Consider two facts about India. Fact No. 1: Every year, nearly 4,000 people die in the Mumbai commuter train system, most because they fall out of overcrowded cars in the cheap standing-room carriages, or try to hold onto the outside of the train to avoid paying the fare. Fact No. 2: According to an international survey of rental prices released earlier this month, Mumbai is the world’s sixth most expensive place to rent an apartment, falling just behind London pricewise and well ahead of Paris and Rome.
Now add to these a third fact: Measured by the Gini index—the standard yardstick of inequality and the number that’s being referred to whenever you read that, say, the Scandinavian countries are “more equal” than the United States—India is substantially more equal than the United States. It is also a little bit less equal than Israel and Japan. If you rank the countries of the world from most to least equal by the Gini index, India falls just a little behind Italy.
As the election season heats up, we hear ever more discussion of the problem of inequality, much of it driven by the assumption that growing inequality is creating an American underclass—you know, those folks clinging to guns and religion because they’re falling behind. These odd facts about India highlight a couple of points about inequality that tend to get buried in the debate. Measuring inequality, or what most people think of as inequality, is not simple. And, perhaps more importantly, the standard measure of inequality tells us a lot less about poverty than we might think or hope.
To see why, let’s look a little bit into the mathematics of inequality. The Gini index is a number that expresses the proportion of income that goes to people on various steps on the economic ladder. In a country in which everyone has exactly the same income, the Gini coefficient will be zero. On the other hand, in a country in which all the income goes to one person, the Gini coefficient will be 1, and the Gini index will be 100 (technically, it’ll never reach the perfect 100, but it’ll be incredibly close). In real life, the United States has a Gini index of 45, and Norway’s is 28.
This is useful information, and by common-sense measures, Norway probably is more equal than the United States. But here’s a thought experiment: Imagine that in some post-apocalyptic, global-warming-induced future the United States breaks up into a bunch of independent minifiefdoms.
One of these fiefdoms will be the Republic of Missoula, where 10,000 people live. Of these, 8,000 are getting by on $20,000 a year, or its equivalent in lentils and steel rods. Two thousand people, however, are doing much better. They’ve maintained a very comfortably upper-middle-class standard of living, with an income of $120,000 a year each.
Not far from the Republic of Missoula is the Principality of Sun Valley, where some part of the remaining über-class has built a series of fortified enclaves. A full 6,000 of Sun Valley’s 10,000 residents are rich. Let’s say they have the post-apocalypse equivalent of $300,000. The other 4,000, however, have nothing except for the alms they manage to beg at the side of the computer-controlled ski lift. Their income is essentially zero.
Now, which of these two states, the Republic of Missoula or the Principality of Sun Valley, would you say is more equal? My inclination, and I suspect most people’s, will be to say that Missoula is the more equal of the two; you might feel differently. But either way, the Gini index will not help us, because in both of these cases, the Gini index is exactly the same. (For the mathematically inclined, both will have a Gini index of 40—less equal than India’s 36.8 but more equal than the United States’$2 45.) The problem here is that Gini index alone does not yield enough information to indicate what proportion of a country’s people are poor—even if we know the country’s total income. A measure omitting that crucial concept doesn’t get to what people really mean when they talk about inequality. Take it out, and most of the rhetoric about inequality loses its soul.
So if the Gini index doesn’t really tell us very much about poverty, what is this measure of inequality good for? Well, in the case of real-world countries, which are less stratified than our post-apocalyptic mininations and have incomes that rise more smoothly as you move up the economic ladder (rather than taking a sudden jump), the Gini index will indeed yield a sense of how steep that rise is. And so it is useful as a measure of a fairly narrow kind of inequality, the difference in income of a typical person from the income right above and below him. Think of this in the real world as the difficulty of keeping up with the Joneses.
How important you think this is will depend in some part on how important you think it is to keep up with the Joneses. But it also may depend on whether you are an economist. The American economist most associated in recent years with concern over inequality is Cornell professor Robert H. Frank, author of The Winner-Take-All Society. Frank points out that while neoclassical economists think that more is better, many people, when asked if they would rather make $110,000 while their neighbors make $200,000 or $100,000 while their neighbors make $85,000, will choose the second. They would, in other words, rather have less if they will have more than the folks around them.
Or at least they say they would. But the question itself is loaded, because it presumes a much greater ability to look into the neighbor’s wallet than people actually have. Economists are in the business of measuring the average bank account; noneconomists are not. I often have lunch in a restaurant near my apartment that looks surprisingly fancy (it was featured as a luxe Los Angeles restaurant in the movie Garden State, even though it’s actuallyin Brooklyn, N.Y.). I sit by a huge indoor pool, by a floating boat filled with flowers, under a skylight. The lunch special, including an appetizer, is $7.50, or $8.50 with a shrimp dish. I don’t know if the people at the next table are millionaires or spending their last $10.
Both are possible. When economists talk about inequality, they are talking about something that can easily be captured in an equation about national income. When noneconomists talk about inequality, however, they have in mind not their neighbor’s wallet, which they can’t see, but their own, which they can. They are thinking of what they can and cannotafford, and also of the most visible extremes of wealth and poverty around them. That’s why India’s Gini index may be lower than our own, and yet it will be the rare person who will say that India is more equal in any sense that matters. When we talk about inequality, it’s not about resentment of the next door neighbors’ pool. It’s about gut issues: whether we feel poor, whether we feel that those around us are poor. That’s why it’s worth thinking about in the first place. Unfortunately, the usual way that economists talk about and measure inequality tells us next to nothing about it.