of a “bad” increase in social or economic equality, but no attribution is made for such a claim, and for good reason – I doubt any serious economist or political scientist would ever make it, at least not in that way. Gini is what it is – a very quick and easy to calculate way to come up with a mathematical expression for the dispersion of income in a sample population. No one in their right mind would suggest that economic policy be devised to target Gini in the way that some central banks target inflation or used to target monetary aggregates. Those economists and political scientists that express concern over economic inequality focus on a much broader array of concerns.

The rest of the entry consists of various points attempting to illustrate that certain things that could result in a higher Gini are “good” or at least “not bad”. Some of these points are perfectly valid for what they are, but some of them involve rather whopping faulty analytical assumptions (e.g. the false assumption in #2 that only way for the Gini to go down is to seize income from the rich and hand it the poor, and the thought experiments in #3 & #4 that impose a purely static analyses of economic consequences; the assumption in #29 that higher marginal tax rates would halve(!) long-run trend economic growth); misunderstanding of the method used to calculate the metric (#19 –the Census Bureau does not in fact include capital gains in its measure of income, and even its “experimental” measures of post-tax income include only realized capital gains); the assumption that only absolute income matters (consider the much-discussed concept of “positional goods”); the assumption that wealth inequality has no relevance (why?). There are plenty of examples given of how different kinds of events or patterns can effect Gini such as changing patterns in education, child-bearing, proportion of labor dedicated to household production, etc. – all without any analysis or consideration as to what the actual trends are and what the actual effects have been.

Most problematic was the apparent total lack of recognition that there are metric tons (measured in paper-weight equivalents) of analyses out there on many of these subjects published in economics journals.

Reading the entry, I was reminded of an earlier entry where Phil B was critiquing an analytical paper by a professional economist: “For my own part, I would certainly prefer to have a paper of my own vetted by Tango or MGL than by an anonymous academic economist who is unlikely to have a strong grounding in sabermetrics. I think experienced amateur sabermetricians are much more likely to find legitimate flaws in my work than professional economists.”

I thought this point was very well taken. Because while most professional economists are trained in these use of statistical methods, they don’t necessarily have an intimate knowledge of baseball. And without a very strong understanding of the nature of the thing one is analyzing, it is all to easy to fall into very obvious traps and pitfalls that someone else who is far more familiar with the data and the subject matter would easily avoid (even if that someone else doesn’t have the same level of statistical training). And I think that general point applies here (albeit with the shoe kind of on the other foot).

At Friday, March 20, 2009 10:39:00 AM,  Phil Birnbaum said...

Hi, Jason,

First, let me say that my post was not critiquing economists; to be honest, I don't know what professional economists say about the Gini. Rather, I was responding to what I've read mostly in opinion pieces in newspapers. In any case, this Wikipedia Page lists arguments from all sides, some of which I disagree with for reasons I specified in the post.

Second, you say, "There are plenty of examples given of how different kinds of events or patterns can effect Gini ... all without any analysis or consideration as to what the actual trends are and what the actual effects have been."

Well, yes, I didn't bother analyzing demographic trends to see why and how the Gini has changed. That would take weeks. What I was trying to do is to show that quoting the Gini *without investigating those patterns* is inappropriate. It is impossible to draw any practical conclusions from the Gini without understanding where the changes come from. If we brought back slavery, the Gini would rise. If we allow immigration from third-world countries (as we do), the Gini would rise. I argue that you can't say anything about a rise in the Gini until you know what the hell caused it.

This was not an economics post – I tried to keep the economics to a minimum because I am not an economist. It was a post about how a change in the Gini does not give you any useful information about what's happening in the economy, because there are so many things – some contradictory – that may be causing it.

At Friday, March 20, 2009 5:38:00 PM,  doc said...

If you want to find some academic research about the meaning use, and misuse of the Gini coefficient, go to
http://papers.ssrn.com and search on gini; you'll find 156 recent research papers dealing with it. All by economists, most highly technical.

At Friday, March 20, 2009 5:55:00 PM,  Phil Birnbaum said...

Thanks, Doc ... am checking it out. A lot of it is indeed technical, as opposed to arguing how it should be interpreted. I'll look through it for what I'm looking for.

At Friday, March 20, 2009 6:12:00 PM,  Phil Birnbaum said...

"Diversity of preferences within a society often contribute to economic inequality. When faced with the choice between working harder to earn more money or enjoying more leisure time, equally capable individuals with identical earning potential often choose different strategies. This leads to economic inequality even in societies with perfect equality in abilities and circumstances."

OK, now, I'm not an economist, but how is that economic inequality? I thought economics dealt with leisure as well as money. If A chooses leisure, and B chooses overtime, then A and B do NOT have economic inequality! B earned \$20, and A chose \$20 worth of leisure.

My understanding is that economists are big on opportunity costs. If the opportunity cost of the leisure is \$20, and A freely choose the leisure, doesn't that make A and B equal economically?

Having been beaten over the head by economists writing about how economics comprises much more than money income, why suddenly is "economic equality" defined only in terms of money income?

Any economists out there who can answer that?

At Thursday, March 26, 2009 9:10:00 PM,  Brian B said...

Uh, yea... all of your hypertheoretical examples *could* make a dent in the Gini coefficient as a useful number. I can poke holes in GDP, CPI, unemployment, and any of dozens of other measurable economic statistics, however: are you telling me because they are flawed numbers, GDP, inflation and unemployment figures convey no useful information? Because that seems to be what you're getting at.

Say your birthday is Feb 1, 1969, and you claim to be 40 years old. But I point out that actually, you are greater than 40 years old by some fraction, thus your age is not a useful measure at all. That's essentially the level of analysis you're offering here. Ok, with more detailed examples, but....

Fact is, this is not a 5 or 6 citizen economy with one immigrant moving in. It's far more complex than that, and while simplifying often helps us to understand complex issues, you've used simplification in order to confuse and discredit.

Higher Gini coefficients mean that the income distribution within the measured country is skewing toward fewer and fewer wealthy people, and away from poorer people. This correlates directly with decreased growth and increased crime in the long run. Like it or not, those are the facts, and that's where we are headed.

Your 10-cent analysis notwithstanding. I feel like I just spent 10 minutes with Charlie Brown.

At Thursday, March 26, 2009 9:54:00 PM,  doc said...

See, Phil, this is what happens when you use wikipedia for complex pieces of analysis.

1. Yes, economic well-being includes leisure--as well as many other things, including the availablility of public goods available to all, regardless of their incomes or wealth. Changes in labor (or income)/leisure preferences are not necessarily correlated with changes in economic well-being or with the distribution of economic well-being.

2. Economists generally don't talk about "economic inequality." We talk about the distribution of (real--inflation-adjjusted) income, and about changes in that distribution. We talk about inequality in the distribution of income, not inequality in the distribution of economic well-being. In what remains perhaps the classic (American Inequality: A Macroeconomic History, by Jeffrey Williamson and Peter Lindert) book on the subject, we find this statement of the problem: "The puzzle was to explain why American earnings, income, and wealth seemed to be more unequal in some epochs than in others" (p. xix).

3. Note, however, that absent changes in other factors related to *economic* well-being, a change in the distribution of income *will be* a change in the distribution of economic well-being.

4. Given the observability of the distribution of "earnings, income, and wealth" (and, for what it's worth, consumption) and the much less easily observed distribution of "economic well-being," most of us in the profession think that those who would separate the two have the obligation to provide evidence, not simply hypotheses, about the distribution of economic well-being. Assertion is not proof. Possibility is not proof. Evidence may be proof.

You have presented nypotheses. Be my guest at presenting proof.

At Thursday, March 26, 2009 10:20:00 PM,  Phil Birnbaum said...

Doc,

I agree with you on 1., 2., and 3. Actually, I defer to you on 2, which is as good as agreeing.

My point is not to assert that a change in the Gini is unrelated to a change in economic well-being. My point is to assert that there are *so many possible causes* of that change that the number alone is no measure of anything except exactly what it measures, which is the distribution of money income.

Again, I obviously defer to you on the way the number is used in the field of economics. But in the popular press -- and in Wikipedia, which I suppose is a more sophisticated example of the popular press -- conclusions are drawn which are not based on evidence. I will start collecting them as I see them, but here are a couple of hypothetical arguments that I consider invalid:

1. The rise in the Gini shows that society is becoming more unequal. [Me: only unequal in money income.]

2. The rise in the Gini shows that the rich are getting richer and the poor poorer. [Me: it's possible everyone is getting richer, just at different rates. It's also possible that everyone is getting richer at the same rate, but there are more poor immigrants who haven't started getting rich yet.]

3. A rising Gini shows the poor are finding it more difficult to improve their lot than the rich. [Me: the quintiles are not necessarily the same people.]

My beef is about statments of the form:

"The Gini has risen, which therefore means X". I believe that any "X" other than the strict definition of the Gini needs to be backed by evidence. "The Gini has risen, therefore the distribution of money incomes in the US is wider than it was" is true. But that's a tautology, and it's not what people use the Gini to try to argue.

My sole argument is: knowing the Gini changed tells you nothing useful until you examine WHY it changed. It could be that the exact same change in the Gini could happen for completely different reasons!

That's all I'm saying. Personally, I think the Gini is very interesting, but I don't think I (or anyone) should be drawing any kinds of conclusions from the raw number, at least not without an argument with evidence.

At Thursday, March 26, 2009 10:25:00 PM,  willkoky said...

It would still also again still be cool if anyone could find some material that proves this statement true.

"It's pretty much accepted that we could create more equal incomes if we wanted to, by increasing tax rates on the rich. And it's also accepted that it would slow down economic growth -- say, by reducing it from 3% a year to 1.5% a year -- because of reduced incentive to work or take risks."

At Thursday, March 26, 2009 10:38:00 PM,  Phil Birnbaum said...

http://www.nber.org/papers/w5826

"Our results suggest modest effects, on the order of 0.2 to 0.3 percentage point differences in growth rates in response to a major tax reform that changes all marginal tax rates by 5 percentage points and average tax rates by 2.5 percentage points. Nevertheless, even such small effects can have a large cumulative impact on living standards."

At Thursday, March 26, 2009 10:48:00 PM,  willkoky said...

Thank you for replying, but that's not exactly what I meant. I meant that I've seen arguments for and against this and read that there is no accepted answer. And certainly not a provable one. If there was, tax proponents or opponents would throw the proof in each other's faces. I was looking for a link that showed "It's pretty much accepted that we could create more equal incomes". Because I do not believe that either view is "pretty much accepted" to be true. Thanks for replying either way.

For example I think the key statement in the description of the link you sent is "Our results suggest".

At Thursday, March 26, 2009 11:01:00 PM,  doc said...

But, Phil, don't you see that your complaint is that the Gini coefficient doesn't do something that it was never designed to do? Don't you see that it's sort of like looking as a study that deals with the factors affecting the distribution of runs scored and complaining that it doesn't do a good job of explaining the distribution of wins? It doesn't, because that's not the purpose.

Again, yes, there are other factors that affect "economic well-being," which I keep putting in quotation marks, for a reason. "Economic well-being" is a subjective concept, not an objective concept, so attempts to measure it are likely to be, well, arbitrary.

Economists proceed in their analysis in a lot of cases by using a partial equilibrium analysis. We say, "Assume that nothing else important has changed. What is the effect of a change in X?" Or, "Assume nothing else important has changed. What is the meaning of a change in Y?"

Take your "2. The rise in the Gini shows that the rich are getting richer and the poor poorer." Well, I don't know of any economist who studies the distribution of income who would say that. The economist would say that the rise in the Gini shows that the distribution of income is becoming less equal, and then would ask "Why?" We would ask that precisely *because there is something to explain.* And, recently, it's clear that *much* of the increase in the Cini coefficient is *in fact* a result of rising incomes among the upper-rich and stagnant incomes elsewhere.

It is a fact that if the Gini coefficient rises that the distribution of income has become less equal. If that fact is accompanied by (a) a stagnant median family income; (b) a rise in the percentage of income accruing to the top 5%, 1%, .1%, .01%, and a declining percentage of income going to the bottom 20%, one might be justified in saying something like: "The distribution of income has become less equal because virtually all of the recent income gains have gone to the people at the very top of the income distribution." (Oh, wait, that's about what has happened.)

Or, if the Gini coefficient has increased, one might ask, "What's happened to the age distribution of the population?" An increase in the percentage of the population that's under 16 tells us some things, other changes tell us other things.

Or is the Gini coefficient has increased, one might ask, "What's happened to change in income among fixed cohorts of people over time?"

Observing the change in the Gini coefficient leads *economists* to ask questions--to ask *why* this has happened. If the popular press [including the wikipedia (and incidentally, the tax finding you cite is valuable only if one knows how and when that study was done)] get it wrong, it's our responsibility to try to correct that. And a lot of economists do exactly that.

None of this reduces the utility of the Gini coefficient. It allows us to track changes in the distribution of income, or earnings, or wealth, or consumption. (All of those, incidentally, tend to move together. Wealth is less eqaully distributed than is income; income is less equally distributed than is labor income--earnings--and labor income is less equally distributed than is consumption, but all these measures of inequality tend to rise and fall together.)

Measuring "economic well-being" is a snare; I do not believe it can be done in any meaningful way. Measuring income is not easy, measuring changes in real income is not easy, and measuring changes in the distribution of income is not easy, but all of these can be done to ar reasonable degree of accuracy. Asking a measure of the economy to do something it's not designed to do is an error, and it does not advance the conversation very much.

At Thursday, March 26, 2009 11:23:00 PM,  Phil Birnbaum said...

1. "But, Phil, don't you see that your complaint is that the Gini coefficient doesn't do something that it was never designed to do?"

Yes, I see that. I think we agree on this. I say that if a columnist writes something like, "the Gini is up; therefore it's getting harder for the poor to keep up," then the columnist is drawing a conclusion not justified by the Gini. That's most of my point, and you seem to agree. You say that the Gini measures only inequality of income, and again I agree.

2. "If that fact is accompanied by (a) a stagnant median family income; (b) a rise in the percentage of income accruing to the top 5%, 1%, .1%, .01%, and a declining percentage of income going to the bottom 20%, one might be justified in saying something like: "The distribution of income has become less equal because virtually all of the recent income gains have gone to the people at the very top of the income distribution." (Oh, wait, that's about what has happened.)"

Um ... I don't think I agree with that. If you consider that humans move between quintiles, it's possible that the income gains have gone roughly equally across the income distribution, but poor immigrants have very low incomes. Isn't that possible? I think it's consistent with your numbers above. Brian Burke's analogy of the movie theater applies here.
And that's my point. The Gini is nice because it lets you see that *something* changed, but you have to investigate (as you did) to see what that change is.

3. And even then, you don't really know what caused the change, do you? You seem to be implying that it's accepted that a change in the Gini for overall income is very highly correlated to a change in the Gini for labor income, which is very highly correlated to the Gini for consumption. To which I say, is that really true long-term? In 1900, I think I would be hard-pressed to consume more than my money income. Today, I have all sorts of government services that I didn't have back then. As a Canadian, even if I were on welfare, my average consumption of medical services would be quite high today, but zero back in 1900.

Seriously: suppose the US introduces universal medical care. The income Gini won't change much, but the poor will be consuming more. Can we agree on that?

At Thursday, March 26, 2009 11:43:00 PM,  doc said...

I agree with much of what you said. It is the interpretation of the Gini that's an issue, and that interpretation comes not in the professional literature, but in the "popular" literature.

The thing is, though, people do study this stuff. Take this: "If you consider that humans move between quintiles, it's possible that the income gains have gone roughly equally across the income distribution, but poor immigrants have very low incomes. Isn't that possible?"

Yes, it is *possible.* But it is not, apparently, what has happened (I'm at home, I can't find specific research citations, but the recent upswing in income inequality is not a result of poor immigrants or of people moving across the income distribution (incidentally, in calculating the Gini, we use individual icome data, not quintile distribution data). It *is* the result of an exceptional increase in the incomes of people who already had high incomes.

About the correlation of inequality measures. As a first approximation, the current measures are highly correlated. To the best of my knowledge, changes in them are still highly (but less highly) correlated. And, yes, if you introduce a major change in the provision of some specific service, that will make a *temporary* change in the correlation of these measures over time, but unless you keep introducing new programs, we're back to high correlations.

Look, I don't think we fndamentally disagree. But a lot of you original post was essentially a set assertions about why the Gini coefficient is a *bad measure.* Had you stopped with saying that the Gini coefficient measures the distribution of income, and changes in the Gini coefficient measures change in the distribution of income, and that people misuse it, we could have stopped.

But you proposed a whole series of propositions about why the Gini coefficient is a bad measure of what in fact it does measure. It's a reasonably good measure of what it does measure; it will never be much of a measure of what it does not measure. Changes in the Gini coefficient lead to research questions. And it's those research questions that may--MAY--get us to some conclusions.

At Friday, March 27, 2009 12:00:00 AM,  Phil Birnbaum said...

1. "But you proposed a whole series of propositions about why the Gini coefficient is a bad measure of what in fact it does measure."

If I did that, I didn't mean to ... I thought I covered it when I said: "The problem isn't with the measurement itself; as I said above, the Gini Coefficient is a reasonable way to measure what it's supposed to measure. The problem is with the interpretation of movement in the measurement."

What I did mean to say is that the Gini isn't very meaningful all by itself.

2. "Yes, it is *possible.* [that the Gini increase is caused by immigration.] But it is not, apparently, what has happened (I'm at home, I can't find specific research citations, but the recent upswing in income inequality is not a result of poor immigrants or of people moving across the income distribution ..."

OK, I believe you; no references required. But you've proven my point. The recent increase in the Gini COULD have been caused by immigration. And you have to do some other research to prove it wasn't. So why cite the Gini in the first place?

It's like ... say I compute the number of unemployed, and call that the Birnbaum coefficient. And say I tell you that the Birnbaum is higher than it was 20 years ago.

You'd say, "well, couldn't that just be that the population is higher?" And I say, yes, it *could* be, but it's not -- I checked, and unemployment is also up per capita."

Then you'd be well within your rights to say, "that's all very well and good, but, geez, what good is the Birnbaum coefficient if you can't tell if it's caused by higher unemployment rates, or higher population?"

That's what I'm saying about the Gini. If you can't tell without researching if inequality is increasing among existing Americans, or if it's just an artifact of immigration patterns, isn't that an argument that it isn't very useful as a standalone measure?

At Friday, March 27, 2009 12:01:00 AM,  Phil Birnbaum said...

BTW, Doc, I appreciate you bearing with me on this ... I hope I'm not trying your patience too much.

At Friday, March 27, 2009 12:15:00 AM,  doc said...

But the Gini *is* useful as a stand-alone *measure.* It is not, has never been, and never will be, an *explanation* of anything. Gross Domestic Product is useful as a measure; it doesn't explain anything. The current-account (trade) balance is a useful measure; it doesn't explain anyting. The eror is confusing measurement with explanation. The measurement is useful. THEN you have to find the explanation. But without the measurement, how would you ever know that you NEEDED an explanation?

And the conversation is almost always useful.

At Friday, March 27, 2009 10:52:00 AM,  Arkay 2.8 said...

I know this is slight off from the topic.
There is a coefficient in which it measures the government spending.
It states that every \$1 govt spends, there is a coefficient that reduces the strength of that spending. so, if the coefficient is .4 to .6, the real output of \$1 comes out to be .4(\$1) to .6(\$1).

Can someone confirm this?
If I am wrong, can someone correct me on this?
Also, can someone give me a reference?

I remember it really well but I need a reference point. I read it when I had mid level economic classes. It was one a side note but I remember it.

Thanks.

At Friday, March 27, 2009 11:26:00 AM,  Phil Birnbaum said...

Doc: I agree with your most recent comment, which means that maybe I'm not accurately saying what I want to say. I'll give it some thought before replying again.