Monday, May 30, 2011

Criticism of observations about wealth inequality in the U.S. on Huffington Post and elsewhere

This comes from a sympathetic standpoint, but we should do our homework and not either be ignorant of what we're talking about or try to finesse data to make things look different than they are.

A big misunderstanding comes from simple definitions: wealth as measured by economists is not the same as income. Wealth is assets, stocks, bonds, land, homes, cars, bank accounts, while income is just that, income earned either from work or from wealth. Wealth inequality, that is inequality in who owns stocks and bonds and has big bank accounts, is not the same thing as income inequality. But too often the two are conflated. It's even worse when wealth inequality in the U.S. is quoted, and then compared to income inequality in other cases, such as bringing Sweden into it, as we shall see, because it's not only misleading but wrong.

Lets take This article from the April 29th Huffington Post by Wray Herbert. According to Herbert,

"Wealth inequality is at historic highs in the U.S. as well, with some estimates suggesting that 1 percent of Americans control nearly half the nation's wealth"

Bad, indeed, if that is the case, but how does this compare to other countries? The Gini index is a good comparative measure that can be used to assess the relation of possession of income or wealth by a percentage of people to the total volume of income or wealth of the country. The Gini Index runs from 0 for perfectly equal, to 1 for completely unequal, with a very small percentage of people owning mostly everything. The U.S.' wealth Gini index according to this study, the Luxembourg Wealth Study,(Luxembourg Wealth Study Working Paper Series #1, 2006) an international project run by central banks and statistical agencies, is .84. Pretty bad. Yet Sweden's is .89, Germany's is .78, and Canada's is .75 . The years for all of these are 2001, so it is a decade out of date at this point.

The Gini income coefficients for these countries, in comparison with the United States, are as follows, from Wikipedia (
"List of Countries by Income Inequality",) based on the CIA's data: according to the CIA, the US' Gini is .45 (2007). This is higher than the UN's estimate of .408 (2007). The Gini of Sweden is .23 (2005), that of Germany is .27 (2006), and that of Canada is .321(2005).

Shouldn't we be up in arms about the Swedes with their utterly disproportional distribution of wealth? Actually, they're one of the most income equal countries on earth. The U.S. has a higher incidence of income inequality than all of Europe, Western or Eastern, with the possible exception of Bosnia. It's on par with that of the countries of South America, as well as the new China. This is nothing to be proud of. But we shouldn't try to fudge facts by pointing to our wealth inequality and then, at times, pointing at the income inequality of places like Sweden and being shocked at the difference. Other countries that have much more even incomes still have very unequal distributions of wealth, so it alone is not a good indicator of how a country is doing. Still, it makes for a good statistic to shock people, even if that statistic has no relation to the reality of most folks, who may have proportionally little savings or assets even if they bring in lots of money month to month.

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