statistical-distortions inequality economics income-inequality

Measuring Income Inequality

world leaders rely on the statistical method for measuring income inequality, what if its wrong?

Overview

At first glance, the idea of “income inequality” seems simple. The rich get richer because the poor get poorer. Many political leaders throw around statistics about income inequality as if income equality is the Holy Grail of “fairness”. When they do, they almost always use the “Gini coefficient” that was created in 1912 by Corrado Gini, an Italian fascist theorist who wrote “The Scientific Basis of Fascism.” But the Gini Coefficient is a statistical trick that holds out a mirage of perfect equality as its goal. It creates a very misleading picture because it makes no distinction between vastly different causes of income inequality or between people living in poverty or wealth.

The Gini Coefficient is important, not because it's an accurate description of the problem, but because it's so widely quoted and because it can be so easily used to inflame passions and hatred. Every world leader using it concludes that there's a huge exploitation problem even in rich countries like the U.S. where billions of people would love to come to be poor.

Faulty Gini Yardstick

How the Gini Coefficient Works

The Gini Coefficient compares the percentage of people (horizontal axis) with their respective share in total income (vertical axis). The 45 degree Line of Equality indicates that everyone shares in the income equally. If they do not, a curve is created that lies below the Line of Equality as shown on the following graph. The farther the curve is from the 45 degree line the greater the income inequality.

“The area above the Lorenz curve -- marked "A" -- is shaded differently from the area below the curve -- marked "B". This simplifies the mathematical explanation of the gini coefficient, which is A/(A+B)” (Wikipedia)

Gini-Coefficient and Actual Income

What is most important – the Quality or Equality of life?

You are likely to say the quality of your life is more important than whether you have everything the next guy has, but many political leaders seem to think that you prefer equality to quality. Are they right? Would you rather live in a society where there was inequality and prosperity or one where there was equal poverty?

The problem with the Gini-coefficient is that it makes bad look good and good look bad, because it fails to consider how much people actually make. It only compares income relative to everyone else, and makes uniform poverty look like heaven. For instance:

If everyone was equally poor (everyone had an annual income of $1,000), the Gini-coefficient would be zero, indicating perfect equality (no inequality), which is considered very good by those who value equality above all other virtues.
On the other hand, if everyone in the bottom 90% of the population had an income of $50,000 per year, while the top 10% had incomes of $500,000 per year, the Gini-coefficient would be high, indicating great inequality. This would be considered very bad by people who consider material equality to be the most important measure of fairness.

But if you are the poor person in the two examples above, would you rather live on an annual income of $1,000 in a society of equals or $50,000 in a society with a free cooperative market that lifted all boats, even though if it lifts the big boats higher and faster?

Why is the Gini coefficient used?

The Gini-coefficient, used by almost everyone who discusses the “problem” of inequality, might add something to the discussion in a tyrannical society where force is used to enslave the population who have no economic mobility; but it's wildly misleading in a free society if it had a truly free cooperative market where rent seeking were prohibited.

The Gini-coefficient points in the wrong direction if you want prosperity, but the right one if you want statism and central control. Should it be any surprise that a fascist theorist would come up with a way of measuring inequality that admires equal poverty more than unequal prosperity, and uses it to promote revolution, redistribution and government control?

The most emotional cries of “Inequality” come from those who want central government control of pretty much everything and everybody. Those championing material equality through central government planning and control love the Gini Coefficient because it aids them in their quest for power.

Lesson

The most common measure of income inequality, the Gini Coefficient, is a misleading statistical mirage because if makes no distinction between the causes of income inequality, some of which are good and some bad, and whether the people it is measuring are rich or poor.

In spite of these severe limitations, all the political leaders of the world use the Gini Coefficient as a measure of fairness. Although many may adopt this position because of their ignorance and lack of understanding, others likely find it an easy way to stir up social discontent and use the resulting envy and hatred of the rich to promote massive government interventions, like Piketty's massive progressive worldwide taxes on the rich.

Policy designed to help solve the real problem of poverty needs to be based on a better measure of economic fairness than “Income Inequality” as measured by the Gini coefficient, because income inequality is a statistical trick designed by a fascist who must have been more concerned with concentrating power than figuring out how to help the poor. On the other hand, if political manipulation is the goal, the Gini coefficieint works very well.