Sunday, September 09, 2012

Does income inequality matter?

Here are the top 11 US states with the greatest levels of income inequality by Gini coefficient (note that some states are tied):

1. New York
2. Connecticut
3. Massachusetts
3. Louisiana
5. Florida
6. Alabama
7. California
8. Texas
9. Tennessee
9. Mississippi
9. Georgia

Here are the top 10 most equal states:

1. Utah
2. Alaska
3. Wyoming
4. New Hampshire
5. Iowa
6. Wisconsin
7. Nebraska
8. Hawaii
8. Idaho
8. North Dakota

Here is a ranking of the top 13 metropolitan areas with the greatest levels of income inequality:

1. Bridgeport-Stamford-Norwalk, CT
2. Naples-Marco Island, FL
3. Brownsville-Harlingen, TX
4. NYC-Northern NJ-Long Island, NY-NJ
5. McAllen-Edinburg-Mission, TX
5. Miami-Fort Lauderdale-Pompano Beach, FL
7. Trenton-Ewing, NJ
8. Shreveport-Bossier City, LA
8. Tallahassee, FL
10. Charleston, WV
10. Charlotte-Gastonia-Concord, NC-SC 
10. Lexington-Fayette, KY
10. Los Angeles-Long Beach-Santa Ana, CA

And those with the greatest equality:

1. Ogden-Clearfield, UT
2. York-Hanover, PA
3. Lancaster, PA
4. Anchorage, AK
5. Reading, PA
6. Vallejo-Fairfield, CA
7. Provo-Orem, UT
8. Salem, OR
9. Colorado Springs, CO
9. Honolulu, HI

Now here is a selection of both some of the most equal and unequal countries by Gini coefficient. Among the top 25 most equal:

2. Montenegro
3. Hungary
10. Kazakhstan
14. Belarus
15. Ukraine
20. Cyprus
21. Kosovo
22. Ethiopia
25. Pakistan

Among the most unequal (out of 136 countries):

13. Hong Kong
29. Singapore
42. United States


No matter which type of political entity one examines -- be it city, state or country -- there does not appear to be an obvious connection between income inequality and economic vitality. Ogden-Clearfield, the most equal metropolitan area, has an unemployment rate of 6.4 percent while the second most equal area, York-Hanover, clocks in at 8.3 percent. Unemployment in Bridgeport, the most unequal city in the country, is slightly above the national average at 8.5 percent, while that of Lexington  (#10) is 6.8 percent. Vallejo (#6) is one of the most equal cities but also declared bankruptcy just four years ago, and Reading (#5) has been called the country's poorest city with the highest share of citizens living in poverty.

The story on the country level is much the same. While greater levels of income inequality typically correlate with problematic countries and lower levels with more prosperous/stable countries, exceptions abound. Niger is more equal than New Zealand. Japan is more unequal than Uzbekistan. Ireland is more unequal than Bangladesh. The United Kingdom is more unequal than Tajikistan. The most equal country, Sweden, is often cited as a model of tolerance and prudent microeconomic policies while the number three country, Hungary, faces an economic mess and talk of institutionalized corruption.

If any pattern is to be found, it is perhaps on the state level, where the list of most equal states is dominated by those who derive much of their wealth from agriculture and natural resource commodities (AK, WY, IA, NE, ND). They all have small populations as well, with Wisconsin the biggest at 5.7 million while the rest all have 3 million or fewer. While it does seem that greater equality also corresponds with greater levels of economic freedom (and inequality with lower levels), the correlation doesn't seem particularly strong. 

There also doesn't seem to be a strong connection between inequality and migration. New York and California have seen a net outflow of people to other states, but Texas and Florida -- which also have high income inequality levels -- have seen big population gains. If people are particularly bothered by income inequality, they don't appear to demonstrate it when choosing where to live. Rather, it stands to reason that their absolute level of income and absolute welfare matters to a far greater extent than how well they are doing vis-à-vis their neighbors, and choose the location to live that offers the best standard of living from an absolute perspective. 

Explanations for income inequality likely vary. Utah's population has a relatively homogeneous population with similar cultural values, and the propensity to work hard and become educated from person to person probably does not differ as much as in other states. States with economies highly dependent on agriculture and related industries, such as Nebraska and Iowa, probably have lots of jobs that pay enough to afford a middle class existence but are unlikely to produce great riches. Relatively few people are particularly poor and relatively few are particularly rich. In California and New York, which feature more high-paying industries (Silicon Valley/Alley, Hollywood and Wall Street), the rewards are potentially much, much greater but most people do not realize them, thus increasing income disparities. 

Income inequality by itself is not a problem. At worst, it may be a symptom or reflection of problems that exist, such as highly regulated economies where riches are made based on rent-seeking rather than the creation of wealth and innovation. There is a massive qualitative difference, for example, between the riches collected by Steve Jobs and Carlos Slim, whose wealth is largely a result of his monopoly status in a variety of key industries.

Indeed, income inequality rabble-rousers such as Timothy Noah and Paul Stiglitz are more on point with their criticism of unequal incomes that result from the ability of individuals or corporations to extract wealth from the government (think of the Fanjul brothers or Archer Daniels Midland). The simple solution there, however, is not expanded government but less of it. The adoption of a flat tax that eliminates deductions and loopholes, for example, or the abolishment of all agriculture subsidies are both policies that would pare back special advantages of the moneyed elite. 

It is always useful to remember that a government program that doesn't exist can't be hijacked by the rich and powerful for their own ends. There is nothing that a crony capitalist fears more than the free market and unbridled competition.

Update: This post from Scott Sumner seems like a good companion read.

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