(Roughly) Daily

Posts Tagged ‘GINI

“An imbalance between rich and poor is the oldest and most fatal ailment of all republics”*…

… so, how we measure it matters…

In 2015, Greece, Thailand, Israel, and the UK were equally unequal. That is, all four countries had the same Gini coefficient, a common measure of income inequality.

The number suggests that the spread of incomes in the four nations was the same. However, a close look at the poorest and wealthiest in those societies reveals a very different picture. The ratio between income held by the richest 10% and the poorest 10% ranged significantly, from 13.8 in Greece to 4.2 in the UK. 

The fact is, just because the Gini coefficient is so well known doesn’t mean it’s a particularly useful measurement. Its appeal comes from its simplicity—a number between 0 and 1 that can encapsulate a complex distribution in a single figure—as well as its popularity. It is also regularly published and updated by powerful international organizations like the OECD, the World Bank, and the International Monetary Fund

However, it has a number of serious limitations. So many, in fact, that the World Inequality Database, one of the world’s leading sources of income inequality data, steers clear. And it’s not alone. While some economists defend the Gini coefficient’s continued use, most agree that as a way to understand income inequality, it’s insufficient on its own…

A primer on the dominant measure of economic inequality, and on some alternatives/supplements to it: “Gini coefficient: An introduction.”

* Plutarch

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As we aim to understand, we might note that today is the Summer Solstice, the day on which the earth’s north pole is maximally tilted toward sun, and there are more hours of daylight than on any other day of the year (in the Northern Hemisphere; in the Southern, it is the Winter Solstice, the shortest day). The June solstice is the only day of the year when all locations inside the Arctic Circle experience a continuous period of daylight for 24 hours. And perhaps more immediately, it is the “official” start of Summer.

(The 21st is the traditional date; in the event, the solstice falls on the 20th, 21st, or 22nd– this year, on the 20th… still, the traditional date is the one folks tend to mark.)

Not coincidentally, today is also National Daylight Appreciation Day.

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“A rich man is nothing but a poor man with money”*…

Intrigued by the mechanisms that generate a world like ours, in which over 33% of the wealth in the U.S. is held by 1% of the population, economist Ricardo Fernholz and mathematician/statistician Robert Fernholz developed a model that might explain the high degree of income and wealth inequality we see in advanced economies.

As James Kwak notes in Baseline Scenario,

The model assumes that all households are identical with respect to patience (consumption decisions) and skill (earnings ability). Household outcomes differ solely because they have idiosyncratic investment opportunities—that is, they can’t invest in the market, only in things like privately-held businesses or unique pieces of real estate. Yet when you simulate the model, you see an increasing share of wealth finding its way into fewer and fewer hands [as illustrated in the chart above].

As the authors emphasize, “it is luck alone – in the form of high realised random investment returns – that generates this extreme divergence.”  In the absence of redistribution, either explicit or implicit, this is the kind of society you end up with…

Clearly, the world is not quite so simple; there are some redistributive mechanisms (taxes and the like), and (given, e.g., educational differences) not all peoples’ earning abilities are equal.  Still, as Kwak observes,

…this is a useful antidote to the widespread belief that outcomes are solely due to skill, hard work, or some other “virtuous” attribute. Even if everyone starts off equal, you’re going to have a few big, big winners and a lot of losers. Because we want to find order and meaning in the universe, we like to think that success is deserved, but it almost always comes with a healthy serving of luck. Bear that in mind the next time you hear some gazillionaire hedge fund manager or corporate CEO insisting that he knows how the country ought to be run.

Read a summary of the Fernholzs’ paper here; download the (rather mathematically-intense) original here.

* “A rich man is nothing but a poor man with money”  – W.C. Fields

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As we ponder polarization, we might send balanced birthday greetings to Elmer Ambrose Sperry; he was born on this date in 1860.  An early exemplar of equipoise, Sperry was the engineer and inventor who devised the gyrocompass (a huge advance on traditional magnetic compasses, first tested on the U.S.S. Delaware in 1911).  His compasses and stabilizers have helped navigate and “balance level” first ships, then aircraft ever since.

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Written by (Roughly) Daily

October 12, 2012 at 1:01 am

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