1. On Income Inequality:
Okay,
"The time has come --
To talk of many things --
From paupers to kings --
And whether Gini has wings."
With the Democratic Party's lurch to socialism, it is now inevitable that NY Times will dust off its income inequality crusade. So let's engage.
Okay,
"The time has come --
To talk of many things --
From paupers to kings --
And whether Gini has wings."
With the Democratic Party's lurch to socialism, it is now inevitable that NY Times will dust off its income inequality crusade. So let's engage.
2. This thread is not political. Any references to political figures are incidental, not substantive to the topic under discussion.
3. Before I talk about income inequality, let me reference a few important topics briefly which are germane to the topic of "income inequality" but which I have covered elsewhere in detail: Socialism, Capitalism, Safety Nets, and GINI Index/Coefficient.
4. Capitalism leads to the greatest good for the largest number of people. Socialism leads to tyranny and untold misery for most.
5. To know why, please read this thread where I cover the topic in detail, including a sub-thread on case histories in Socialism, real (Venezuela) and alleged (Nordic Countries):
6. Well designed safety nets are good, but they must not be confused with socialism, no matter what the politicians on the left or on the right tell you. No fault auto insurance is a free market safety net. Medicaid is a government managed safety net. Neither is socialism.
7. Socialism is not about wealth redistribution, it is about control, absolute control. Socialism is antithetical to free market capitalism, and cannot coexist with capitalism, not even a little bit. Shame on our leaders & educators who don't know or don't talk about it honestly.
8. GINI Coefficient (which is either expressed as a fraction from 0 to 1, or as a percentage from 0% to 100%) is a mathematical measure of income inequality within a country at a given point in time. Lower value implies less inequality and a higher value implies more inequality.
9. A GINI coefficient of 0 means everyone in the country has exactly the same income (GINI coefficient can also be applied to wealth instead of income, but I will stick with income here), and a value of 1 means just one person has all the income and everyone else has zero income.
10. As you can imagine a GINI coefficient of 0 can only be achieved through a diabolically stringent form of Communism, whereas a GINI coefficient of 1 can only be achieved through a diabolically stringent form of dictatorship. Both values represent just hypothetical extremes.
11. All that said, and being just a mathematical computation, a GINI coefficient can theoretically be computed at any point in time, and for real countries on God's green earth, it will always have a value, which realistically will be somewhere between 10% and 90%.
12. What GINI Coefficient value is good? The so-called socialists, being fixated on income inequality to the exclusion of everything else, will say "lower the better." Truth be told, if you are interested in actual well-being of the nation, there is no answer. It all depends.
13. GINI Coefficient is just a data point whose significance by itself is nill. Context is everything. As a comparator across countries, it is worse than useless. Bangladesh has the same GINI Coefficient as The Netherlands. You can infer absolutely nothing from it.
14. Even within the same country, you can have several very different income distributions which will result in exactly the same GINI Coefficient. As a means of setting social policy, it represents nothing more than a propensity of certain economists to intellectually masturbate.
15. Now getting back to the main topic of income inequality, no matter how you measure it at the starting gate (nothing fancier than just measuring average income level by deciles will do), the initial value is just an accident of history.
16. What can be meaningful is a trend-line of income growth over time. In other words, what's meaningful is whether within the same country, over time, the dispersion of income across various segments of income distribution becoming more or less stark.
17. Clearly, a long term trend toward more income inequality would be intuitively bad, as it can lead to social strife if there is a widespread perception of unfairness.
18. Viewed fro that point of view, we do have an income inequality problem. Root causes and solutions are deliberately being politicized, and the willful obfuscation of economics involved is rampant, even among Nobel Prize winning economists.
19. Turns out a Nobel Prize in economics is no inoculation against ideological zealotry. Be that as it may, first things first. And the first thing to do here is to acknowledge we do have an income inequality problem.
20. To get a detailed sense of the extent of the problem, have a look at this thread I wrote 11 months ago. If you click on the graphic, it should take you to a NY Times article which has an excellent animated graphic.
21. Now let me provide my perspective on how income inequality fluctuates over time, and good and bad ways to do something about it. Needless to say, there is natural and unnatural inequality in all manner of things in life.
22. While we are all endowed with certain unalienable rights at birth, we are not all equally fortunate with the circumstances into which we are born.
23. While we as a society must strive to provide for everyone, as much as humanly possible, an equal opportunity to succeed, there is no way to guarantee equality of outcomes.
24. In other words, we must strive to eliminate all unnatural (i.e. man made) inequality, while also accept that all inequality in outcomes is neither avoidable nor villainous, and in the ultimate analysis, nor desirable as it would be unnatural.
25. So income inequality happens all by itself, even after all unnatural root causes are eliminated. I am by no means making the asinine assertion that all unnatural causes of income inequality have been eliminated. Not at all. It is an ongoing struggle that must continue.
26. But this thread being about economics, I will focus here exclusively on macroeconomic aspects of income equality. Macroeconomically speaking, there are only two ways to impact income inequality: GDP Growth and Income Redistribution.
27. A certain amount of both is always happening, no matter what. It is only the relative extent to which one or the other is dominant varies across countries or over time even within the same country.
28. Govt controlled Income Redistribution's impact on income inequality needs no explanation. By varying the extent of redistribution we can achieve any level of income inequality, including perfect equality by imposing perfect Communism.
29. Needless to say, beyond a safety net level, government imposed reduction in income inequality is bad. It only leads to equal sharing of misery and death and destruction.
30. Reduction of income inequality through GDP Growth is far more sustainable and in harmony with the human nature. There is an inverse proportionality between GDP Growth Rate and Income Inequality. How so?
31. The income levels at lower deciles have a kind of high-beta correlation with GDP Growth Rate, compared with income levels at higher deciles. At sustained high GDP Growth Rates income levels at lower deciles rise faster than those at higher deciles, and vice versa.
32. That's what happened in the decades after WWII. Income inequality came down as the U.S. economy galloped. As the average GDP Growth Rate declined over the last couple of decades, income inequality started increasing.
33. That's why I maintain that the best antidote to an increase in Income Inequality is a higher GDP Growth Rate. Of course beyond a certain level of deregulation and a wise mix of fiscal and monetary policies, government cannot grow the GDP at will.
34. Ultimately, only innovation and an increases in productivity can grow the GDP of a nation. And while a society can create conditions more or less conducive to innovation, it cannot create innovation on demand. There is always a certain amount of serendipity involved.
34. Innovation happens when it happens. Internet happens when it happens. Biotech breakthroughs happen when they happen. What happens in the interregnum? Well, economic slowdowns can happen. Recessions can happen.
35. And consequently, income inequality can worsen. So, calls for more income redistribution to adjust income inequality can happen. And depending on the severity of economic hardship, or cleverness of political rhetoric, legislation to redistribute income can happen.
36. The more economically sclerotic European countries became, the more social welfare programs happened. It is not a value judgment so much as a descriptive statement.
37. Macroeconomics is holistic, not linear. Does income redistribution cause economic slowdown or the other way around. Hard to tell. The two go together, regardless of direction of causation.
38. The right question usually isn't whether it is right or wrong, but what is the best way to ensure long term sustainable growth, taking into account the cultural ethos of a society and a nation.
39. While freer markets and lower levels of income redistribution have a proven track record of success in creating national prosperity, one size does not fit all.
40. The right mix of policies always requires accommodation to cultural zeitgeist, since prosperity without harmony is a bit pointless. Persuasion and education are key.
The END
The END
