Who Cares About the Gini Coefficient?

 Pine Needles - photo by JoAnn Sturman

by Scott Sturman
 
The Gini Coefficient, named after an Italian mathematician, measures income inequality and wealth distribution.  The coefficient’s value ranges from 0 to 1, where 0 indicates equal incomes for all, while 1 signifies one single person receiving all income.  Why is this number important and how should it be interpreted?

Much comment has been made in the lay press and academic circles about an increasing share of the national wealth being concentrated in hands of a small portion of the population.  Few could disagree that under these conditions the prospect of sustaining a large, prosperous middle class is ominous, and at this rate the country is destined to become a land of oligarchs and paupers.  The concern seems to be substantiated by the United State’s Gini value of 0.469 compared to an average of 0.31 for the twenty seven European nations.  Numbers don’t lie, but they can be interpreted in a manner which misinforms.  Use of the Gini Coefficient is an example of how the Left claims to have objective evidence for government to forcibly increase wealth redistribution.    

Strong arguments can be made for closing tax loop holes and simplifying the tax code, but there is a misconception about the Gini Coefficient’s ability to measure the degree of the wealth maldistribution.  In fact it only considers one piece of the puzzle: cash income.  It is as if one were computing household finances and devising the family budget based only on gross pay from one’s employer.  It excludes all non cash transfers: Medicare and Medicaid benefits, capital gains, the worth of many forms of welfare like food stamps and public housing, employee benefits like health insurance, retirement benefits, and increased home equity.  As discussed in “The Mismeasure of Inequality” in Policy Review, when these items are considered, the Gini Coefficient computations are considerably less dire and have grown only 10% in the last twenty-nine years, the length of time this statistic officially has been used.

An even more accurate method of viewing wealth distribution includes taxation in the equation, which considers both inflow and outflow of resources.  This commonsensical view rightly establishes that wealth is influenced by all sources of income and taxation.  The Census Bureau’s comprehensive definition does exactly this, and when taking this into account, the modified Gini value of 0.388 in 2009 is 18% less than the original value.

As the general public becomes less familiar with math and science, crafty politicians assume a few facts and exotic formulas will make their points unassailable.  A number phobic society plagued by falling SAT scores is loath to challenge an argument made in the language of differential equations and integrals and more apt to accept its validity.

As intricate as a mathematical model may be, one must always ask, “What really is it measuring?”  Once this question is answered, it becomes evident using the Gini Coefficient in a limited fashion becomes a sophisticated way to dupe the public into making bad decisions based on limited facts.