Tim Worstall on a Wall Street Journal article which asks “how do we measure inequality”. Tim says “not that way, idiots” (although I might have imagined the “idiots” part):
The title of the piece is “How do you measure ‘inequality’?” to which a very good response is “Not that way”. For although all the numbers there are exact and accurate (well, as much as any economic statistic is such) the whole statement is entirely misleading. For the numbers that are being used for the USA are calculated on an entirely different basis to the way that the numbers for the other countries are. So much so that in this instance we have Wikipedia being more accurate than either the WSJ or the CIA itself. Which, while amusing, isn’t quite the world I think we’d all like to have.
Here’s what the problem is. Conceptually we can measure inequality in a number of different ways and this particular one, the Gini, looks at the spread of incomes across the society. OK, no need for the details of how we calculate it except for one. We again, conceptually, have two different incomes that can be measured.
So, the guy pulling down $1 million a year dealing bonds on Wall Street. Does he really have an income of $1 million a year? Or is it more true to say that he gets $600,000 a year after the Feds, NY State and NYC have all dipped their hands into his paycheck? And the guy at the other end, making $15,000 a year as a greeter at WalMart. Is he really making $15,000? Or should we add in the EITC, the State EITC (if there is one), Section 8 housing vouchers, Medicaid and all the rest to what he’s earning? He might be consuming as if he’s getting $25 k a year, even though his market income is only $15k.
What we actually do is we calculate both of these. The first is called the Gini at market incomes, the second the Gini after taxes and benefits. There’s nothing either right or wrong about either measure: they just are what they are. However, we do have to be clear about which we are using in any circumstance and similarly, very clear about not comparing inequality in one country by one measure with inequality in another by the other measure. Yet, sadly, that is exactly what is being done here.
