Wednesday, October 26, 2011

The Roots of our income inequality

The Gini Coefficient measures the degree of inequality of income in a society. The larger the coefficient, the greater the income inequality. According to Bloomberg, according to this index, income inequality has been increasing across the OECD club of developed countries for decades. Thus the Gini coefficient for the United States has increased from 0.316 in the mid 1980s to 0.381 in the mid 2000s.

The Bloomberg data indicate that only Mexico and Turkey had more inequality of income than the United States among the 24 OECD countries.

The Scandinavian countries of Denmark and Sweden, with the lowest Gini coefficients in the OECD, had coefficients of 0.232 and 0.234 respectively in the mid 2000s. Those countries had managed to keep the growth of income inequality over the two decades to manageable proportions (increasing from 0.221 and 0.198 respectively).

Source of graph

I would suggest that the graph, which shows that income inequality in the United States rose until the stock market crash and remained high until Roosevelt was elected. I suggest it came down due to the policies of the New Deal Democrats, and stayed low until the Reagan years. While the poverty of the Depression might have seen an increase in income inequality, policies designed to care for the people suffering most from the Depression reduced the Gini coefficient. It stayed low during the great economic growth after World War II.

There is a wide spread opinion in the United States that globalization, and especially the growth of imports from China and other developing nations, has been responsible for unemployment in the United States and thus the increasing disparity between the rich and the rest of us.

The reality seems to be that the United States has seen much more increase in income inequality than other developing nations. I suspect that it is not globalization that is the problem so much as the policies that have been used in the United States to deal with globalization. Other nations have done better. The American political process has favored the rich to the detriment of the rest of us.

We are now seeing an NBA lockout because the millionaire basketball players and the billionaire basketball team owners can't agree on the way to split the spoils they reap from the fans. This is perhaps prototypical of the reality that the richer that the rich get, the less they seem to care about the rest of us. Obama's proposed Buffett tax hike on millionaires would not only raise some much needed government revenue without causing any serious pain to the millionaires and billionaires, but might bring them closer to reality and to caring about the rest of us.

Why is American income inequality greater than that of any of the European countries? Clearly our country is less homogeneous than those countries in the sense that we are less concerned that everyone has a decent life, that we are more willing to tolerate poor health, poor education and other attributes of poverty in a large (and increasing) portion of our population.

I suspect that that tolerance of inequality (or indeed intolerance of cultural differences) is an artifact of our history. The United States was conceived as a country allowing slavery and it was only in my lifetime that we saw the fiction of "separate but equal" struck down in the courts. The Know Nothings militated against poor European migrants as many today militate against Hispanic migrants. Indians were enslaved until quite late in our history. Prejudice against Chinese immigrants was such that exclusion laws were passed. Not to mention the history of bias against women in the work place and voting booth. The legacy of a society that allowed some to profit greatly from the enslavement of others is a willingness of the affluent to profit while the poor suffer and the middle class declines.

Source of map
The map of income inequality indicates that the old, slave-holding south remains the area of greatest income inequality in the United States, although the Indian reservations show up in the West. History counts as culture changes only slowly without major interventions to promote change.

Perhaps the most important policies we should promote to improve our long term welfare as a people are social and cultural policies to promote more fellow feeling among our citizens and less prejudice against those who are culturally different that ourselves!

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