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How special is American inequality?
Will Wilkinson writes:
I was surprised to discover that U.S. market income (i.e., pre-tax) inequality is lower than the U.K.’s, the same as Germany’s, and only slightly higher than Sweden’s...
Check the graph at the link. Will continues:
This is from Brandolini and Smeeding’s 2007 “Inequality Patterns in Western-Type Democracies: Cross-Country Differences and Time Changes” [pdf]. While the U.S. pre-tax Gini is still on the high side of the median of these 16 OECD countries, it is remarkable how much differences in tax and transfer policies push the U.S. to the top in inequality in disposable income. This is striking to me because, at a glance, it suggests that the U.S. is not all that distinctive in the way the basic structure of the economy affects the distribution of market income. Unions in Germany and the U.K. are rather more powerful than in the U.S., but (again, at a glance) appear to do nothing to reduce inequality relative to the U.S. Of course, eyeball empiricism isn’t dispositive. But it seems to me to fit pretty well with the weak effect of the relationship between declining unions and rising inequality found in other research, and suggests that the structure of basic American political-economic institutions is not especially conducive to inegalitarian outcomes.
My take: This is all well worth knowing, and it does help counter the view that growing inequality of income is a poliical conspiracy. But oddly both the critics and the defenders here are missing one major inequality-related difference between Germany and the United States, namely social norms. We have weaker families, weaker social pressures to conform, deeper bayous, and as a result more flat out lunatics, losers, and violent psychopaths. (Did I mention we also have more innovation?) That's inequality too, though the usual political recipes aren't likely to provide the cure.
Addendum: One very eminent source emailed me and he wishes to stress that the (relatively) high level of the European Gini stems from higher levels of unemployment, whereas the relatively high level of the American Gini stems from the rich being very rich. He points out that although the final Ginis may be similar, the underlying patterns are very different and it would be misleading to conclude that America and Germany have ended up at the same pre-tax point. This is absolutely correct, my apologies if the post created a misleading impression.
Posted by Tyler Cowen on October 18, 2007 at 06:00 AM in Data Source | Permalink
Comments
"more flat out lunatics, losers, and violent psychopaths."
Maybe not more but you do tend to give them their own TV shows and buy more of their books. ;)
Posted by: Finnsense at Oct 18, 2007 6:29:04 AM
It seems to me that this actually reinforces the idea that inequality of income is a political conspiracy. If politics were not a factor, that politics did not result in a redistribution from the poor to the wealthy, then we would expect that post-tax income inequality would be at least no worse than pre-tax inequality. Instead it seems that a large part of the inequality is introduced by the tax-and-spend system. Libertarians should be just as outraged by regressive government transfers as by progressive ones. We should not reflexively embrace inequality for inequality's sake. Simply because socialist hate inequality and libertarians hate socialists, therefore libertarians should love inequality. We would like to think that the particularly high level of inequality in the US is just a product of our freer markets and our lack of a robust socialist state, so libertarians embrace our levels of inequality as an odd sort of badge of honor.
Posted by: nelziq at Oct 18, 2007 6:38:15 AM
"We have weaker ....pressures to conform": are you quite sure?
Posted by: dearieme at Oct 18, 2007 7:02:57 AM
yeah, I agree with dearime's sentiments.
I think there is intense pressure in the United States to become successful materially (to become part of a respectable profession and earn a solid income).
I just don't sense that from my travels in Italy.
Posted by: thehova at Oct 18, 2007 7:26:50 AM
The before and after fiscal transfers statistics have always been the most succinct way to understand the differences between the US and the social-democracies in Europe. People in the US know that they have to take care of themselves, and the system rewards that; thus pre-transfer inequality is lower in the US. In Europe, people understand that transfers will lower inequality, and so they tolerate more pre-transfer inequality. The final result is all that matters in my book. (Also note that these statistics do not capture the stress of self-sufficiency in the US, and I consider that a major drawback to life in the US.)
From behind the Rawlsian veil, I prefer the greater security and solidarity of Europe. (I am also a white, male graduate student doing VERY well in the US system -- the case for Europe is far stronger for those who are not so lucky!)
Posted by: David Zetland at Oct 18, 2007 7:55:23 AM
finnsense and dearieme have questioned two of your assertions, so...
"weaker families"? Divorce rates in the US are high, to be sure, but perhaps because so many nordic types don't get married to start with because they are under less social pressure to conform to marital norms.
I'll give you the deeper bayous though.
Posted by: tom s. at Oct 18, 2007 8:08:09 AM
THIS IS ONE OF THE BEST SITE I HAVE COME ACROSS.
Posted by: UDAYKUMAR at Oct 18, 2007 8:09:32 AM
I'm deeply lost. How do "differences in tax and transfer policies [that] push the U.S. to the top in inequality in disposable income" "counter the view that growing inequality of income is a political conspiracy"? Aren't tax and transfer policies political decisions?
Posted by: eriks at Oct 18, 2007 9:03:04 AM
While I grant some initial intuitive plausiblity to the "more lunatics, losers, and violent psychopaths" assumption, is there any actual trustworthy data on this topic?
Posted by: Brian Doherty at Oct 18, 2007 9:29:50 AM
Unless I'm mistaken, the reason "differences in tax and transfer policies push the U.S. to the top in inequality in disposable income" is not because US tax policies are regressive but more because European tax policies are simply more progressive. So maybe the problem is we just don't have enough of a political conspiracy to reduce the after-tax income disparity to European levels.
Posted by: mraver at Oct 18, 2007 9:39:45 AM
I don't find this convincing.
It seems to me that there should be more income inequality in America because there is more ethnic and racial heterogeneity in America. We have ethnicities that do especially well, like Jews and Asian immigrants, and ethnicities that do relatively poorly, like the descendants of slaves. And that may also have an impact on inequality. So its not our system but our population. On the other hand, I would think that our less progressive tax structure would tend to make the pre-tax distribution of income more egalitarian than it actually is. That is, when the tax rate on rich doctors and lawyers is lowered, the supply of rich doctors and lawyers increases, reducing the pre-tax wages of these professions. So our pre-tax distribution of income might look a lot more egalitarian because our taxes and subsidies aren't as egalitarian as other nations'.
Posted by: steve at Oct 18, 2007 9:48:55 AM
I work in North Dakota now and then and so I have look at certain stats for that state and if you do that, many of the areas where the USA lags Europe, North Dakota does not lag Europe. Could it be the racial make up in the USA is the main difference between us and Europe and that all of the socialism (and gun control etc.) really has little affect?
There seems to be little poverty in Fargo and Grand Forks also the crime is low etc. Would Norwegians in Norway fall into poverty with out the extensive welfare state? Could it be that the welfare state in Norway only functions so well because the country is full of Norwegians?
Posted by: Floccina at Oct 18, 2007 10:29:14 AM
Why has socialism not solved these problems:
http://www.guardian.co.uk/australia/story/0,,1802705,00.html
“The damning figures also show that 70% of the Aboriginal population, who number almost 500,000, die before the age of 65, compared with 20% of non-indigenous Australians. The average life expectancy for Aboriginal men is 59, compared with 77 for non-indigenous males, according to the report by the Australian Institute of Health and Welfare.”
http://www.cbc.ca/story/canada/national/2005/04/11/UNNatives-050411.html
“Life expectancy among the Inuit is 10 years lower than the rest of Canada.”
http://findarticles.com/p/articles/mi_m0PCG/is_2002_Sept/ai_105657385/pg_4
“In New Zealand the difference between Maori and non-Maori life expectancy was 8.1 years for males and 9.0 years for females. The situation in Australia, even allowing for some variability in the reliability of the estimated life expectancies, was dramatically worse, with differences of 21.5 years for males and 20.0 years for females. Indigenous Australians can expect to live only around three-quarters as long as all Australians. Maori, on the other hand, have an expectation of life about 90 per cent of that of non-Maori.”
http://www.guardian.co.uk/medicine/story/0,,1691741,00.html
“For here in this multi-deprived inner city area, the average life expectancy of a male is just 53.9 years. In Iraq, after 10 years of sanctions, a war and a continuing conflict, suicide bombs and insurgency, the average man has a good chance of making it into his 60s; the life expectancy of a male there is 67.49. In Iran it is 69.96, in North Korea, 71.37 and in the Gaza Strip it is 70.5.
Statistics recently revealed that the Calton ward has not just the lowest life expectancy in the United Kingdom and Europe but of many areas of the world. A child born in the Calton - locals always prefix a "the" to Calton - arrives into an environment saturated by drink, drugs, smoking and poor diet. A baby girl has more of a chance of survival - her life expectancy at birth 74.8.”
http://www.theage.com.au/articles/2004/04/27/1082831568285.html
http://www.encyclopedia.com/doc/1G1-105657385.html
Posted by: Floccina at Oct 18, 2007 10:34:25 AM
I come from Sweden and for me there is no doubt that there is much less pressure in the US to hold certain opinions and do certain things than here. Don't confuse the fact that you may like the values better in other countries for the social pressure being less rigid. I must say, having lived in other European countries aswell, that we have much more social opressiveness going on here than in the US. The only country where I have felt close to the US in openess is the UK.
Just adding my 2 cents, it's not based on any serious studies.
Posted by: Erik at Oct 18, 2007 11:20:48 AM
"Why has socialism not solved these problems:"
Australia is not even close to socialist (whatever you mean by that). Neither is it clear that socialism should stop people smoking, drinking, being violent and doing drugs.
I wish people on here would stop using the term socialist. The US takes 25% of GDP in taxation, the UK takes about 35% and Denmark takes about 50%. If we Europeans are socialist then the US is too, just to a lesser degree. In actual fact we are all free market capitalist economies that enjoy a high degree of economic and social freedom.
Posted by: Finnsense at Oct 18, 2007 11:21:13 AM
Erik, Tyler had a long post about how truly free the Sweedish people are. How deep inside, libertarians love Sweden and their welfare system.
Not saying that one of your perspetives is wrong. Its just interesting to get another perspective.
Posted by: anon at Oct 18, 2007 11:43:05 AM
Finnsense I like your answer becuase you point out some of the causes of inequalty that are not dependent on socialized medicine and other welfare programs. Now if is it not clear that socialism should stop people smoking, drinking, being violent and doing drugs, how much could it do to stop income ineqality since those items effect income ineqality.
Also I would not disagree with you statement "If we Europeans are socialist then the US is too, just to a lesser degree. "
Posted by: Floccina at Oct 18, 2007 11:44:57 AM
According to the way you measure it, whey you put together all European countries (for example, Switzerland and Lichtenstein on one hand and Portugal and Greece on another) inequality ends up being higher than in the US.
Posted by: Badger at Oct 18, 2007 12:16:07 PM
Correction: Depending on the way you measure it, whey you put together all European countries (for example, Switzerland and Liechtenstein on one hand and Portugal and Greece on another) inequality ends up being higher in Europe than in the US. Example:
http://www.businessweek.com/the_thread/economicsunbound/archives/2005/11/is_europe_reall.html
Posted by: Badger at Oct 18, 2007 12:22:25 PM
My theory: Every country tends toward the same Gini, independently of their social/political/economic system. Deviations from that 'natural' Gini (I don't yet know exactly what it is) is an indicator of instability, not the "right" or "wrong" social or economic policies.
Posted by: M. Hodak at Oct 18, 2007 1:28:25 PM
Your addendum aptly illustrates the sheer lunacy of distilling an abstract, poorly-defined concept like "inequality" down to a single number.
Posted by: Noah Yetter at Oct 18, 2007 2:34:08 PM
Tyler,
Would you explain what you mean by weaker family ties? I lived in Germany 1/3 of my life and found Germans universally astounded at the emphasis Americans put on family over friends. In addition, not one of my friends (I'm 34) was married, engaged, or considering either. And children? No way!
Posted by: Kelly at Oct 18, 2007 3:19:03 PM
How could Socialism have "solved these problems?"
Are the objectives (political, economic or academic) of Socialism to obtain lessening inequality in "incomes" for the purposes of "more equitable distribution" of resources (goods & services)?
Is it possible that inequalities arise as reactions to the political and other forces (Socialistic) acting to cause distributions of goods and services on bases other than contributions to productivity?
Thus each and every action of Socialism brings forth an equal and opposite reaction?
Next:
The roots of (incomes) inequality? Many seem to have already evaluated that the God of the Declaration of Independence made a mistake.
How about productivity inequality; and the efforts of humans to shift their activities to areas of greater (or better) productivity - and consideration of the obstacles (social, cultural, political and economic) to such shifts Then consider the differences in those obstacles as they exist wthin various economic perimeters.
Posted by: R. Richard Schweitzer at Oct 18, 2007 3:39:06 PM
Mrayer writes: "European tax policies are simply more progressive." Is that true, and, if so, how much of an impact is attributable to it? European nations get a large percentage of their tax revenue from the VAT, which is regressive. Could it be that transfers play as much a role as tax rates? We devote far more of our tax revenue to military spending than the Europeans, leaving them, I suspect all other things being equal, with more to transfer.
Floccina writes: "I work in North Dakota now and then and so I have look at certain stats for that state and if you do that, many of the areas where the USA lags Europe, North Dakota does not lag Europe. Could it be the racial make up in the USA is the main difference between us and Europe and that all of the socialism (and gun control etc.) really has little affect?
There seems to be little poverty in Fargo and Grand Forks also the crime is low etc. Would Norwegians in Norway fall into poverty with out the extensive welfare state? Could it be that the welfare state in Norway only functions so well because the country is full of Norwegians?"
The same is true of Minnesota which is probably the healthiest state in the nation. I suspect it is partly climate (cold and snow reduce crime for instance), part rural / urban balance (more exercise, fresher air, less going to a bar after work) and the ethnic point you make may not be Norwegian-specific but the inhabitants of an ethnically or culturally homogeneous community may feel comfortable that way and that may have some benefits for their health and social stability, while those who don't like it select other places to live and reinforce the pattern.
Posted by: mt at Oct 18, 2007 3:46:18 PM
'How could Socialism have "solved these problems?"'
Socialism bravely solves problems not found under any other system!!!
(old Polish mock-slogan)
Posted by: notsneaky at Oct 18, 2007 6:07:43 PM
