THE GINI INDEX A KEY TO UNDERSTANDING OUR ECONOMY AND POLITY
GINI INDEX EXPLAINED
The Gini Index, (ratio or coefficient) is a measure of statistical dispersion first developed by the Italian sociologist and statistician Corrado Gini who in his 1912 seminal paper entitled: "Variabilita e mutabilita",used this function to measure inequality among values of sociological frequency distributions such as wealth or income levels. The function has been widely applied in social science, agronomy, chemistry and other fields. It is most frequently used as a measure of income inequality. Gini's calculation was based on the frequency distribution of total income of a population, where the y axis is the cumulative share of income earned, and the x axis is cumulative share of people from lowest to highest incomes. The plotted values approximate a convex curve (Lorenz curve) formed between the upper left arms of the x and y axes. A line constructed across the endpoint of these axes, forming a 45 degree angle relative to the x axis, would represent the line of perfect equality of incomes. The Gini ratio, coefficient, or index is a ratio of the area which lies between the line of equality and the curved line and the total area under the line of equality. The value can range from zero to one. The closer the value approximates 0 the more equal the distribution is and the closer to one the more unequal the distribution is. For ease of understanding the values are often expressed as a percentage. At G = 1, one person receives 100% of the income, while at G =0, every person receives the same income. E values can be expressed as a fraction or in percent, or as whole numbers. So Sweden is at times represented as having a Gini index of .23, 23, or 23%.
Other measures of income inequality are also in use that are even simpler and easier to calculate. The "decile dispersion' ratio is a simple concept and simple calculation. It is the comparison of the average income (or other measure) of the richest 10% of the population divided by the poorest 10% of that population.
Decile Dispersion (DD) at 10% = r10%/p10%.
This value is easily understood, since the computation results in a number which expresses the number of times that the income of te top 10% is greater than the bottom 10%. A DD 10% value of 16 for example would mean that the top 10% of that population (rich) have an average income sixteen times greater than the average income of the bottom 10% ( poor).
WHAT DOES IT MEAN?
First we must be clear, the Gini index says nothing about the wealth of a nation. The index measure the dispersion of wealth within the nation. Cameroon, Bulgaria and the USA all have the same Gini index @ .45 but are poles apart in income, GDP and individual wealth. But the index does indicate that the disparity in wealth within those countries are similar, though the individuals themselves may have vastly different incomes.
An examination of the most recent CIA data (CIA World Factbook) reveals that for this recent set of data mostly from the early to mid 2000s, the Gini indices range from a low of 23 for Sweden to a high of 71 for Nambia. For the most recent CIA compilation of 111 nations, I could find, (See Wikipedia " Gini index") ranged from 34.5 for Albania to 71 for Nambia. I plotted these data on xcell and calculated the mean (43.2) and median (41.1) and determined the modality to be bimodal (39 and 40.1). I plotted a frequency graph which indicated that the values tailed off into low frequencies on the high (50-70) end of the Gini value intervals. The USA, at Gini index 45, plotted in the high end of the curve beyond the median and mean. Indicating that in comparison to all woord nations listed on the CIA tabulaton our brand of unmoduated capitalism has permitted incomes to become widely divergent, more similar to situations one would find in the third world. But see below.
WHERE DOES THE USA RANK IN INCOME INEQUALITY?
On closer examination of the world list indictes that most first-world, modern, (mostly) western, industrialized states have Gini values which range in the low 30s. How did the USA compare with this selected group of nations who have modern democracies and are our allies and trading partners. I tabulated sixteen of these nations from the latest CIA compilation. The list included: Austria-Gini index=26, Australia=30.5, Canada=32.1, France=32.7, Greece=33, Germany=27, Israel=39.2, Italy=32, Japan=37.6, New Zealand=36.2, Poland=34.2, Portugal=38.5, Spain=32, Suisse=33.7, Sweden=23, and the UK=34 and were chosen as typical of this western, modern-nation group. The mean value of the Gini indices of this selected group is 32.7. The Gini index of the USA is listed as 45. A number which is way out of the range of the other nations of similar wealth, level of development, industrialization etc., and more typical of third-world dictatorships and middle Eastern absolute monarchies. In fact our Gini value is 12.73 or nearly 13 points higher than the average industrialized western nation from my selected list. That departure suggests that our "income inequality level" is more than one-third higher, or 37% higher than the average of the selected "modern" nation list values. Over-all we rank above (where below would be better) the mean at 43 and the median at 41. I consider the variation between the USA Gini ranking in those of my selected "modern" nations to be a very significant variation. Why are our Gini values so far off the others of our allies and trading partners?
Some would decry the attempt at comparison of income inequality measures between nations and claim that there are inherent difficulties in evaluating Gini values from one country to another. And there are historic and demographic reasons (in the US ) for some of the circumstances we see in these tabulations. However a comparison over time of the same nation is valid and might shed light on the way our levels of income inequality have changed. Our Census Bureau has collected over the years aince 1968 and these data are available. This permits us to compare the US values over time. Such a compilation of US annual Gini values over the years show a disturbing trend of generally rising income inequality.
Comparison USA Gini Values from 1925-2009
(US Census Bureau Data)
1925-45 estimated
1947-37.8 estimated
1967-39.7 first year reported
1968-38.6 lowest value
1970-39.4
1980-42.8
2000-46.2
2005-46.9
2007-46.3
2008-46.7
2009-46.8
After:www.ruralvotes.com/thebackforty, M Williamson.
A graphic representation of these data reveal a troubling trend of rising Gini values beginning from the period of about 1970 when inequality values reached into the high 30s and continued to climb into the high 40s. The present value of 45 is what is estimated to have prevailed in this measure in the "roaring 20s" prior to the Great Depression. Then after WW II we had a leveling off of this measure for several decades during a period of manufacturing expansion and widespread income equality. ( It is noteworthy that even at our lowest level in 1968 --Gini @39--this measure does not approach the values of modern, democratic industrialized nations of @ 33). But by the late sixties when this measure of income disparity hit its lowest point, something changed (this has been termed the "great divergence" by economist and Nobel laureate Paul Krugman) and from that inflection point onward the graph of these data points indicates that income inequality has been steadily rising---up to 2005, when these US data lists the highest value of inequality and then continues to return to nearly that level again in 2009. The Great Recession has had some understandable but minor impact on this measure in the most-recent 2011 compilation which indicates that it has dropped back a few points to 45.
WHY WEALTH CONCENTRATION IN THE HANDS OF THE FEW IS TROUBLING
In a piece published in the Economist, Jan 20 2011, "Unbottled Gini. Inequality is it rising? Does it matter?"the author notes that the trend in inequality of income in America is increasing and quotes others who state that "countries (with high Gini values) have worse social indicators, a poorer human development record, and higher degrees of economic insecurity and anxiety." That is that the "haves and have-mores" (former President George W. Bush's self-described constituency) are grwoing in wealth and have now become the "have-even-more" group. Because it appears that for those that have been accumulating wealth at the very top, that process of wealth-accumulation becomes even easier and more effective, and the wealthier these individuals become the more they accumulate. A study published by the Census Bureau and noted in the Economist article indicates that the disparity in wealth is growing because the top tier income levels are accumulating wealth at a far faster rate than the lower rankings while those at the bottom are declining in real income.
Based on The Economist (op.cit above), in the US in the 1970s, the incomes of the top fifth (20%) of earners rose by 14%, while in the same period the bottom fifth rose only by 9%--not a huge disparity at only 5%! But by the 1990s, that disparity grew, in that period the incomes of the top fifth had increased by 27% and the bottom fifth by only 10%. So by the 199os, the difference between the top fifth and bottom fifth had grown to 17%, or more than three times what it had been two decades earlier. Thus the trend in income-disparity is one of increasing divergence between the top and bottom levels of earners. In regard to this phenomenon the USA can be imagined as on a "slippery slope" of income inequality in which that measure become smore extreme over time. And with it the negative social, economic and political impacts of income inequality will only increase.
Since the 1970s, due to these factors described above, an enormous amount of wealth has been transferred to the top percentages of the nation's earners---the wealthy elite. (So says, Les Leopold, author of "Looting America," Chelsea Green Publications, June, 2009). Leopold found that in 1973 the top one percent took home 8% of the nation's income, but by 2006 this same group was pulling down nearly three times more of the total pie at 23%. That was the highest percentage since the 1920s. In another analysis of this same phenomenon, an article in the Economist has noted that between 1979 and 2000 the top one percent increased their earning by about 275%, while the bottom 80% have had their real earnings reduced by half.
What is apparent is that old saying that "wealth begets wealth" is true. It is apparent that the super wealthy have greater access to the public media where they can change the economic and political story and circumstances to their advantage, and, also, in a nation in which money can purchase political power, they use their wealth to change and control the political environment to their advantage.
Its plain that this disparity in funds has had dramatic political effects. See:"Fear and Looting in America", Les Leopold (June 06, 2009) Huffington Post. Its obvious that the wealthy can spend on political campaigns and do so with abandon. They also support massive lobbying efforts to control legislation they see as advancing their financial goals, acess to power, and business aims--mostly to accumulate more wealth. Leopold states, that: "The shift in wealth in turn created an unholy cycle of more lobbying for more benefits for the super-rich and large corporations, who in turn paid for even more lobbying--a cycle that is till in motion." (Leopold, Huffington Post 2009). The same author gives several examples of what he describes aptly as the "appalling example of raw power of money" in the hands of a determined and wealthy constituency. Often the wealth which gets into the hand of the investor-class goes into off-shore accounts where they are sheltered from taxes, and these funds support no investments in a tangible, real-economy here in the USA which would help to keep Americans employed. All too often, the funds that do remain here are not invested in profit making enterprises but are slated to "fuel the derivatives casino on Wall Street", or "the exotic financially-engineered-products designed to soak up the investor classes' surplus capital". These funds "go to feed the orgy of fantasy finance investments, that led directly to the crash of the economy in 2007-2008." Op.cit.
WEALTH AND POLITICS
But in order to maintain and abet their accumulating habits, the super-wealthy often turn to politics to protect and enhance their wealth. (They are mightily afraid of the wealthy's so called "nightmare" scenario" which, for them occurred in 1932, during the Great Depression, when after a limp recover from the 1929 Wall Street crash, the public rose up in well-justified public anger and tried to bring down the oligarchs whom they rightfully blamed for all the ills of the Depression. See "The Wealth Report" by R. Frank, WSJ, Dec 23, 2011.) They are determined to prevent this "nightmare scenario" which brought to power anti-corporatists such as populist Senator Huey Long, and of course the nemesis of the Republicans...FDR. But recall that what they call the "nightmare scenario" they so fear ushered in the longest period (four decades) of continued growth and relative income equality (Gini values in the high 30s) in American history. )
The wealthy, through PACs and now anonymous direct support (after Citizen's United ruling) can literally purchase their own candidates for major government offices.
Take for example that of Newt Gingrich and his primary and seemingly only supporter Sheldon Adelson, the Las Vegas multibillionaire who has poured five million (of the 33 million dollars he is reputed to earn each day) into Newt's floundering campaign. He has threatened to make that 100 million or two-hundred if he needs it. Adelsons and his Israeli-national wife (and two daughters who are binational and carry Israeli passports) is notorious as a fanatical supporter of Israeli PM Netanyahu. Adelson famously purchased a newspaper (name?h which he distributes for free in Israel. It's purpose was to support Mr. Benjamin Netanyahu for his first election and since then, the daily (dubbed "Bibiton"a play on the Hebrew words which means "Bibi's newspaper"--where "Bibi"is a reference to Benjamin Netanyahu's nick name) has become one of the most widespread and widely read dailies. It is the "Washington Times" of Israel, existing for the sole purpose of supporting and advancing Israeli right wing causes and Netanyahu in particular. Now as a result of the Citizen's United ruling in the Supreme Court, and the tax structure in the USA which favors the super wealthy, Adelson has been able to amass great wealth, and to direct it into personal political goals which he favors. No one is denying his right to do so. But it does illustrate a disturbing trend.
During this presidential election cycle he has become the sole, big, financial supporter of former House Speaker, Newt Gingrich. Former Congressman Gingrich, who was a vocal Israeli supporter before , but now since his support from Adelson, has become more outspoken, even strident supporter of right-wing Israeli positions, perhaps to keep those millions of Adelson's dollars rolling in, which are the primary props of his campaign. During the campaign, Gingrich made several statements which were both intemperate and undiplomatic for a potential US president. The now infamous slur against the Palestinians as "an invented race" and his statement that all of the Palestinian leaders were "terrorists"were comments which caused a flurry of protests and embarrassing comments around the world, but were no doubt ment to please and encourage his prime supporter--Mr. Sheldon Adelson.
Now can you imagine what it might be like if these two men, Netanyahu and Gingrich, both of whom are proteges of and apparently under the influence of the same enormously wealthy and powerful man, were to actually serve contemporaneous and respectively as President of the US and PM of Israel. Would that be too much power in the hands on one man? I think we all instinctively know what that answe is. See: Salon.com. "The Adelson's other pet project:the Israeli right," February 09, 2012.
SOME THOUGHTS
The facts above, that wealth is concentrated in the hands of the very few in this nation and that process of concentration is accelerating, strikes at the very heart of Republican political strategy and talking points.
1. Trickle down economics does not work. Wealth moves to the top and stays there...unless government intervenes by tax policies and other legislation which acts to level the playing field. The former also goes also for that old Republican saw, "a rising tide lifts all boats"--it aint true! It is well to recall that during the post WWII period of high employment, low Gini values, high profits and expanding economy the very wealthy paid as much as 60% on their earnings. They prospered very nicely then, now they pay less than 15%.
2. The basic Republican symphony has recurring strains of cutting taxes for the wealthy "for they are the job creators", all too often this is not true and that what we need now is selective raising of taxes for the wealthy so as to help to move funds downward into the hands of the vast majority of middle class and workers who actually do create jobs by increasing demand.
According to Professor William Domhoff, (Domhoff UCSC, in "Who Rules America", www2.ucsc.edu/whorulesamerica,) in 2007, the top 1% of this nation held 35% of the total net worth of the nation, the next 19% had 51%, (thus the top 20% held @86%) while the bottom 80% had a net worth of only 15%. Got that? The top 20% held more than 85% of the nation's wealth while the bottom 80% held only 15%! Or look at it this way the top 1% held 35% of the nations net worth while the bottom 99% held 65%. Thus the vast majority of American are scrambling and competing among themselves for only 65% of the nation's wealth. One asks where have all the jobs gone? Why is the economy stagnating? With a major chunk taken out of the economic pie and reserved to circulate in Wall Street exotic financials, or to buy up vast estates in Brazil, or a second Lear Jet, or swap $90 million dollar Manhattan apartments for a chalet in Paris. There is a lot less wealth in the hands of those who circulate the money, purchasing homes, washingmachines, automobiles and services. If there is no money in the hands of the many there is little demand and the economy stagnates.
3. Some modern nation's have mastered the problem of wealth concentration by means of taxation and legislation, but the USA is not one of them. We have never approximated the ideal, (a Gini index in the low 30s) but now we are in a netherworld of inequality with Bulgaria and Cameroon. Some of our political leaders (at the behest of the very wealthy to whom they owe allegiance) are still mentally and politically stuck in the 19th century era of robber barons and impoverished slave-workers. We have yet to evolve into the idea that more equitable dispersion of wealth is best for our economy and for all of us-- rich, middle and poor alike.
The fact of income inequality and its cancerous growth is a real threat to our economy. Wealth concentrated in the hands of the very few, as noted above, distorts growth, stifles demand, and results in is less tax revenue, less cash in circulation in the hands of the many. It encourages the movement of surplus funds of the super wealty into exotic financial transactions and the "Wall Street casino" where wealth is circulated and accumulated, but too often with no tangible benefits to the nation as a whole, or positive effects on job creation--and in short forces us to face a generally less inventive, vibrant and les-than-thriving economy.
4. The political impact is troubling too, since accumulation of wealth in the hands of the few inevitably leads to the dangerous concentration of political power, to social unrest, and to political polarization and stagnation. We can see this today in our high levels of income inequality wqhich seem to be associated with the polarized, ineffective government we are saddled with right now. Are they related?--I think so.
5. In the USA, in recent years the top one-percenters, constituting only some 3.2 million of us, have vastly more money and more political clout than the remaining 317 million middle-class and poor citizens. That is not simply the case of the "cream rising to the top". There are potentially sinister economic and political forces at work here which are acting to distort wealth distribution and the democratic fuctioning of our nation. We ignore them at our peril.
Get the picture?
rjk
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