Thursday, December 4, 2008

Gini Matters, Because So Does Income Mobility

Originally I was going to post an article arguing that the U.S.'s large Gini coefficient for income distribution is less significant than it appears because of increased income mobility. That is to say, it matters less to you if incomes are less widely distributed as long as there's a chance for you to move up, and overtake the rich families if they're resting on their laurels. Milton Friedman and Josef Schumpeter expressed this idea eloquently (quoted here). My expectation was that while Gini might be greater in the U.S. than in Europe, income mobility would also be greater, leading to lower income inequality. My expectation was wrong.

I encountered this NY Times piece about two minutes into my research, which stopped me from writing the rest of the article. The piece shows with a slick Flash animation that U.S. income mobility is less than that of France, Canada, and Denmark.

Of course the U.S. has long been noted as a conspicuous Gini outlier (click on the image to view it legibly):

I'm not the first person to think about this question: other economists and social scientists who had a similar expectation to mine have written similar articles, coming to the opposite conclusion: that the U.S.'s rising income inequality is not offset by income mobility.

My justification would have begun here, arguing that humans are better off under such a system as long as income mobility is better than in lower-Gini states. This echoes Nozick's counterargument to Rawls's Theory of Justice. Rawls argued that if a group of peole were voluntarily setting up a new state and allocating power (and wealth) within it, the only truly moral manner of doing so would be for them to conceal their assignments from themselves until they had pressed "go". That is to say, it must have been great living in ancient Rome if you were a patrician and not a slave, and no sane person would agree to step into such a system if s/he couldn't know his/her assignment until they were in it. As a result, the only moral and rational choice is to create a society with a totally or nearly egalitarian distribution of power. Nozick rebutted thusly (imaginatively paraphrasing): imagine it's the first Friday night in Egalitaria (population 1 million), where everyone popped into existence the previous Tuesday as a result of a Rawlsian state set-up process, and each person has $50,000 in their pockets. It has been made known that the Egalitarians have in their company a fantastic violinist. She offers a performance, at the cost of $1 a head. The entire population of Egalitaria orders pay-per-view (voluntarily) and watches the performance.

There are now almost a million people with $49,999 and one with $1,050,000. Egalitaria now has to change its name to Sortaegalitaria. Gini has increased. But where was the immoral act? Nozick's conclusion: if point A (Egalitaria) is moral, and a society can get to point B as a result of moral choices made by its members, than point B is also moral. To dispute this you would have to find moral fault with the Egalitarians' desire to exchange goods and services based on their own judgment. If income mobility is greater (in a regime of overall economic stability or growth), it's likely that this results from these voluntary choices being made. Unfortunately (I say as a patriot and a libertarian), income mobility in the U.S. is not greater than in the so-called welfare states of Western Europe, as already seen, even in an analysis that researchers had thought would support the Austrian circle and its descendants (as with Ken Lakeworthy's).

The U.S.'s larger Gini has been justified by saying that we're a bigger country with a far more diverse landscape, both demographically and physically, and that it's unfair to compare the U.S. to Denmark. It's also been argued that a higher Gini has been at least partly responsible for the U.S.'s on-average-one-percentage-point higher economic growth than Western Europe - and by extension, that any redistributive taxation that would lower U.S. Gini would damage economic growth over the long run. This theory must assume a "sweet spot", otherwise Mexico would be an unstoppable powerhouse. Complicating the picture are several factors that have conspired in favor of the US. Western Europe was flattened twice in the first half of the twentieth century; much of Western Europe's business and civil infrastructure is early twentieth century (hence the exceptional development of Ireland for the last 15 years, and why developing Asian metro areas have a better business and transportation infrastructure than the US, stuck in the 1960s and 70s); and that the U.S. is a larger, younger and more self-sufficient country.

Ultimately the question is what is the best way to encourage economic growth, and to remain focused on increasing happiness and reducing suffering, which is the point of the whole thing. I ennumerate these confounding factors as much for myself as for readers because I am a market libertarian but I'm also a rationalist. Consequently, when I see new data, I change my mind; and consequently my objections to certain parts of the traditional (U.S.) liberal program are weakening.

Regardless of the reason for growth, any nation will benefit from transparent institutions that allow growth, transparent property and business law, openness to outside trade, and a strong educational system (also open and available to all) that allow ever-more-important value-adding labor to take place.

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