Getting Geeky: Income Inequality Worsens


It’s been a while since WC got down and wallowed in the warm, geeky mud of economics. So even though WC can see readers nodding off already, let’s look at some numbers and charts. Warning: this post is depressing, too.

First, the Federal Reserve released a report showing that, unless you are in the richest 10% of Americans, your financial situation got worse 2010 – 2013. The Land of Opportunity isn’t working for 90% of Americans.

Income Inquality Worsens, via Steven Rattner, NY Times

Income Inquality Worsens, via Steven Rattner, NY Times

These numbers make the Republican takeover of the U.S. Senate even more remarkable. But this post isn’t about the election.

To understand the details of increasing inequality in America, we have to look at one of the more common measures of inequality, the Gini Coefficient. The Gini Coefficient, in one of its variations, is the most common measure of income inequality.1 From Wikipedia:

The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income). A Gini coefficient of one (or 100%) expresses maximal inequality among values (for example where only one person has all the income or consumption, and all others have none).

In the real world. neither extreme – zero or 100 – occurs. Countries like Norway and Sweden have GINI Coefficients of 25 – 30; countries like some of the Southern African kleptocracies have GINI Coefficients of 60 – 65. Historically, the U.S. has been in the range of 40 – 45.

In the countries who are members of the Organization for Economic Cooperation and Development (the OECD), at least, the government provides significant benefits to its citizens. The Gini Coefficient varies depending on whether you measure it before or after the citizen has received those economic benefits, as well as on the extent of those benefits. So if we compare Gini Coefficients among OECD countries before and after government benefits, it looks like this:

Before and After Government Redistribution, via Steven Rattner, NY Times

Before and After Government Redistribution, via Steven Rattner, NY Times

So what’s going on is that governments are redistributing wealth in many OECD countries, decreasing income inequality by taxing the rich and redistribuiting the tax revenue to the less wealthy. If you look at the U.S.’s Gini Coefficient before that redistribution, the U.S. is about in the middle, maybe a tiny bit better. But if you look at after-tax Gini Coefficients, the U.S. has the highest rates of income inequality in the OECD.

Yes, the U.S. really is No. 1 at something.

So why is that? Partly, it’s because the U.S. has one of the lowest tax rates in the OECD on persons with incomes of $100,000.00 or more. There’s less tax revenue that can be redistributed.

Effective Tax Rates on Incomes of $100,000, by KPMG via Steven Rattner, NY Times

Effective Tax Rates on Incomes of $100,000, by KPMG via Steven Rattner, NY Times

All that whining by Republicans about how taxes are killing growth. Piffle. WC gives props to President Obama for keeping the Bush tax cuts from continuing and making the situation worse. The undeniable fact is that the fat cats in America – the Kochtopus and their kin – have sold the voters a bill of goods.

It’s not economic serfdom for a majority of Americans, but that’s the trend. It’s magnified in the U.S. economy because consumer demand is such an overwhelmingly important part of our economy. It’s consumer demand that increases the U.S. Gross National Product. That creates jobs and reduces income inequality. As the bottom 90% of Americans face decreased income, they can’t afford to buy as much, reducing consumer demand and shrinking their share of the pie. So inequality increases further. Wash, rinse, repeat. Even if you are a member of America’s oligarchy, a part of the top ten percent or even the top one percent, you should find this worrisome.

We know how to break out of this downward cycle. Either agree to deficit spending or increase taxes, and use the government money to create jobs for public works. Use the money to improve skilled job training. Use it to reduce the cost of higher education. It’s not rocket science. In the 1950s and 1960s, it made the middle class rich.

But for the political party in charge of Congress, both deficit spending and increased taxes are anathema. The Republican Party’s platform is based on reducing the deficit and reducing taxes. Never mind that the shoddy, embarrassing arguments in favor of both have long since been disproven.

WC honestly doesn’t know how to teach macroeconomics to the electorate. But the electorate’s ignorance of economics, like their ignorance of climate science, is leading the electorate to a bad end.

 


  1. WC spent a miserable two weeks in a macroeconomics course in 1970 learning some of the two dozen or so variations on the Gini Coefficient. WC isn’t about to do that to his patient readers. Any Real Economist reading this far has WC’s apologies for oversimplification. Any reader who thinks they want to know more about Corrado Gini’s work, Lorenz Curves and Discrete Probability Functions is directed to the Wikipedia article and its footnotes. 
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