July 9, 2000

UNEQUAL INCOMES CAN MAKE ALMOST EVERYBODY BETTER OFF

There's a lot of public agonizing over the supposed fact that American society is growing ever more unequal as it grows richer.

Even if it were true, would it matter? Possibly yes, if the total amount of money stayed constant and the poor were made so by yielding up their meager pennies to the rich. Not at all, if the economy grows so some people benefit disproportionately but no one is worse off.

Economists measure inequality by something called the "Gini coefficient."

In conditions of perfect equality, where every income is identical, the Gini coefficient is zero. It is 1.0 if income is perfectly unequal, meaning a single person has all of it.

What does it mean if the Gini coefficient is increasing? Please join me in a thought experiment to find out.

Imagine a sleepy rural Chinese village, before the economic reforms, where the village collective distributes exactly $500 a year to each of 2,000 families.

Since income is flat, the graph of "percent of total income" against "percent of total population" is a straight line from (0,0) to (1,1). That is, the bottom 43 percent of the population has precisely 43 percent of the income and so on for every percentage you choose.

Of course, Chinese villages never slept in such utopian equality. For one thing, they were a lot poorer; I've just picked illustrative numbers that make the calculation simpler. For another, Communist party cadres were a lot more equal than everybody else, both because they had privileged access to scarce goods, and because they could extract bribes from their village comrades. Those things did not appear in the official accounts, however.

When Deng Xiaoping proclaims "To get rich is glorious," the collectives are dissolved and one fortunate resident is tapped by his capitalist relatives in Taiwan or Hong Kong to set up the Golden Fortune Baby Buggy factory. (I once toured just such a Taiwanese-supported factory in the hinterlands of Shanghai).

Half the village goes to work there. Nine hundred people get jobs attaching wheels and such, earning $1,000 a year; 90 are floor stewards earning $10,000 a year; nine are vice-presidents who get a princely $100,000 and the lucky CEO awards himself $1.8 million.

The graph of income against population has sagged. The Gini coefficient -- the ratio of the area between the straight line and the sag to the total area below the straight line -- is a decidedly unequal 0.74. Those in the bottom half of the income distribution, though not a single yuan poorer, now earn only 10 percent of the total income.

Yet the villagers would think you foolish to claim that they were worse off.

The coming of the factory is not all that changes in our little village. One of the reasons peasants were so poor is that they tended plots not much bigger than postage stamps. With half the workers off making baby buggies, those who continue to farm can lease their land and begin to earn a little extra selling to the factory hands. Maybe buy a motor scooter with a trailer, to take produce to market.

The newly rich want to build houses, and hire former peasants as construction workers.

Also, the Chinese people are famously entrepreneurial when not forcibly restrained. The comparatively well-paid workers stake their wives and daughters and younger brothers to ice-cream carts outside the factory gates, and noodle shops down the road. As prosperity spreads, little shops open everywhere -- groceries, clothing, small appliances, eventually cell phones and satellite dishes.

If you think I'm making this up, you've never seen Shenzhen.

Something very like this gradual diffusion of wealth happened as the United States developed economically. At the beginning of the 18th century, the Gini coefficient was .65; a century ago, .55; and by 1973, .32. Because stagflation was particularly devastating to the poor, income inequality rose during the malaise years, but for much of the last decade the Gini coefficient has been fairly steady at around .46.

If it decreases because the people at the bottom earn more, that's fine.

If it decreases because the people at the top earn less, that's no good to anyone.

Poverty is the problem. Not inequality.

(691 words)