The Gini Index is a statistical indicator of the inequality in a set of data. If all the values are the same, the gini index is 0, corresponding to total equality. If all the value is in one member of the set, and the others have none, the index is 1.0 corresponding to maximum inequality. It is usually applied to income data for a given year, but could also be applied to total assets. dcross1@home.com (David Cross) Organization: Sprint Canada Inc. Newsgroups: alt.politics.economics Jim Blair had this question to pose for me.... "Suppose all you Canadian workers were to start at $8 an hour, but increase X% an hour every year. All in constant dollars, (not inflationary because productivity had increased in proportion to wages due to technology). Explain to me why this would be BAD, but don't just say "because it would increase the Gini index": I KNOW that. But why would it be BAD." >If we start with an (assumed) pool of 100 people, all of who start at 8 bucks. >Every year their wages move up in absolute lockstep, so 100 people go to 9 >bucks, 10 bucks, etc forever. >The Gini index in this case stays at 0.000 or nearly there, assuming roughly >equal rates of savings among that 100. >However, if I read your question correctly, let us throw a wrinkle into this >mix, and ask ourselves what happens when population growth enters into the >picture... >Then we have 100 people *each year* starting at $8, and moving up $1/hr/year. >Eventually there's going to be a wage spread which will range from $8/hr to >$17/hr, so the Gini index starts to rise. I don't know how to calculate it from >this data alone, so if someone else would be so kind.... >Just for the sake of argument tho, let's say it's 0.200 at this point. >Now as the differential increase in wages spreads out, so that the "wage >spread' grows from $8-$17 to something like $8-$30/hr, (so that the Gini >rises to, say, 0.300) it starts to become BAD because the rising level of >inequality means that the ones at the top can start using that larger Marginal >Propensity to Save to their advantage, and begin accumulating wealth and extra >(unearned) income. This is where the monkey wrench kicks in, because as >differential wealth accumulation and distribution occurs, the generation of the >wealth that the top income earners gain the most of (due to their existing >claims on that wealth generation through stocks and bonds) has to come from >those on the low end of the wage scale, since those on the low end have a much >larger Marginal Propensity to Consume. >As an aside, I can't believe Ed Flaherty baldly states that the MPC is the same >all across the income strata, since economists as respected as Samuelson, who >has written definitive texts on economics, have shown how the MPC > MPS for the >low-income earners in many industrialized nations. REPLY: I mean an on going society, not 100 new workers on an island. Consider the "one dollar a year wage increase" case. But note that an X% annual increase has the higher paid workers getting bigger dollar value raises, thus raising the Gini Index even more. So assume there are equal numbers workers of ages 20-30 (earning an average of $13 an hour, since they start at $8 but are up to $18 in the 10th year. And there are also an equal set of workers in the age range of 30-40 earning an average of $23 (ranging from $18 to $28) And an equal set of workers aged 40-50 earning an average of $33 per hour. And an equal set of workers aged 50-60 earning an average of $43 per hour. Say people retire at 60 and live from their savings and investments which provide them with their last decades average income of (I estimate $90,000 per year, from 50 weeks X 40 hrs/week X $43). If they live another 20 years collecting $90,000 per year, can you calculate the Gini Index for all the workers in this society? Now you say such a change in the Canadian economy would be BAD because: >.....the rising level of >inequality means that the ones at the top can start using that larger >Marginal Propensity to Save to their advantage, and begin >accumulating wealth and extra (unearned) income. But this is exactly what IS happening in the US and in Canada as well. People do earn higher incomes (on average) as the get more experience. And they borrow when young and invest more as they get older (and think about retirement). And they live in retirement from that (what you call ) 'uneaned income'. (I call it the interest from their life savings). Note that in a primitive society income drops with age as people cannot work as hard. The income increase with age that we see is the result of technology. And you say this is BAD?? >...This is where the monkey wrench kicks in, because as >differential wealth accumulation and distribution occurs, the >generation of the wealth that the top income earners gain the >most of (due to their existing claims on that wealth generation >through stocks and bonds) has to come from those on the low >end of the wage scale, since those on the low end have a much >larger Marginal Propensity to Consume. Well, aside from the controversy over whether this Marginal Propensity to Consume really does drop with age, the saving and investments of the elderly do not harm the young. Quite the opposite. It is the money put into banks (by the elderly rich) that provide (at least some) of the money that the young (poor) borrow to buy their homes and cars and education, etc. And the current group of elderly rich are continuously dying off and being replaced by a new generation of formerly young and poor. But (to review) you say that if technology continues to result in wage increases for more experienced workers as it has in the past, this is a trend that is harmful to society? That on average people should not get higher wages as they learn more and become more productive? Because the sacred Gini will then rise? But do you think that it would be GOOD if a group of workers were to arrive on a island at the same time, and the exact same technology would result in them all getting the same pay raises of $1 a year that you think are BAD for a functioning society? >David Cross: > >>That's a fallacious definition, since it uses percentiles instead of how many >>people are in a particular income strata. > Hi, If you define "middle class" in terms of "constant dollar income"--adjusted for inflation with the consumer price index, then today just about everyone is above the "middle class" of 1950. See for example: http://www.heritage.org/library/categories/healthwel/bg791.html >That's precisely the problem. You can use an "absolute scale" to "prove" that >poverty doesn't exist when we all know it still does, based on a simple >sociological observation that the dispossessed of any society always compare >themselves with the current aristocracy. >> The Gini for income in the US peaked at 0.410 at around 1988 (bing! the end >of >> the Reagan era) and has hovered at 0.400 since then. > Now let me summarize this: You say that the Gini index for incomes in The US peaked at 0.41 during the peak of the economic boom in 1988, at about the time that real median family income reached its all time high. But that the Gini fell during the recession of 1990-1, as did real median family income. And that real median family income has not returned to its all time high. (at least not as of the most recent data). And from this you conclude that when the Gini rises, it is BAD. Because it is now higher than it was during the decade of the 1960? A decade that featured 2 recessions? And as a PS, since recessions were more frequent in the past than since 1982, perhaps the Gini numbers should be checked for the exact year they were measured. During boom or bust? >>With the falling real wage, it's a miracle median family wage rose, ??? No, it is exactly as expected. Lower (actually slower rising) real wages are largely the result of rising family incomes. When only dad works outside the home, say his wage is $30,000 per year. But if mom gets a job which pays $20,000 per year, the average wage drops to $25,000 per worker per year, but family income increases to $50,000 per year. Hardly a "miracle". * IN REGARD TO THE DISCUSSION RE: THE GINI INDEX * I went and checked and got blown away by a few facts I picked up on the Gini index. Seems that my memory was faulty and this is what actually happened: Year Gini 1947 0.374 1968 0.348 (all-time low!) 1994 0.426 So 0.401 in 1988-9 wasn't the peak. I must have been looking off a web site that gave Gini values before taxation, which gives a different picture than after taxation. I also invite you to explain to me why the Gini would FALL as the economy expanded. Let's agree to use this standard reference table for all future discussions.. (All Ginis listed are after taxation) 1947 .376 1978 .363 1948 .371 1979 .365 1949 .378 1980 .365 1950 .379 1981 .369 1951 .363 1982 .380 1952 .368 1983 .382 1953 .359 1984 .383 1954 .371 1985 .389 1955 .363 1986 .392 1956 .358 1987 .393 1957 .351 1988 .395 1958 .354 1989 .401 1959 .361 1990 .396 1960 .364 1991 .397 1961 .374 1992 .403 1962 .362 1993 .429 1963 .362 1994 .426 1964 .361 1965 .356 1966 .349 1967 .348 1968 .348 1969 .349 1970 .353 1971 .355 1972 .359 1973 .356 1974 .355 1975 .357 1976 .358 1977 .363 Source: U.S. Bureau of the Census, Current Population Reports, Series P60 >Let's assume that we have 10 people: >$100, $200, $300, $400, $500, $600, $700, $800, $900, $1000 >(Assume yearly incomes). The median is $500. >Assume that inequality kicks in, so that the guys one side go down and >the guys on the other side go up. >$50, $100, $150, $200, $250, $500, $750, $850, $950, $1050 >Now all of a sudden the median's at $500, but a Gini index applied to these two >would show worsening inequality. Hi, Yes. But your example does not mean that ANYONE has actually moved down in income. Because the second set is at a later time. Say a decade later. The top 3 guys died, and 3 new people moved in (were born, came of age or immigrated) and they are the $50, $100 and $150. The $100 guy increased to $200, the $200 to $250, the $300 to $500, etc. Everyone has a higher income (except the ones who died). Even the immigrants who are on the bottom here but have a higher income than they had in Mexico or India. Individual people tend to move up with time; that is what the Hubbard study shows. That is why income mobility needs to be considered. And from your numbers, I don't see any obvious connection between the Gini and recession. It dropped during the 1990-1 recession but grew during the 1960-61 recession. Maybe a plot of Gini vs. median family income will show something? DATA ON .XLS >Which reminds me, did you look at that cutesy chart I did? >http://www.L7.net/bcresponse/gini.html Jim Blair: First, it is not clear that marginal propensity to save does increase with income. See for example: http://www.geocities.com/capitolhill/4834/save.txt Where you will find this quote: > >"In 1946, Simon Kuznets got headed towards his Nobel prize by > >compiling the data that proved the marginal propensity to save does > >*not* rise with income, and the marginal propensity to consume does > >not fall with income. End of story, except that the idea that they do * >went into the political-economic folklore anyhow." And recall that Lester Thurow, in "The Future of Capitalism" is concerned about the exact reverse as you: that as the US (and world) population ages, there will be less saving and investing. Will people continue to "save for their old age" when thay ARE old? David Cross wrote: > > So you're using a Nobel Prize winner in 19*46* to "prove" my statement in 1999 > wrong? Come on, let's have some real data from the 1950s through to 1995 > instead of some guy's data from a Great Depression and a World War. > > [ Snipped pending some research and thought ] Hi, Today the US is over "twice as affluent" (real percapita GDP) as it was back in the 1950's when JK Galbraith wrote "The Affluent Society". But the "saving rate" is lower now than then. How does that square with your claim? Some say it is not wealth or income that correlates to higher propensity to save, but age. But the average age in the US is also now higher than it was then. Anyway, this is all beside the point. So what if propensity to save were to increase with age. Or income. Or wealth. How is that an argument against annual pay raises based on experience? Finally notice that (in my model), while a larger X% annual wage increase increases the Gini index, and if combined with a greater propensity to save at higher income/wealth/age, means an ever greater percent of the total wealth is owned by the top 10%, never-the-less everyone has the same income and wealth when averaged over their lifetime. Point to this exercise: that consideration of the Gini index and or the concentration of total wealth or income, without reference to income mobility is very misleading. It is possible to have a large Gini and a huge imbalance in wealth in a society where everyone is actually exactly equal in wealth and income during their life. -- AND You mean that it is BAD that people can save for their retirement? >It's BAD if differential savings is what occurs. There's a reason that Social >Security got invented in the first place. But even if it were true that people save more as they get older, so what? That just changes the wealth-age profile. The old will be relatively better off in retirement than if they did not save more. But why is this BAD?? And Social Security "got invented in the first place" because for the first time there were a lot of people who were living long enough to retire but who had not expected to, and so had not planned for it. >>So society begins to bifurcate, and we find that those on the top end up raking >>so much in from their side 'investments' that they no longer need to work for a >>living at all. You mean that it is BAD that people can actually retire when they get old? >See above re differentialism in savings rates. >>...At that point, we have a group of people who are the rich >>welfare bums of society, Only we don't call them rich welfare bums, we call >>them "brave, smart capitalists who take huge risks" (please note my sarcasm). We call them "retired". And hope to join their ranks someday. >There are tons of retired people with no savings to speak of except a bank >account and no income streams except interest off the account and their Social >Security checks. ??? But didn't you just say that this is GOOD? That it would be BAD if people were able to save and have a lot of money when they are old? You see the recent trends (since 1980) in the USA as being BAD for exactly the same reasons that I see them as GOOD. As more people save and invest while they work, and as the stock market rises and as returns on the investments grow because of compound interest, and as incomes increase with experience, ever more people are able to retire from work and still live well. >Yes, *if* the stock market can keep on going like the Energizer Bunny, and IF >population growth continues (One of capitalist economics' unstated assumptions >is that of infinite population growth to drive the 'growth engine'), and *IF* >stock market holdings are evenly distributed across quintiles (as I read in >this NG, they're not). The stock market has done well this century. It was "down" only during the decade of the Great Depression and "flat" for a decade of the 1970's, and has been growing for the rest of the time. And now over 40% of households own stocks, up from about 5% in 1980. I think this is GOOD, even if the stock holding are not "evenly distributed across quintiles". And there is no assumption of unlimited population growth in capitalist economics. It is about the utilization of resources for a given population. That can be a growing, stable, or even contracting population. The GNP can continue to grow even if the population does not. .... And just what do you mean by "So society begins to bifurcate"? >Bifurcation occurs when mobility is less than perfect and inequality is greater >than some mean which checks the inadequate mobility. For reasons which I've >stated before, I feel that the Gini as it existed in the early to late 1960s >checks any inadequacy in mobility that may exist in the 1990s. All of your references are to the USA. But you live in Canada. What is the history of the Canadian Gini index? (I expect that it is closer to what you consider "ideal" ;-) .... In my model (and in the real US), there is a continuum of incomes and ages. There is no sharp break between young and old, or between rich and poor. The closest to a break is between "retired" and "working", and even then, there are 'semi-retired' and people who work part time as a way to phase in retirement. >In your model. But in the real world, the top 1% still holds more wealth than >the bottom 90% combined. Even in my model (everyone starts a $8 per hour and gets an X% raise every year), if X is large enough, and if people save and invest a percent of their income, and returns on investment are high enough, the top 10% will own over 90% of the total wealth. (I think that is what you mean, otherwise what happened to the other 9%?). Are you mixing income and wealth here?? But again why is this BAD? Is it BAD if the retired can live well? Remember the retired will need wealth of about 20 times their annual working income if they are to have the same income in retirement (assuming they can get 5% on savings). And everyone can eventually retire, depending on the size of X (the annual wage increase), the amount they save, the return on their investments, and the level of income that they want to have when they are retired. >Only if marginal propensities to save do not rise with income. Marginal propensity to save probably does not rise with income, but even if it did, so what? ....with reference to the data and graph at: http://www.L7.net/bcresponse/gini.html What I see is that the index was relatively constant or falling, until median incomes rose above about $35,000 (1997 dollars). Then, since 1967 the index and the median income have increased together. And this is for the USA. What was happening in Canada? >The other thing *I* see is that median family income seems to have levelled off >in constant dollars after 1973. Extrapolating the slope of that curve from the >1960s would mean median FI would be around $50,000 (constant dollars). >I would thus submit to you that even median FI has stagnated even though there >are now dual-earner families (which temporarily beat the real wage decline by >increasing the income of a whole household, so that the real wage pinch isn't >as deeply felt). So more wives are working now. Is that BAD? A woman's place is in the home? >>Question for you on that chart: Why is it that during the highest growth >>periods (the 1950s and 1960s), at 4% per year on average, the Gini *FELL* to >>its lowest point (0.348 by 1967), and real wages rose, and the top rate on the >>rich was 91% (effective 75% according to a study done by two guys who I STILL >>can't find the names of). Ain't no supply-side stuff goin' on here, just >>old-fashioned Keynes. > In terms of US economic policy, this is the time of the JFK tax cuts. He cut income taxes across the boards and cut the top rate from 90+% to 70% and raised the income brackets. This is not CALLED a "supply side" tax cut (like the Reagan cuts were) mostly because the term had not been invented then, and because they were done during a Democratic administration. >Reagan's cuts were designed to favor the rich. Reagan's top rate cut did not favor "the rich"; it favored those who wanted to BECOME rich. High income tax rates favor the already rich who want to protect their status from the commoners who have ambition. The tax is on "taxable income", not wealth. "Taxable income" is the kind that the already rich can avoid having. >.....JFK did not substantially boost >regressive taxes (Soc. Sec.), nor did LBJ. Reagan did. Now this is a common misunderstanding. For the facts, see: http://www.geocities.com/capitolhill/4834/socsec.txt .... >>What wouldn't I give for that kind of economic structure today, considering my >>real wages would then begin to rise quite nicely. Real wages rise more slowly when the fraction of the population with jobs increase. >Not necessarily. What's important is the composition of the job market. >Manufacturing is declining and service is increasing. The former is high-wage; >the latter is low-wage, and bifurcated. (Lawyers and doctors and accountants >make up high value added services, while fast-food workers, janitors and house >cleaners make up low value added services). The fraction of the population working in manufacturing is dropping, just like the fraction in farming has been. And for the same reason: automation, technology and greater productivity. You can't stop that. And this is another reason for the growing spread in incomes. .... But the median family income has been rising and is about back up to its all time high level of 1989. >The median income is "back" to its 1989 level due to a piss-poor 1990s average >growth rate of around 1.8% per year. So we agree that US economic growth has been lower since the Bush/Clinton era of tax increases than it was during the Reaganomics era? But at least the USA has done better than Japan or Europe during the 1990's.. IMMIGRATION: >[ Stuff on immigration snipped as population growth is one of the general >components of 'growthism' in a capitalist economy, and it's really a separate >discussion in and of itself ] It is. But you can't ignore the impact it has on US income and wealth distribution when one out of 3 new workers is an immigrant, mostly from a 3rd world country. >For 200 years prior to 1973, immigrants poured into this country with no skills >and no education but had a desire to make it on their own in a new country, and >real wages never fell, unlike today where the real wage onslaught hasn't lifted >since 1973. So again, I submit it is the job market composition, NOT the fact >that the immigrant is an Ethopian instead of an Englishperson. Immigration into the US has come in distinct "waves". There was very little from the restrictions placed on it during the mid-1920's until the law change of 1965. One result of this 30 year suspension of immigration was a much less diverse USA. Social critics in the 1950's worried that we would soon all be alike: the "Man in the Grey Flannel Suit", all living in Suburbia in identical rows of houses, and most American would never even hear any language but English, etc. No one worries about this today. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth.