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Cronk, I have posted research that shows why Ritholtz is making the same mistake as others. A commenter on his site has noticed the same thing. He writes:
BR,
Yes, the Gini coefficient is designed to measure the overall inequality of a distribution, whether of individual or household incomes. By its nature it is not linear. Are you trying to say that it will not reflect the distribution within the top 1%? It was clearly not designed to do that. Or are you trying to say that if all the income in the country were concentrated in the top 0.1%, or even in one individual, the Gini coefficient would not reflect that? It will.
The point of my comment and link is certainly not that there is no income inequality, nor that it has not changed over time. The point that is that the income distribution for households and families has changed significantly, while that for individuals has not.
The chart from EPI entitled “Incomes Rising Fastest at the Top”, which is what I presume you call unequivocal, refers to households, not individuals. And the changes in income it displays are also reflected in the Gini coefficient for households.
The Gini coefficient for individuals has actually decreased slightly, while that for households has increased. That would suggest that the noted rise in top household incomes may be due to changes in household composition rather than changes in individual income. Although the data may be unequivocal, the conclusion may not be.
In other words, it is not clear that the changes you noted are due to rich individuals getting richer. They could be, with better logic, be imputed to rich individuals combining into households more over time. Or possibly, poor households increasingly breaking up into individuals. Or both. Given that, I would hesitate to jump to any conclusion based on this. Do you have more data on distribution of individual income?
The glaring problem with the Gini coefficient is that it overlook the significant tax incentives for high income households to distribute their wealth evenly over members to lessen tax burden via trusts, dividing holdings of companies, hiring family members… etc. Thereby significantly increasing household income while changing individual income less.
I think really you need look no further than food stamp statistics and the unemployment statistics to see that income inequality is worse than it has ever been before (unless generations of Americans are getting dumber, less innovative and enjoy poverty). By worse I mean not only in magnitude, but also that the problem appears to now be a structural one, where the “haves” have increased means to innovate, accumulate capital… etc and the “have-nots” simply do not have that opportunity.
I’m not disputing that there is a wealth gap.
It sounds crass, but I’m open to consider that there may be a large group of Americans who are conditioned to live off the Gov’t, and are less innovative, and may in fact enjoy poverty (as long it the “poor” continue to have cars, washing machines, AC, cable, multiple TVs, and are typically never hungry).
Then, there is the issue of investing, which those lower on the wealth scale do not do.
The bottom line is that I fully believe this is a problem created by gov’t policy.
I certainly agree government policy is the main contributor to this inequality. In the middle ages it was kings with armies and goldmines that created it. Today its the tax code, lobbyists, the criminal code, and the structure of the welfare system.
I am convinced, from personal experience, there are people who “game the system” to live off the state and are not interested in working.
However this is too often used as a strawman argument to try to take support from those in society who are truly unfortunate and need it.
With regards to investing, the reason those lower on the wealth scale do not is because of the proportion of their income they must spend on food, energy, clothing and shelter is too high. Additionally those with lower incomes that are unionised often lose their “investments” when pensions are renegotiated or mismanaged.
Blaming the rich is not the solution but neither is blaming the poor. And certainly those with the means to affect change bear a greater part of the responsibility for current circumstances than those without.
Somehow I feel if the top 1% had a quarter of what they did and it was given to the bottom 50% no one would really be much worse off than they are now in terms of quality of life.
Of course the poor invest. Have you not seen the lotto payouts lately? Not much difference in that and the HFT bot controlled markets we like to play in.
i did read your articles
U6 has more than doubled over the last decade. Currently 1 in every 6th American is either unemployed, underemployed or has given up. I can imagine in some poorer communities it could be 1 in 3. I don’t need a study to confirm that as unemployment goes up income equality down. However, it does keep a few statisticians employed
http://portalseven.com/employment/unemployment_rate_u6.jsp?fromYear=2000&toYear=2011
Wait a second, so unemployment causes income inequality to go up? Well who woulda thunk it. I know, let’s tax the job creators til their blue in the face so there will be even more unemployed and then the wealth inequality will persist but at least we’ll have more funds to pump into useless entitlement programs! Yea!
Some interesting articles regarding this I found researching for a counter to your post Woodshedder. Love the dialogue btw.
Paper on Social Inequality in OECD countries (spoiler alert: USA doesn’t rank well)
http://www.bertelsmann-stiftung.de/bst/de/media/xcms_bst_dms_34886_34887_2.pdf
Tracking Food stamp usage – http://gregor.us/policy/food-and-the-empire/
TJWP, I still have those articles saved and have been meaning to post them. Thanks!
Just finished my own research paper literature review so I have more time to read off topic papers now.
I don’t know if you have encountered similar problems in searching for research on this topic, but I find that most of the articles I come across are really politicized.
Absolutely they are. Most of the research I’ve seen has been done not to provide solutions but instead to demagogue.
the wealth gap just got smaller.
thru out history these same issues always arise at an inflection point. the rich are not like the poor. the poor truly own nothing. easy to define. the rich own assets that fluctuate in price. it is inevitable that the rich are never as rich as they seem. at least not for long.
if anyone is ignorant today it is the rich. they have no clue that their paper wealth which has been assured for decades could possibly implode to zero. of course not all of it but a sizable percentage for sure. the wealth gap will inevitably collapse. it always does.