Income Inequality In the US: A Primer

This definition of the Gini Index is from the CIA World Factbook:


This index measures the degree of inequality in the distribution of family income in a country. The index is calculated from the Lorenz curve, in which cumulative family income is plotted against the number of families arranged from the poorest to the richest. The index is the ratio of (a) the area between a country's Lorenz curve and the 45 degree helping line to (b) the entire triangular area under the 45 degree line.


Among countries with modern economies, the United States is the clear leader in income inequality under the gini measure.  Income inequality in the U.S. is more comparable to the third world.
According to the CIA Factbook, the US has a Gini index of 45. By way of comparison, a large number of countries with a higher gini number are in South America and Africa.    From South America: Argentina, Bolivia, Brazil, Chile, Columbia, Honduras, Nicaragua and Paraguay.  From Africa: Botswana, Central African Republic, Lesotho, Namibia, Niger, Sierra Leone, Zambia and Zimbabwe.

 


The Census Bureau notes the trend of increasing income inequality started in 1968.


The most commonly used measure of income inequality, the Gini index (also known as the index of income concentration)1, indicated a decline in family income inequality of 7.4 percent from 1947 to 1968.  Since 1968, there has been an increase in income inequality, reaching its 1947 level in 1982 and increasing further since then.   The increase was 16.1 percent from 1968 to

1992 and 22.4 percent from 1968 to 1994.


According to the Census Bureau, the top 5% of US income earners have steadily increased their share of national income from 16% in 1969 to 21.1% in 1999.  Those numbers are 41.3% to 48% for the top quintile of income earners.


Economists love to talk about "pies" and now would be a good time to use this comparison.  I'll use the current national compensation figures to demonstrate the difference in each income level's respective share of national compensation.  In addition, tax analysis is sometimes broken down into "quintiles".  A quintile is simply a way of dividing all of the income earners into 20% brackets.


According to the Federal Reserve's Flow of Funds report, the national income pie was $11.491 trillion in the first quarter of 2006.  Compensation of employees accounted for $7.329 trillion or 63%.  According to the Census Bureau, in 1969 the top 5% took 16% of the national compensation pie, or $1.17 trillion of the current compensation pie.  Using 1999's percentage that number would be $1.54 trillion or an additional $370 billion.  For the top quintile, their 1969 percentage take would be $3.02 trillion of the current compensation pie and their 1999 percentage take would be $3.51 trillion, or an additional $497 billion.  Comparing the difference between the 1968 and 1999 income distributions, an additional 6.78% of the national income pie went to the top quintile of income earners, leaving less for those in lower quintiles.


So, the top quintile is making more.  That means by definition, the bottom three quintiles are making less.  Again according to the Census bureau for the years 1969 - 1999 the fourth highest quintile saw its percentage of national compensation income drop from 23.6% in 1968 to 22.8% in 1999.  This is a 3% drop.  The third quintile saw its percentage drop from 17.3% to 15.3% or a 11.56% decrease.  The second lowest quintile saw its percentage drop from 12.1% to 9.8% or a drop of 19%.   The bottom quintile saw its percentage decrease from 5.7% to 4.1% or a drop of 28%.

 

In other words, the lower you are, the larger share of national income you have lost over the time period.


The Tax Policy Center has done a similar analysis for the years 1979 - 2002.  Their analysis came to the same conclusion.


So - the short version of US income distribution over the last 30 years is straightforward: the rich are getting more of the national income pie.


So, why is income inequality such a big deal?  Ask Marie Antoinette.  But don't lose your head if she doesn't answer (A failed attempt at economic humor if ever there was one).


Seriously, income inequality at its worst is a cause of civil unrest.  Suppose in hypothetical country A 10% of the people control 90% of the wealth.  Eventually, the 90% of the people who aren't getting anything to live on will start getting angry, eventually overthrowing the ruling party.  This was one of the primary reasons the Soviet Union was fairly successful during the Cold War period in going into countries with large Gini numbers and gaining political influence, access and eventually an ally.  This partially explains Latin America's recent move to the political left as left leaning ideologies play well to a population where income disparity is wider.  And when the US income distribution resembles the developing world rather than the developed world, it's important to ask questions like "is this a good thing?"


From a political perspective, this inequality in distribution completely explains why the Republican's economic poll numbers are so horrible despite having some good macro-level numbers to trumpet.  Although US GDP grew strongly in the first quarter, 80% of the population looked around and say, "where's my piece of the pie?  I see CEOs are making tons more than me - they're getting big raises, but I haven't had a raise after inflation since this expansion began.  This stinks."


Perhaps most importantly, it raises interesting questions about tax policy.  Inherent in these questions is the issue of fairness.  What is a "fair" tax rate for a certain income level?  When has someone paid "enough".  These are all tough questions that have no easy answer.  But they should be discussed and answered.


So, not only is the US a debtor nation in the tradition of Latin America circa the 1980s, we are also following a similar path in the area of income distribution.  It's very important to ask ourselves: is this what we want?


A completely unrelated note


In addition to misrepresenting total US GDP and wage growth (and a host of other statistics), Larry Kudlow's recent column makes the following claim:


The U.S. Bureau of Labor Statistics is recognizing the importance of the small-business-driven household survey, and has suggested averaging household jobs with the corporate payroll survey to get a clearer jobs picture.


Two bloggers - Angry Bear and Blah3 called the Bureau of Labor Statistics for clarification.  BLS responded with:


BLS has always maintained that both surveys are needed to provide a complete picture of the labor market [ed. note: This was not at issue], but BLS has not suggested that one should average the monthly household and payroll survey employment estimates, or the over-the-month changes of these figures.


That makes literally every factual assertion Larry made (save his name) in the article 100% wrong or incredibly misleading.  At least he's consistent.


Bonddad provides economic analysis to Democratic candidates and causes with NRRSA


Thanks to CanYouBeAngryAndStillDream for emailing some of this information to me.

Tags: Economy (all tags)

Comments

8 Comments

Equality's Not Everything

A good Gini index isn't the only thing that matters.  Kyrgyzstan and Rwanda have really low numbers.

Now I haven't been able to find the facts to back this up, but when I first took a course that discussed the Gini index the prof noted that the index for the USA pre-tax and pre-transfers was lower than that in Europe.  Know anything about this?

by LoganFerree 2006-07-11 05:14AM | 0 recs
Re: Equality's Not Everything

No.

by Bonddad 2006-07-11 05:36AM | 0 recs
Re: Income Inequality In the US: A Primer

Bonddad - Another great post.  Income inequality and making sure people at all levels gain is very important.

Question - Do you ever have a situation where the pie is expanding so while the wealthy gain so do those in other parts of the spectrum?  

by John Mills 2006-07-11 05:59AM | 0 recs
Re: Income Inequality In the US: A Primer

That's a good question, an no I don't have an answer.  

by Bonddad 2006-07-11 06:53AM | 0 recs
Re: Income Inequality In the US: A Primer

An excellent point. If we look at the aticle above: "Since 1968, there has been an increase in income inequality, reaching its 1947 level in 1982 and increasing further since then." This begs the question that: at what point between 1947 and 1962 was income inequality the lowest and more importantly: Why? Was it government policy? I have read (can't remember where, possibly citzens for tax justice) that during the 1950's the share of corporate income taxes as a percentage of total federal tax revenue was 32% and today is less than 10%. Could this be a part of the answer?

by TimThe Terrible 2006-07-11 08:29AM | 0 recs
Re: Income Inequality In the US

Note that the Congressional District with the highest per capita income regularly elects Democrat Henry Waxman, while the one with the lowest regularly elects Republican Harold Rogers.

by admiralnaismith 2006-07-11 06:12AM | 0 recs
Re: Income Inequality In the US

A few years back, a friend of mine pointed out that it was a sure sign of the Republican party's astonishing skill at mental ju-jitsu that they have somehow managed to convince poor people that it's better for them to keep electing the republicans who are enriching themselves while keeping the poor folks poor.

A surer sign than of that than Waxman vs. Rogers you are unlikely to find...

by jasonbl 2006-07-11 10:06AM | 0 recs
Graphs and charts would really help this article.

It's difficult to understand exactly what the Gini index means without seeing a chart showing how the U.S.'s Gini index is calculated.

That said, I'm not sure I'm convinced that worrying about our Gini number is terribly useful.  Here's a chart of worldwide Gini values, in increasing numerical order:

The top value, Zimbabwe, is clearly something of an outlier.  The red line indicates the median value, 42.2, not counting Zimbabwe.  Viewed in this context, our Gini number doesn't seem so outlandish.

I certainly agree that income disparity in this country is a problem, particularly with the administration's relentless press to crush the middle and lower classes into oblivion, but I'm not convinced that our Gini number is terribly meaningful.  I agree with the person who commented that it would be nice to see a plot of U.S. Gini value vs. time, with a note to when it was lowest, and an explanation of why.  Now that would tell us something.

by jasonbl 2006-07-11 10:21AM | 0 recs

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