Greedy Capitalists Hogging Wealth Are Not Causing Income Inequality


For all those interested in finding out the other half of the income inequality story that last week's CBO study does not tell, here is some fascinating stuff from Political Calculation, a wonkish blog.

It produces three charts, displaying the Gini Coefficients of individuals, families and households in America from 1994 and 2010 that show that we can safely dial down the CBO-triggered gloom-and-doom that the capitalist system is generating vast disparities of wealth. (This data is superior to the CBO's in at least one major respect: It is more current because it goes up to 2010. The CBO's ends in 2007 which means that it does not take into account the post-recessionary losses that the much-reviled top 1 percent experienced.)

The charts show that although there is a slight increase in income inequality for U.S. families and households, there is absolutely no significant change in the inequality among U.S. individual income earners from 1994 through 2010. (A Gini Coefficient of 0 indicates perfect equality—everyone has the same income—and a value of 1 indicates perfect inequality—one person has all the income, while everyone else has none.)

The CBO study's finding—being shouted from roof tops by the left—that the top 1 percent of Americans have pulled ahead from everyone else was based entirely on household income. But the better metric to indict capitalism would be rising individual income inequality. Why? Explains the blog: "If income inequality in the U.S. was really driven by economic factors, this is where we would see it, because paychecks (or dividend checks, or checks for capital gains, etc.) are made out to individuals, not to families and not to households."

So the real complaint of the left isn't about rising income inequality produced by markets, but rather, income inequality produced by how people choose to group together into families and households.

Says Political Calculation:

With a near rock-steady level of income inequality among individual income earners over time, it is only possible for income inequality to rise among families and households if the most successful income earners group themselves into families and households and if the least successful income earners likewise group themselves together into families and households as well.

Think about it. The reason that the income inequality levels recorded for families and households are lower than those for individuals are because most families and households may have one high income earner, who is balanced out by individuals within the families or households who have low or no incomes.

But, if people with very high income earning potential join together to form families and households, and increasingly do so over time, perhaps because such people might have things in common that make forming themselves into families and households an attractive proposition, then income inequality among families and households will increase.

The same holds true for the opposite end of the income-earning spectrum. If people with really low income earning potential join together to form families and households, or perhaps if they choose to split apart, and increasingly do so over time, then the resulting low income family and household will also make income inequality among families and households rise, even though there has been no real change in the amount of actual income inequality among individuals.

In other words, if rising inequality is limited to households and families and does not extend to individuals then the causes might have less to do with greedy capitalists in the American economy and more to do with other factors in the American society. These include: diminished social contact between the rich and the poor; rising divorce rates and the breakdown of families; fewer income earners in a household because of a lack of education, death or incarceration and so on.

If the left seriously wants to address inequality, these are the issues it'll have to focus on rather than fleecing poor rich people.

H/T: Adrian Moore.