Snarky Behavior

Dropping Knowledge: Gini Coefficients

August 28, 2007 · 7 Comments

Dropping Knowledge: where I “laymenize” an important aspect of social science.

Sometimes, as in the previous post, I can get pretty whiny, self-entitled, and indignant when I get the vague impression that I’m being shafted in some way or another. (What can I say? I’m the youngest child).

Faithful readers will tell you that one thing in particular that really grinds my gears is uneven and unfair income inequalities within American society (and the world) today. It bothers me that CEO’s can make five digit multipliers over some of their employees, because fundamentally, I don’t believe any single person is ten-thousand times more valuable, by any imaginable measure, than any other given person– especially when you consider that 1 in 6 of the world’s population lives on less than $1 per day. (Note: exceptions include Jessica Alba and Scarlett Johannson… pay them whatever they ask).

I understand that the prevailing normative wisdom will tell you that global and internal income inequality is a necessary evil to drive growth and keep the overall standard of living within the US above the poverty line. In theory, greater income equality takes away the incentive from hard work and productivity (which makes it even more incredible how the egalitarian Dutch can survive by getting high in coffee shops all day every day).

One of the most prevelant methods of measuring and comparing levels of income inequality within and between countries is the Gini Coefficient. (Click the link for a full description). The coefficient is a number between 0 and 1, with 0 corresponding to perfect equality (i.e. everyone earns the same income) and 1 corresponding to perfect inequality (i.e. one person has all of the wealth… I’m rich, bitch!)

Now, the World Bank would tell you that 1) empirical data shows no strong correlation in either direction between income inequality (i.e. high Gini coefficients such as Brazil, US and China) and growth and 2) high degrees of income inequality, especially in developing countries (i.e. Mexico), can be disasterous to the fundamental institutions of government.

You see, it follows logically that the greater the distribution of the concentration of wealth in the hands of the few, the less democratic a society becomes, because the lower- and middle-classes become either disenfranchised or disillusioned with the representative nature of their government.

Lacking regulatory measures, high income inequality allows for a permissive environment of corruption and graft. And extreme degrees of income inequality (such as in Brazil) negatively effect growth because so many people are left poor, unskilled and uneducated that the country runs well below its productive potential.

What does this all mean? Well, as I mentioned before, the accepted theory is that high income disparity is the necessary biproduct of healthy economic growth. In a global context, this means that governments (and their economic advisors and ministries) are increasingly pressured to pursue aggressive economic policies, paying scant attention to the distribution of their country’s wealth, because they are largely acting under the assumption that growth benefits all (i.e. trickle down economics) and that redistributive measures (i.e. progressive taxation) are undesirable because they dampen growth. Overall then, I suppose we should expect to see an upward global shift in the Gini coefficients.

I will say (and I don’t have any empirical data to back this up, it’s just my hypothesis) that while greed and self-interest may be a motivating factor up to a certain level, the returns are diminishing once Maslow’s basic hierarchy’s are met. I believe that successful people work hard for the prestige and power after they’ve obtained the wealth. I believe that nose-to-the-grindstone poverty doesn’t incentivize hard work, but just the opposite: despair and anomie. And I believe that the country that grows together, stays together.

Thoughts?

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7 responses so far ↓

  • misha // August 30, 2007 at 6:57 am | Reply

    Neat post, though I personally don’t like gini coefficients much b/c they abstract away from where the gaps in the income distribution are. If you want a single number to summarize income inequality, consider the gap between the income levels at different percentiles, e.g., average wages at the 80th vs 20th percentiles, or 90th vs 10th, or 50th vs 10th, and so on.

    I don’t have any facts to include in this comment per se, but it seems to me that concern for different outcomes might suggest different places to make the cut: if you think extreme poverty is going to choke off growth via health or education setbacks, the bottom is probably what you’re worried about. If you want a middle class to emerge and push for better governance, maybe you can trample the bottom 10% for awhile so long as the 50-90 gap is closing….

    Incidentally, a lot of recent growth in US inequality is driven by people like Jessica Alba (and lots of less foxy CEOs) pulling away from the rest of the losers in the top 10 percent. My understanding is that 50-10 and 90-50 inequality have been pretty stable lately. But don’t cite me on that – I’m just a guy killing time.

  • misha // August 30, 2007 at 7:04 am | Reply

    Oh, and while I too feel the baser of Maslow’s needs, middle-class and higher people in poor countries (and ours) can’t seem to get enough useless shit. In fact, wikipedia tells me that self-esteem and respect come right above friendship in the all-important rainbow pyramid, and what commands respect like conspicuous consumption?

    Or maybe that’s what you were getting at w the remarks about how people work for prestige over & above wealth. The problem w that argument is that losers who get no respect from any normal social hierarchy can buy respect from rubes, hence the nouveau riche. So for every stylish gent (you & me for instance) who seeks satisfaction in life by doing important work, there are another 10 who go to law school and push your gini coefficient back up (since there are also another 20 who don’t have either option).

  • Jon // August 30, 2007 at 2:55 pm | Reply

    misha good work. if you’d like to guest blog at any point let me know, since this is clearly up your alley.

  • misha // August 31, 2007 at 1:20 am | Reply

    in the spirit of the blog title, I’d rather just point out your shortcomings

  • Faraj // August 31, 2007 at 5:33 pm | Reply

    Misha, I resent your comment about law students. Lawyers also do important work (see Mt. Rushmore, 3/4 are lawyers, 0/4 are economists). For further proof see: http://freakonomics.blogs.nytimes.com/
    2006/03/27/an-economist-for-president/

    Q.E.D.

    I will sue you for defamation damages and use that money to buy your respect from the Sharper Image catalog. I hope you enjoy playing with your compass/beverage chiller/thermometer/calculator while I count the rest of my money. My bright yellow Lamborghini (which runs on premium grade, high octane income inequality) will trump your “Gini Coefficient” every time.

  • Mr. T // September 1, 2007 at 2:31 am | Reply

    In my experience, douchebags like my former Republican roomate like to throw out the following argument: Money is not a zero-sum game. CEOs are not stealing money from the poor; they’re creating, and making, money that didn’t exist before. Unfortunately, he didn’t understand my Marxist rebuttal, to wit, that the money didn’t exist before, but the labor that produced that money certainly did (only I said it in a more complicated way to sound smarter). Regardless, I think this is the kind of quintisentially American thinking that underlies so much these days–life is a jungle, smart people learn how to make money and win the game. Except instead of winners and losers, there’s only winners, and people who were too lazy/stupid to be winners

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