The folly of the concept of income distributions
Michael Mahon
Last Thursday, as I sat in one of my friend's political science classes, I was reminded of how some people see the world through rose-colored lenses, or rather red-colored lenses. The professor was commenting on income distributions in some Latin countries, and she said they had not become "better."
A "better" income distribution. I almost gagged. I thought only wanna-be economists with honorary (fake) degrees from Harvard and positions in the Clinton Cabinet would use the adjective "better" when referring to income distributions. Most serious people grow out of such simplistic ideas, but I guess some of us do not grow as much as others.
Standard income distributions typically compare the amount of total national income earned by various segments of the population ranked by income. It is common for people like Labor Secretary Reich to refer to regions under the curve in quintiles, often also considering the top decile and percentile.
I could fill the Daily Bruin from here to page 40 with reasons why income distributions are hollow data and reveal next to nothing. I could go on to make ideological points about liberty and equality. But I would hate to crowd out Sports, A&E and the crossword puzzle, so here are just two basic realities about income distributions: First, regions under the curve do not represent real, temporal people; and second, income distributions reflect only relative incomes, not incomes in absolute terms.
To understand the first point, consider the shelf at Ralphs which has cans of chicken soup. If on day one there were 20 cans of that soup and two weeks later there were also 20 cans, one might assume that Ralphs does not sell much chicken soup.
But no! Ralphs does sell quite a bit of chicken soup, and why is that? Because the 20 cans you see two weeks later are not the same 20 cans from day one. Year by year income distributions look only at income levels, not actual people, which is analogous to looking only at the number of cans on the shelf.
If one understands the concept of stock flow, one can see how a particular picture of income distribution can be nearly meaningless. Income distributions do not tell the whole story of inequalities in income.
A popular myth frequently retold about the 1980s is that the rich got richer and the poor poorer, and income distributions are used to argue this point. But the fact is that the people whose incomes were in the bottom fifth in the early 80s were more likely to be in a higher quintile at the end of the 80s than in the same, lowest quintile.
As a matter of fact, those with incomes in the bottom fifth were more likely to move to the top fifth than were those with incomes in the top fifth likely to stay there.
A real insight into how low incomes are divided in America, as well as most of the world, can be gained by comparing age to income. Generally, young, inexperienced people have low incomes, middle-aged people, at the height of their lifetime productivity, have higher incomes, and old, retired people have low incomes.
This should not be shocking news. It explains much of what a standard income distribution looks like and it can hardly be considered unjust. One can more easily and more accurately assume from an "unequal" income distribution that marginally higher levels of productivity receive higher compensation than average levels of productivity, with productivity closely correlated to age and experience.
Although different conclusions can be drawn in cases of agrarian economies (this may excuse the professor in my friend's class), an unequal income distribution in an advanced, complex economy is a sign of a healthy, growing economy.
A second problem with the standard income distributions is that they consider only relative, not absolute incomes or wealth. Before prematurely deciding that a flatter income distribution is "better," one should consider (if one would prefer) that the lowest group of incomes be lower, provided the highest were more so, that is, relatively more low. In other words, would it be better or worse for the highest 10th to be getting 40 income units and the lowest a one (a ration of 40:1) or the highest getting 30 and the lowest a .9 (a ratio of roughly 33:1)?
In the former example the gap between high-income and low-income is substantially larger than in the latter, but one can see that both groups are unambiguously better off, that is, both have higher incomes overall.
Now, if we were to take the latter example, 30 vs. .9 income units, as an accurate representation of the income distribution at some fixed period in time, and then saw the former, 40 to one, as a representation of the income distribution at a latter time, then we would have to say that 40 to one is more unequal than 30 to .9, but it is just as clear that 40 and one means higher incomes for both groups than does 30 and .9.
If an income distribution changes over time such that it becomes more unequal, that does not mean that those on the lower end are any worse off. In fact, it is completely normal for the gap between highest and lowest incomes to widen while every group is improving in absolute terms.
So the next time someone speaks of income distributions, ask yourself if they are ignoring important realities about income distributions. Or are they assuming that you are too stupid to understand these realities or if they, like so many on the Left, are purposely choosing to disregard reality in favor of ideology.
And if it is a professor talking, consider what it means for you to have an ignorant or a condescending or an ideologically motivated professor.
Mahon is a senior majoring in political science. His column appears on alternate Wednesdays.