I dream of Gini and income inequality

The inequality whiners use a statistical measure of dispersion, the Gini Index, to describe the plight of humanity. Visiting a minor indignity (using only the positive side of the real number line, but no one wants to hear about that) upon Corrado Gini’s 1912 mathematics, the Gini Index gives a number between zero and one that purports to measure the level of inequality in a group.

One may misconstrue the Gini Index as sort of a ratio of the haves to the have-nots. Since there are always more have-nots, that ratio produces a number less than one. That is an oversimplification. The index actually deals with the economic distances between everyone. It is the ratio of sum of all the differences to twice the square of the number of participants times the average (now there is something you really did not want to hear).

Thus a Gini Index of zero describes an Orwellian society in which everyone has exactly the same amount of wealth or income. When Gini = 1, everything is in the hands of a single member of that society.

Never shy about contorting mathematics to their purpose, sociologists have come up with several ways to go about the calculation, no doubt some that Gini never imagined.

Ginis abound. Wealth, income, disposable income, pre-tax — the list is practically endless because it can be computed on nearly any series. Let’s not go there; Wikipedia has already done yeoman’s work in that area. The interesting questions are whether we want inequality to change and if we do, what it costs to make it change.

We know that transfer payments temporarily move wealth between parties. The policy issues are well worn. Stealing is easy. Convincing one segment of the population that it is down-trodden and extracting their votes on the promise to liquidate a different segment of the population is how politicians get into and remain in office. But is it a good thing to force the Gini index down toward equality?

Ubiquitous data in our information society permit the examination of the Gini Index at the ZIP code level, refining the politics of envy to a science. A mouse click reveals one of the poorest places in the United States is Panther, W. Va., where the median household income is less than $22,000 per year. This is about one-tenth of the same income in Weston, Conn., $213,000 per year.

But according to Gini, the folks in Panther (Gini = 0.53) are more unequal that those suffering through life in Weston (Gini = 0.47).

When social engineers want to improve the lot of those in Panther, do they do so by driving down the local Gini, making neighbors more equal to each other, or do they make West Virginians more equal to Connecticut by improving Panther income with taxes from Weston?

One may apply this globally, imagining how many Ethiopian lives could be more equal by importing the wealth of a single Westoner. What’s a redistributionist to do?

Let’s examine the question over time. It has been observed that if all the wealth in the world were divided equally and the same share distributed to everyone (Gini = 0), within some time — say, 20 years — that wealth would migrate back into the same hands (estimates of global income Gini today are about 0.65) as it was before the reallocation.

This is not a comment on equality; it is a comment on efficiency. Property rights gravitate to the highest bidder, not because he is more equal or more popular or higher-born, but because he is the one who can use the resource more efficiently for himself and for others.

The inequality crowd is exercised about equality of output without regard to the disproportionate input that goes into making a tasty stew for which all the ingredients must be unequal. People in Weston, Conn., efficiently compress their relative prosperity into more equality than those who lack that ability elsewhere.

The general problem has to do with order. Do we first try to make the pie as big as possible and then divide it, or do we decide how the pie will be divided before we start baking? In the former case, the market decides winners and losers; in the latter, those choices are made by some authority. There are some really low Gini values in former Soviet bloc countries, but you probably do not want to live there.

Social engineers are rarely happy. One of the things you get with inequality is diversity.

Brown is an investor and freelance writer in Alpine.

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