Moneybox

How Bad Is the United States at Reducing Income Inequality?

A symbolically handy yacht parked outside of Washington, D.C.

Reuters

A couple of months ago, I posted a chart that I thought nicely illustrated just how little the United States does to combat economic inequality compared with the rest of the developed work. Based on data from the Luxembourg Income Study Center, or LIS, it showed that market incomes—the money people earn from working and investing—aren’t much more skewed stateside than elsewhere. Measured by the Gini coefficient, which rises toward one as incomes in a nation become more unequal, our overall distribution is similar to what’s found in super-egalitarian Scandinavia, for instance. The difference is that other countries do far more to redistribute resources. And so, after the government gets done with taxes and transfers, U.S. inequality remains unusually high.

This week, LIS’s Janet Gornick and Branko Milanovic released a short report complicating that conclusion a bit. If you look at people of all ages, they find, market income inequality indeed isn’t much higher here than in Europe. And, as shown by their updated version of the original chart, we also appear to be extremely lax about redistribution. 

If you only look at individuals younger than 60, however, things change. Our Gini for market incomes is third highest on the list, and significantly larger than what’s typical of Northern Europe. When it comes to redistribution, meanwhile, we’re “squarely in the middle of the pack.” We do relatively more than countries like Spain or Greece, but less than Germany or Denmark.

Why does nixing senior citizens from the analysis change the outcome so dramatically? Milanovic and Gornick note that Americans older than 60 are much more likely to have high market earnings compared with their peers overseas. In other words, they don’t retire, possibly because Social Security benefits aren’t exceptionally cushy. The fact that more of our elderly are working instead of living off the welfare state makes our market incomes look more even across the board, since we have fewer grandparents who are living their lives while earning nothing. When you cut all of those Americans who plan to die at their desks out of the calculation, and just focus on people in their prime working years, it becomes clearer that U.S. incomes really are unusually disparate.

In some ways, I think Gornick and Milanovic might be overstating the degree to which the U.S. actually redistributes income compared with its peers, in part because their measure of post-tax-and-transfer income doesn’t include government health care benefits. For instance, Canada looks like it lowers its Gini by about the same percentage as we do. But given that our northern neighbors have a universal single payer system while we have a patchwork of programs that still leave many uninsured, it seems a little strange to argue that they aren’t doing any more to reduce the effects of inequality.

That’s mostly a quibble, though. The point to remember is that the U.S. economy creates an unusual amount of inequality on its own, but we don’t go to unusual lengths to fix it.