The Inequality GINI and Wishing

"....a dangerous and growing inequality and lack of upward mobility" is "the defining challenge of our time." So said the President in a Dec. 4 speech at an event hosted by the Center for American Progress. He also stressed that increasing inequality is a "decades-long trend"—

Robert Grady notes that here Obama had struck out on his own, breaking from every other president since the Second World War in placing inequality above economic growth as the "organizing principle of U.S. economic policy." And, as so much of the President's proclamations, none of this quite fits.

Grady is a managing director at the private-equity firm Cheyenne Capital Fund and he wrote an editorial in the WSJ recently on the topic stimulated by this December 4th speech. He is, perhaps significantly, the chief economic adviser to New Jersey Gov. Chris Christie and chairman of the New Jersey State Investment Council and certainly has his motives. Here is a summary of his presentation:

The Gini coefficient is the most commonly used measure of income inequality but its data ignore America's highly progressive income tax system, government benefits and transfer payments. Lee Ohanian and Kip Hagopian point out in their seminal paper, "The Mismeasure of Inequality" (Policy Review, 2011), that Gini uses 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. If those missing elements are included, they write, "inequality actually declined 1.8% during the 16-year period between 1993 and 2009, when the Gini coefficient dropped from .395 to .388." A recent study from economists at Columbia University  found that already enacted benefits and tax programs have reduced America's effective poverty rate by 40% since 1967—to 16% from 26%.

The Congressional Budget Office released a study that came to a similar conclusion in October 2011. The CBO study picked an artificial starting point of 1979, in a period of stagflation. Yet it still showed that family income, including benefits, on average experienced a 62% gain above inflation from 1979 to 2007. It also showed that all five quintiles of the income distribution spectrum experienced real gains in family income.

With respect to upward mobility, longitudinal studies conducted by the U.S. Treasury have found that there was "considerable income mobility" in the decades 1987-1996 and 1996-2005. For example, roughly half of those in the bottom income quintile in 1996 had moved to a higher quintile by 2005.
Grady's bottom line: "In periods of high economic growth, such as the 1980s and 1990s, the vast majority of Americans gain, and have the opportunity to gain. In periods of slow growth, such as the past four and a half years since the recession officially ended, poor people and the middle class are hurt the most, and opportunity is curbed."

This is borne out when looking at the various periods in the last decades. Median family income fell, in real terms, by 5.7% from 1974-1982, during slow growth and high inflation. Tellingly, in this period, real income fell for the bottom four quintiles, but held steady for the top 20%. But from 1983 to 2007 median family income grew substantially—by 21.6% above inflation—and real income grew for all five quintiles. Then, beginning in 2008, real income plunged again, both for the median family and for all quintiles.
Grady summarizes: "If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth—not income inequality or the redistribution of wealth—is the defining challenge of our time."

Mr. Obama continued in his speech to proclaim the need for government "investment" to encourage good jobs and infrastructure. Yet a recent analysis by BCA Research shows a sharp drop in real spending by the government on non-defense infrastructure since the president took office. When a Democratic Congress passed the president's massive $800 billion stimulus bill, seven-eighths of the total went to transfer payments like Medicaid, food stamps and sending a check to millions of Americans who do not pay income taxes. And ACA's employer mandate discourages full-time employment. For most of this year, the overwhelming majority of jobs added to the U.S. economy have been part-time, not full-time. Gallup's payroll-to-population ratio, the proportion of the American population working full time, has dropped almost two full percentage points in the last year, to 43.8%.

Like global warming, income inequality is a new scourge and it may take some time for the rest of us to get up to speed on its behavior and characteristics. But accuracy and specifics will help. Yet, as we have learned, ideology usually gets in the way of facts. And no politician will allow reality to impair his narrative, even if that narrative hopes for the worst.