Thursday, July 7, 2011

Capitalism and Income Distribution

If I haven't mentioned it lately, I am a sports fan and undoubtedly, I spend too much time watching sports on TV. When I read my daily newspaper, I read the sports section first. Currently, baseball is the sport in the spotlight, especially in the Philadelphia area as we are blessed with a fantastic team led by a superior pitching staff. When I watch the games, I am aware of the different pitches that these players use to retire the opposing hitters, how they look when thrown, even when and why the different types of pitches, fastball, slider, sinker, curve are thrown, and the numerous permutations of each pitch. Not to mention to where (which part of the strike zone, or even better, which part of the not-a-strike zone) the pitches are aimed. It can be a fascinating chess game withing the sport, pitcher against batter.

There is another curve, the Lorenz curve, that I wish more baseball fans, indeed more citizens were aware of. This curve is a way for economists to measure what portions of a population are responsible for the income within a group. It is the analysis of this curve that leads to statements such as 10% of the wage earners are responsible for 40% of the income. The closer the curve comes to a horizontal line, the more equally is the income distributed in that group/country. From this curve, economist then create a number called the GINI Coefficient that reflects the level of income equality, or level of income disparity depending on your perspective. The higher the GINI coefficient, the less equal is income distribution, the lower the number, the more equal.

Yea, you know where I am going with this, don't you!!

Rather than enumerating the various numbers, see below a link to the data that I found in Wikipedia which you can cut and paste it into your browser. The data sheet includes a cool interactive tool so that you can sort the various columns other than as it is listed in alphabetic order.

A quick glance at the tables show you that the GINI coefficient for the United States (just over 40) puts us just behind Sri Lanka, Georgia (the ex Soviet country), Ghana, and Turkmenistan (another ex Soviet country), and just ahead of Senegal, Cambodia, Thailand, and Burundi. We are grouped with countries not known for their economic strength, nor their human rights record.

The Nordic countries, Denmark, Sweden, Norway, Finland have 4 of the top 8 lowest GINI scores. Japan is number two. Among others, Germany, South Korea, Turkey, Canada, France, Switzerland, Poland, Spain, Italy and the UK all have lower coefficients.

What bothers me, other than this increasing trend, is the fact that there are many people who will either deny that this situation exists, deny that it is necessarily a bad thing, and/or pretend that unregulated capitalism which results in the rich getting richer to the detriment of the rest, is not a factor of this problem.

To be fair, however, I also read an article that dismisses my belief that income inequality is a problem. This article cited numerous statistics that demonstrated that the poor in America are actually very much better off than the poor, not only in other countries, but even in comparison with the poor of past Americas, say 19th century or early 20th century America. Simple things like access to indoor plumbing, owning TV's, owning a car, having air conditioning, etc. All true. Clearly, there are a host of countries (probably even countries that have lower GINI scores) where the truly poor live in squalid conditions that are far worse than anything in America.

But for me, showing me a picture of the living conditions in some sub-Saharan country and saying, see, our poor don't have it so bad, is an incredibly limited yardstick. How do our poor stack up against those in countries more like ours, say Germany or Japan? Besides, we all know that any comparison is relative. In a place where the average income is $30 a month, someone making $60 is well off. But in America, the average yearly wage is in the upper $40's to low $50's so someone earning $8 per hour (about
$16K per year) is poor in comparison, whether or not they own an air conditioner.

Regardless of what some people might say, more equal wealth and income distribution is not the same as exactly equal. I am not advocating that everyone should earn the same salary regardless of position or contribution. There are people who clearly do not participate in our economy and our goal should be to provide the tools, such as education, skills training, and yes, temporary economic assistance, so that they can become productive members of our nation.

But how do we justify when someone earns 100, 300, even 1000 times the salary of others in the same company? To illustrate how this trend to higher salaries for the top wage earners has blossomed, check out the data from the census tables which can be accessed through the following website.

As you can see, the first chart details that 5% of families earned over $200K per year in 2008 while 8% earned under $15K. Even more illuminating, the second chart illustrates that in 1980, 8.8% of families earned under %15K while 13.2% earned over $100K, yet by 2008, while 8.1% still earned under $15K, a whopping 26% now earned over
$100K. Is it better for a country to have all people experience the benefits of a growing standard of living or just some?

If those earning $7.50 and hour made $10 instead while those earning $51 made $48, would the benefits of that extra money for the lower wage earners outweigh the detriments to those who saw their income drop a bit? Would it be better for America if more people felt economically comfortable? Would it hurt America if less people felt "rich"?

Perhaps the real question is, how do we redistribute income so that we maintain a strong middle class without rewarding those that do not work yet while still limiting the restrictions we place on the movers and the shakers so that they still have incentive to create. There are no easy answers, but we will never find an answer if we don't first admit that income inequality is a problem. And we will never find a solution if we continue to cling to the near religious belief that capitalism is a perfect economic system.

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