The USA’s Economic Inequality

Rachel at Tinkerty Tonk writes about how inequality in the USA isn’t that bad. She approvingly cites the following number-fudging bit:

How we’re supposed to read this is that the USA has a very uneven income distribution, that the poorest 10% only get 39% of the median income, that the richest 10% get 210%. Compare and contrast that with the most egalitarian society amongst those studied, Finland, where the rich get 111% and the poor get 38%. Shown this undoubted fact we are therefore to don sackcloth and ashes, promise to do better and tax the heck out of everybody to rectify this appalling situation.

But hang on a minute, that’s not quite what is being shown. In the USA the poor get 39% of the US median income and in Finland (and Sweden) the poor get 38% of the US median income. It’s not worth quibbling over 1% so let’s take it as read that the poor in America have exactly the same standard of living as the poor in Finland (and Sweden). Which is really a rather revealing number don’t you think? All those punitive tax rates, all that redistribution, that blessed egalitarianism, the flatter distribution of income, leads to a change in the living standards of the poor of precisely … nothing.

In reality, of course what matters isn’t the median but the mean. The ratio of the median to the mean is an important indicator of inequality, and as it happens, the USA’s ratio appears to be really low. Going by the statistics of the 2005 Human Development report, we get the following picture:

In the USA, the poorest 10%’s average income is 19% of the national mean. In Sweden it’s 36%; in Japan it’s 48%; in Norway it’s 39%. Norway’s GDP per capita, adjusted for inflation, is about the same as the USA’s; Japan and Sweden’s are about 30% less. The Norwegian bottom decile therefore makes twice as much as the American bottom decile; the Swedish bottom decile makes almost half again; and the Japanese bottom decile makes almost twice.

Similarly, the bottom 20%’s average income is 27% of the national mean in the US, 48% in Norway, 46% in Sweden, and 53% in Japan. So the Norwegian bottom quintile makes 70% more than the American one, the Swedish bottom quintile makes 20% more, and the Japanese bottom quintile makes 45% more.

This may not apply specifically to the bottom 20%, but Swedes and Norwegians get to work less than Americans, too. The average American works 1777 hours per year, the average Japanese 1828, the average Swede 1316, and the average Norwegian 1328. So Norway not only has the same inflation-adjusted GDP per capita as the US and gives its bottom decile twice the purchasing power as in the US, but also manages to do that while working its population 25% less.

11 Responses to The USA’s Economic Inequality

  1. SLC says:

    1. Actually, the US and Israel are the two worst offenders in the difference in income levels between the bottom 10% and the upper 10%.

    2. As for Rachael, this is a perfect example of the old saw, statistics lie and liers statisticate.

  2. Alon Levy says:

    It’s not the first time I hear the statistic that Israel and the US are the two most unequal developed countries… where did you hear that?

    The Human Development Report of 2005 says that the worst offenders in the developed world are, in descending order, Hong Kong, Singapore, the US, Portugal, the UK, Australia, and New Zealand. Israel only comes after all these.

  3. SLC says:

    It was published some time ago in the Jerusalem Post. I believe it was also mentioned in an article in Haaretz.

  4. Bruce says:

    Two facts to consider.

    1) Sweden’s GDP or standard of living may be underestimated by the fact that some services provided “on books” in the U.S. are “off books” in Sweden. Example: Swedes own fewer cars but have, in most cases, better access to public transit. So the part of the GDP that goes into buying cars, financing cars, insuring cars, repairing cars, upgrading cars and … you guessed, fueling cars is smaller while people are living better. Ditto with medical care, which is almost 100% state run.

    2) The case of Sweden is illustrative of a general point: that subtractions for losses in human or other other capital do not get made against GDP. Example: if you have a car crash and get injured on the way home from meeting with your divorce lawyer to sign divorce papers, you have had a bad day. Your capital (car, body, marriage, social network, shared access to household goods and appliances, efficiencies from joint living, etc.) has been damaged substantially, but the GDP will rise sharply from the physical therapy, psych therapy for your kids, lawyer bills, car repair bills, lawsuit for pain and suffering and the consumer costs of furnishing a second household with tables and chairs. You have been wrecked, literally, but to the GDP you are a productive hero. If only you could have had a heart attack when opening the lawyer’s bills….

  5. Alon Levy says:

    I’m using purchasing power parity, which can account for these effects (though I’m not sure it does). So if the USA institutes single-payer health care, and spends the $3,000 per person per year on something else, then since it’ll suddenly become cheaper to live in the US, PPP will rise by about $3,000/person.

    I’m fairly certain that neither measure accounts for taxes – nor should it, since government spending is part of the economy. I don’t know where government programs that aren’t strictly speaking money transfers, like education, go in the per capita income measures, but I know they figure into GDP and PPP.

  6. Axel says:

    Tim Worstall simply misrepresents the facts and the conclusions in the original report “The State of Working America” from the Economic Policy Institute. To correctly interpret the percentile-U.S. median comparisons the authors explain on p. 25:

    “Four countries—Australia, the United Kingdom, Finland, and Sweden—had household income at the 10th percentile, close to the 39% of the U.S. median. To the extent that these countries provide more social and economic support to their citizens than the United States, these numbers provide a somewhat incomplete comparison regarding the living standards of low-income people. Further in this chapter are figures regarding transfers and social spending, specifically regarding child poverty (Figures 8G and 8H) and health care (Figure 8I). Not surprisingly, high-income households were much better off in the United States (210% of the median income) than in the rest of the countries.”
    (Emphasis added)

    AFAIK “income” in the context of those studies means the total amount of goods and services that a person receives, services like public health and education are also counted in.

  7. Alon Levy says:

    Ah, so that could explain the discrepancy between what the study says and the UN data. The study also underestimates the level of inequality in the US (it gives the USA’s 2000 Gini as .368, whereas in reality it was .45-ish)… so if it turns out the UN fails to take social spending into account too, then it means the American poor do even worse in comparison to Swedish, Norwegian, and Japanese poor.

  8. Nietz says:

    Worstall was wrong, as the report’s writers pointed out. Inequality is corrected by Sweden through government transfers. The point of the report was that most economies have similar inequality but everyone other than the US corrects this through government. Only America’s poor actually live under such poor conditions.

  9. I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.

  10. Austin Beatty says:

    Lets look at the antionality of Norway and Sweden and see what we find. The only reason their socialism works is simply because it is at a small level and the majority of the population is one race and nationality. Their unemployment program allows an individual to stay unemployed for 5 years earning 95 percent of their previous wages. Lets try that in America and see what happens. Also if it wasn’t for capitalism, they all woul dbe speaking German. America has ppor because they choose to be poor. There is more opportunity in America then any other nation, and I am tired of hearing people thinking socialism would work. It can work on a small scale and only if their are more powerful nations who are capitalistc. Lets also look and see how much money Norway spends on their military. Hardly any, why becuase they have the big badd US to protect them. People do not see the whole picture, they just simply look at the numbers. I am damn proud that we work about a 30 percent more than Norway, that number wouldn’t hurt to even be a little higher.

  11. Thor Johnsen says:

    I grew up in Norway, but I have lived in US for the past 8 years, so I have seen both countries up close. You can collect unemployment for as long as you like in Norway, but the amount you receive is about 60% of your stated earnings from your last tax return. Consequently, if you stay on unemployment for an extended period of time, you take a 40% pay cut every year. This is apparently enough of an incentive for most people to get a job, because unemployment in Norway is currently around 3%. The Norwegian unemployment program is also good for the economy. A typical middle class family in Norway will receive 3 times more in unemployment income than their American counterparts. Consequently, most Norwegians manage to hold on to their houses and they don’t cut back their spending as much as Americans when they become unemployed, which means that when recessions hit they are not quite as bad in Norway as in America. I think this program would work well in US and do the US economy some real good.

    The remark that capitalism won WW-II for Europe is inaccurate. America won the war, not capitalism. The sitting president at the time was FDR and he introduced a number of wellfare programs including social security, which lead to the creation of similar programs in Europe. The Norwegian social security system was modelled after the American one. FDR was politically a blend between capitalism and socialism and that is, in my opinion, the best way to go for a society. You want some incentive for people to work, but you also don’t want them to fall to the pits of hell when their luck runs out. Bad things happen to good people all the time.

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