Gini Coefficient in a Bottle: The Inequality Myth

The most commonly used marker for income inequality is called the Gini coefficient. Most leftists regularly refer to it when they make claims like “inequality is rising every year” or “the income gap is now worse than ever and getting even worse.” But what is the Gini coefficient, and why is it misleading?

The Gini coefficient is a ratio of income distribution developed by an Italian statistician named Corrado Gini. A coefficient of zero means everyone has exactly the same income. A coefficient of one means that only one person has all the income. National coefficients are almost always between zero and one. Our Gini coefficient has been dropping steadily over the years, but that doesn’t mean that rich people are necessarily getting richer and poor people are necessarily getting poorer.

Because there’s one element of the posted Gini coefficients that has been left out of the discussion: Gini coefficients are calculated on gross income—which means they don’t take into account taxes and transfers. An opinion piece in The Wall Street Journal gives the details:

Virtually all of the data cited by the left to decry the supposed explosion of income inequality, as Lee Ohanian and Kip Hagopian point out in their seminal paper, “The Mismeasure of Inequality” (Policy Review, 2011), use a Census Bureau definition of “money income” that excludes taxes, transfer payments like Medicaid, Medicare, nutrition assistance, the Earned Income Tax Credit, and even costly employee benefits such as health insurance.

 

Thus the data that is conventionally used to calculate the so-called Gini coefficient—the most commonly used measure of income inequality—ignore America’s highly progressive income tax system and the panoply of benefits and transfer payments. According to Messrs. Ohanian and Hagopian, once the effect of taxes and transfer payments is taken into account, “inequality actually declined 1.8% during the 16-year period between 1993 and 2009, when the Gini coefficient dropped from .395 to .388.”

 

In his speech, Mr. Obama cited a recent study from economists at Columbia University that found that already enacted benefits and tax programs have reduced America’s effective poverty rate by 40% since 1967—to 16% from 26%. But he ignores all this when he claims that inequality is increasing.

Obama can’t have it both ways. He wants more government programs, and he claims the ones we have are working. But how can they be working if income inequality has only gotten worse? And what does it mean if they are working? Think about it. If the Gini coefficient is only getting lower, but the income gap is shrinking, then that means one thing: the government redistribution of wealth is discouraging poor people from making more money (thus lowering their income) while forcing rich people to pay for an increasingly growing population of unproductive poor people.

The median income is actually going down. Gross (as opposed to net) income disparity should not be addressed by taking from the rich and giving to the poor. It should be addressed by encouraging the poor to increase their income. Welfare programs do not work to address this problem. They transfer money from the wealthy to the poor, but this very transfer exacerbates the problem. The hunger of the worker drives him on. Pay a worker not to work, and, guess what? He won’t work. And when he doesn’t work, his income decreases.

Even if government programs supplement this decreasing income, the poor person has not really been helped. He is just now all the more dependent on the so-called charity of the civil government, and ironically, the income of the rich. That means that, as long as the civil government is relying on the taxes of the rich, it should be encouraging the income gap. If rich people started making as little as poor people, how would welfare recipients (I’m including the civil government in that group) survive? According to the lowering Gini coefficient, there wouldn’t be money to give anyone if the rich didn’t make it.

Unless the civil government helps the poor to make money instead of merely helping them to have it, the Gini coefficient will, and has to, get uglier. So a decreasing Gini coefficient shouldn’t inspire more government welfare, but less. If you want to close the income gap, encourage poor people to work. If you want more jobs, let job creators keep their money. When they re-invest it into their own businesses, poor people will benefit—with more and better jobs. And everyone will be better off.