From: jeblair@earth.execpc.com (Je Blair) Newsgroups: sci.econ,alt.politics.economics Subject: Inequality = Stratification?? Date: 15 Oct 1996 19:57:49 - Inequality and Stratification: Same Thing? I have read several articles and posts pointing out that the USA has a much wider range of incomes (and of wealth) than is found in Europe. This is usually reported with the implication that it is a BAD THING, and one newspaper article referred to this as "stratification". It is not. And it may be a GOOD THING: that depends on an independent parameter, Income Mobility. WHO WANTS TOTAL EQUALITY? I agree that a stratified society is BAD, and any reasonable person will realize that some inequality is NECESSARY, and so is GOOD. I mean, if the AVERAGE income is $20,000 this year, would you want a law that NEXT year EVERYONE will have exactly $20,000 dollars? Any income over this will be taxed 100% and anyone with less will be given the difference. Isn't it obvious that this would be insane? (And would you work at all next year if this were the law?) INEQUALITY = STRATIFICATION? Since this concept has been so mis-understood, I offer a hypothetical example to illustrate. Imagine two societies: E and A. Both have a distribution of incomes which is approximately Gaussian (Bell Curve). {I will deal with INCOME rather than WEALTH; they are NOT the same, but total wealth figures are less accurately measured and (I think) less meaningful. They include stock holdings and money tied up in investments and not immediately available to spend. The interest/dividend from this is counted as income. Income is positive, but wealth (assets - liabilities) may be negative. If you consider total assets, most of the "richest" people in the US are women. Old women.}---an aside. Back to the main thought. In E (Europe?) and A (USA?) the economists will divide the population into 5 income levels (for any given year). In E the top 20% have (on average) say 3 times the income of the bottom 20%. But in A the top 20% have 10 times the average income of the bottom 20%. A has more inequality than E. But, let us say, in E, ten years later the SAME PEOPLE are in the top and the bottom and the various middle fifths, except for those who died, and they are replaced by their children. But in A many DIFFERENT PEOPLE are in EACH of the 5 categories. In E, you are born into a level of society and live there, and die there. And there are few immigrants. E is a CLASS society. But in A, there are immigrants, most of them as well as people just out of school are poor (in the bottom income level). But 10 years later, many of the people in the bottom level have moved UP. In society A, people START at the bottom, but most advance as they age. They move up the ladder during their working life, and then retire, and die. This is NOT a stratified society. To say that A "should have more equality" is to say that those who START POOR should not be permitted to improve their position in life "too much"; they should "know their place". HOW CAN YOU TELL?? How can you tell the difference between E and A? Not from the kind of income data usually reported, since that is based on a given year. But one clue is in the ages of each level. In E, all income levels will have pretty much the same average age. But in A, the "poor" will be much younger than the "rich". And another way will be data tracking THE SAME PEOPLE for a decade or so. For this kind of data in the US, see my web page for a link to Income Mobility, a table which relates the movement of individual taxpayers over a time interval.. ,,,,,,, ____________________ooo__(_O O_)__ooo_________________________ (_) Inequality and Stratification: Income or Wealth? In my attempt to reply to Mason Clark's comments on my Inequality = Stratification? Post, by trying to dash off on the fly, I managed to tangle up several thoughts. But fortunately Roy Langston caught my errors. So let me try again. The question I was trying to deal with is this: which is a better indicator of economic well being Wealth or Income? The first answer is that they generally go together. The "rich" generally have both, and the poor have little of either. But neither is a perfect measure. WHAT is wrong with INCOME? Income has the limitation cited by Clark: it can vary much from one year to another. If someone sells a house or business, they may have a very high income in that year but are not "rich". Probably better would be average income over the last several years, but that sort of data is not generally available. WHAT is wrong with WEALTH? Wealth can also be deceptive. Farmers, and retired people who own their home, can have assets of hundreds of thousands of dollars, but may have relatively little income. The high value even becomes a type of liability since they must pay property taxes on it. Are they really as rich as their wealth indicates? And while I can't think of examples of people with negative income, many have negative wealth: their liabilities exceed their assets. Students or new graduates with large student loans for example. Or big time stock or real estate dealers at a time when they have misjudged the market. In an interpretation of wealth, is negative WORSE than zero? I would think not for the two examples given, consider the poor beggar in India who has (small) positive wealth: the clothes he is wearing and his tin cup. He is almost certainly worse off that the kid with a college degree and a big student loan. Having an very large debt can be an indication of high economic status. Recall the old saying: "if you owe the bank $1000 and don't have it, YOU have a problem. If you owe the bank $10,000,000 and don't have it, THEY have a problem." See the next file in this section: "Wealth vs Income?" for more on this. And finally, an example of the difference: women typically have lower incomes than men. We usually hear from 60 to 90 cents earned for each dollar a man earns (depending on what corrections are made for skill level, education and years of service). But in terms of wealth, about 60% of the total wealth in the USA is owned by women. So we have two "facts" in the US: men have most of the income, and women own most of the wealth. Which better describes the relative economic status of the sexes? Person or Family? The other question is which is the better indicator: per person or per family. I think family. (They are sometimes the same: for those who live alone) When I get a raise, my wife and children also benefit. For per person figures, how are children counted? Or non-working married? Doesn't this result in a large number of people with NO income (or no wealth)? REPLIES and COMMENTS: William F. Hummel pointed out that a person's standard of living can depend on their credit worthiness. And that does not necessarily relate to actual wealth; it depends primarily on perception, real or imagined, of the ability to service one's debts. Donald Trump, for example... Roy Langston pointed out that wealth and income do not have the same dimensions. Wealth has the diminsions of income times time. Wealth is the intergal of income over time. But that does not answer the question of which is the better indicator of economic well being. A reply from Frank Palmer questioned the source of the Income Mobility Table Hi, Your questioning of the Income Mobility Table indicates that you recognize its significance. Many do not. If true, it does much to undermine the commonly expressed view that in America, and especially during the Reagan Administration, the "rich" got richer while the "poor" got poorer. According to that table, most of the much lamented statistical transfer of wealth from the poor and middle class to the rich was a result of poor and middle class people becoming richer. But did/does that REALLY happen? Well I first encountered that study when a much less complete summary of its results was published in National Review August 31, 1992, p.47 in a section by Ed Rubenstein titled "MOVING UP". It was described as being from "a treasury study, done at the request of the Joint Economic Committee of Congress". And it was in the Wall Street Journal!! With these leads, maybe someone with good reference skills can find the exact reference. There is some "backhanded" support for high income mobility in the US to be found in Paul Krugman's book PEDDLING PROSPERITY (reviewed on my web page). Krugman, to refute the mobility claim, cites Census data to show that of families in the bottom quintile in 1985, 81.6% were still there one year later; of families in the top quintile, 76.3% were still there a year later. But this means a turnover rate of 18.4% at the bottom and 23.7% at the top in just ONE year. If that persisted every year, there could be complete turnover at both top and bottom in about 5 years! (not that I think this actually happens, but it is consistent with the evidence Krugman cited). I guess it all depends on how you look at it. For those who missed the start of this thread, the Table in question can be found on my web page: INCOME MOBILITY. Dennis Wallick wrote: But that's not > my gripe. My gripe, which I don't think you've addressed is > how the poor *as an income group* (not the individuals themselves!) have > fared since 1980.---DW The Wealth Gap in College USA Hi, I have been thinking of some way to illustrate the point that it is how individuals do, and not how ever changing "quintiles" or other "groups/classes" do, which is the better measure of how well the society/economy is performing. Imagine that you are the dean of a college. You have in place good teachers and classes and your graduates soon have good jobs, and generally become quite wealthy. You also have a well funded scholarship program, and accept many students from poor families who have good academic potential, but would not be able to afford your college. YOU think this situation is just fine. Then the Board of Trustees calls you to a special meeting. You are told that the college students are "too poor". They should have more money. NOW! You point out that your programs are so relevant to the job market that the students who graduate will soon have good jobs and will become rich. But, you are told, that only helps the alumni, not the STUDENTS. In fact, you are just helping the RICH (alumni) become even richer than the POOR (students)! This is BAD. You are contributing the most important problem of our society: the growing gap between Rich and Poor. If you don't find a way to "close the wealth gap" and make the students richer by next semester, you will be fired. So what can you do? Easy. Just expel all those scholarship students from poor families, and recruit dumb students from rich families! You will be hailed as a great egalitarian. The students will become richer immediately, and in few years the alumni will become less wealthy. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. 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