Archive for February, 2011

The Right Level of Income Inequality

Sunday, February 27th, 2011

Overtime, income inequality in the US has experienced an increase, at least in comparison to other Western countries. Some of this has been the consequence of high income women marrying high income men spreading the household income distribution, as well as the move away from heavy industry to a emphasis on new high-tech skills sets. The question posed here is: If people are freely able to sell their labor at whatever price others freely accept – a natural meritocracy – what would be the level of inequality?

One traditional measure of inequality is the Gini index. The index varies from 0 to 1 where 0 is total equality, everyone makes the same income and 1 is one person making all the income. The index is not linear and one can find its definition here.

There must be a natural Gini index associated with a open meritocracy. If the actual Gini index is much higher or lower than this natural value, it takes an outside force like that of the government to compel a different result. At one end, a government could claim all income and distribute it equally, yielding a Gini of 0. At the other extreme, a government could force most people to receive little income and a bulk of the income could be distributed to a few people, probably with political pull. A government could also force an intermediate result.

The US Gini index for income was stable, a little less than 0.40 from the end of World War II until about 1980. From that point, there has been a steady increased to about 0.47 in 2006. More recently there has been a small dip in the Gini index.

The US is always compared unfavorably to our European friends for having a higher Gini index. Their Gini indices tend to be in the 0.30 to 0.35 range, with notable exceptions like Sweden in the 0.25 range. However, that complaint begs the question. What would the optimum Gini index be? The actual Gini index is a complex function not only how much the government determines wages, but of the age and cultural distribution of a society, of the variety of different industries, of geographical diversity, and whether there exist new industries growing rapidly with the need for specialized labor. A growth in the Gini index could be a positive or negative result depending on the cause.

One way to estimate the natural Gini index is to look at sports, which is as close to a meritocracy as we can expect. For Major League Baseball with no salary cap and with free agency, the Gini index is about 0.50, far more unequal than the US general population. In individual sports like golf and tennis the inequality can be greater. Indeed, in some studies the more unequal the distribution in a team’s payroll, the better its performance.

The point here is not to argue exactly what the level of inequality there should be in a society, but simply to caution that it is not necessarily true that the narrower income distribution the more equitable or more optimal.

Random Thoughts

Sunday, February 20th, 2011


If you happened by a newsstand on Tuesday morning February 15, you might have sighted the headline of the Washington Post “Obama Budget Makes Deep Cuts, Cautious trades.’’ The irony is the the first sentence of the article by Lori Montgomery was at war with the headline . She more cautiously explained that, “President Obama submitted a budget blueprint for fiscal 2012 on Monday full of surgical cuts and cautious trade-offs…” Which is it? Were the cuts “deep” or “surgical?”

The conflict between the headline and the article must have been noticed, because the later online editions substituted the headline: “Obama’s proposed budget for fiscal 2012 focuses on education, energy, research”

Perhaps showing a healthy separation between the news and an editorial pages, the editors of the Post did not find the budget cuts either deep or surgical. They concluded that on the subject of the budget, “the President punted… Having been given the chance, the cover and the push by the fiscal commission he created to take bold steps to raise revenue and curb entitlement spending, President Obama, in his fiscal 2012 budget proposal, chose instead to duck.”

Those Signs Again

Any group of people with the energy to take time out of their normal activities to engage in protest are, by definition, the most passionate. Among these, one can find the deliberate and wise as well as angry and bitter, and even mean spirited.

During the protests this week in Wisconsin against proposals by Republican Governor Scott Walker along with the Republican state house to have some public employees contribute to their health and retirement plans, some protesters ported particularly very nasty signs. These included ones that equated Scott with Hitler and another with cross hairs centered on a picture of the governor.

It would be unfair to extrapolate from those signs that the entire group of protesters were mean spirited, rather than robustly making their feeling known. However, if those protesters were sympathetic to Tea Party, we would be directed by the Left to make exactly.those extrapolations.

Religious Oppression

Officals of the University of California-Davis recently defined religious discrimination as:

“The loss of power and privilege to those who do not practice the dominant culture’s religion. In the United States, this is institutionalized oppressions toward those who are not Christian.’’

This proclamation is wrong on so many levels. First, although discrimination is easier for dominant group to implement, it certainly does not preclude minority groups from exercising discrimination. Second, the fact the the university could issue such a definition indicates that the dominant view on that campus is secular humanism. If, for the sake of argument, we adopt the university’s point of view, the we could re-write the university’s definition as:

“The loss of power and privilege to those who do not practice the dominant culture’s religion. At the university, this is institutionalized oppressions toward those who are religious.’’

Fortunately, the university recognized the error after Christians on campus complained and pulled the definition. I suppose we should congratulate the university, but one wonders about an institutional culture that could produce such a definition in the first place.

Egypt: Reason for Optimism

Sunday, February 13th, 2011

Given the recent chaos in the Egypt, the short term outcome has been about as positive as one could hope to expect. Authoritarian strong man Hosni Mubarak was forced to leave office with little violence. The military has taken control providing stability and vowing to honor peace agreements with Israel, accompanied with the realistic hope of early elections. However, the final outcome of revolutions is difficult to predict with certainty. The American and French Revolutions occurred in the same era and employed much the same language. The American Revolution brought us George Washington, while the French Revolution resulted in Napoleon Bonaparte.

Fortunately, we have experience over the last hundred years or so that points to optimism in the case of Egypt. This case for optimism must overcome some serious concerns. Although the peaceful revolution came from the streets, that the radical Muslim Brotherhood did not seem to lead, they are perhaps the most organized and passionate party. One could easily imagine that they use the current instability to move Egypt to a theocracy rather than a liberal democracy. Moreover, if Zogby is to be believed, Egyptians cling to some disturbing ideas. About 90% believe that Israel is a threat to them, and a strong majority believe åçthat clerics should play a larger role in government. However, consider the reason for optimism.

The number of democratic countries has exploded. Polity IV, of the Center for Systemic Peace and Colorado State University, scores countries on a scale of -10 to 10, where -10 is an hereditary monarchy and +10 is a stable democracy. The plot below shows the number of countries scoring higher than eight from 1800 to 2003. Clearly, while not always successful and with setbacks, the move to governments underpinned by the consent of the governed is Zeitgeist of the last century or so.

Studies of this growth in democracies suggest that economic development and the presence of a middle class are the determining factors on longevity. A 1997 study by Adam Przeworski and Fernando Limongi of the world from 1950 to 1990 concluded that if the per capita income of a fledgling democracy was less than $1500, the democracy had a life expectancy of less than 10 years. Above $6000 in per capita income, a democracy essentially lives indefinitely. Indeed, they found that the “relation between levels of development and the incidence of democratic regimes’’ could explain 77% of the observations. Some of the deviations from the relation have to do if the wealth is associated with a middle class. In cases where a country’s wealth comes primarily from natural resource extraction as opposed to more diversified commerce, per capita income did not necessary translate into a middle class.

Egypt currently has a per capita income of $6200. Even with inflation, this gives Egypt a reasonable chance of achieving a long-term democracy. Despite wide-spread poverty, if the middle class is large enough the tendency to authoritarian rule can be mitigated. The depressing part of this sort of analysis is not related to Egypt. Iraq and Afghanistan have a per capita incomes of $3600 and $1000, respectively. The prospect of long-live democratically-based regimes in these countries would appear to be dependent upon rapid economic growth.

Total employment

Saturday, February 5th, 2011

This week were were all pleased to learn that the unemployment rate plunged to 9% from 9.4%. If the unemployment rate continues to fall at a similar pace for another year or so, the economy will be in unequivocal good shape. However, the unemployment rate value over the short term is often difficult to interpret. It represents the fraction of people of people who are actively, but unsuccessfully, looking for work. Discouraged workers are not counted.

If fewer people are looking for work the unemployment rate could go down, but that would still not be a positive economic indicator. On the other hand, if people perceive that more jobs are available and flood into the market, this could be a good sign even if the unemployment rate rises temporarily. This last month, total employment did not rise very much, while the increase in people looking for work was anemic.

Rather than the unemployment rate, It is less ambiguous to look at total employment. The graph below from the Bureau of Economic Statistic is a time history of total nonfarm payroll employment. Although, there are other jobs besides payroll jobs, payroll jobs are easy to count and good proxy for all employment. The gaph shows that the number of jobs is at least not dropping as fast as before, but it still seems to be bouncing on what we hope is the bottom. To see where the economy is going, keep an eye on total employment not the unemployment rate.