Op-Ed: A Better Yardstick for Measuring Inequality

By Sam Pizzigati, Editor, Too Much

We always get what we measure.  And if we measure inequality with a yardstick that only wonks can decipher, we’ll end up with a society too confused about inequality to do anything meaningful about it.

Just 85 of the world’s billionaires, the anti-poverty group Oxfam reported earlier this year, hold as much wealth as the entire bottom half of the world’s population, 3.5 billion people in all.

Seven of every ten people on earth today, Oxfam added, live in nations where inequality has jumped since the 1980s.  Our richest global 1% currently own a whopping 46% of world wealth.

We can’t blame Corrado Gini for this incredibly extreme global divide.  He never set out to create inequality.  He just tried to measure it.

This eminent Italian sociologist once ranked as one of the world’s premiere statisticians.  Almost exactly a century ago, he developed what would become the most widely accepted default statistic for measuring inequality, a yardstick now commonly known as the “Gini coefficient.”

In Gini’s formula, a society where one person grabbed all the income would have a value of one.  A society with all income shared evenly would have a value of zero.

No nation, of course, has ever had either absolute income equality or absolute income concentration.  Most nations end up with Gini numbers like 0.57, the Gini rating for the United States last year, or 0.49, the Gini for Japan.

A rise or fall of a mere 0.1 in Gini values can signify a major change in income distribution.  But these abstract numbers mean nothing to the general public and, consequently, essentially do nothing at all to raise inequality’s political profile.

The Gini numbers have other problems as well. Gini ratings say a good bit about a society’s overall level of inequality, but offer no clue about what’s driving changes in that level.  Are the rich grabbing more or less of the income pie?  Are the poor losing ground?  Or households in the middle?

On questions like these, note inequality-watchers Andy Sumner and Alex Cobham, “the Gini won’t be a great deal of help.”

Sumner, the co-director of the International Development Institute, and Cobham, a Center for Global Development researcher, are beating the drums for a new inequality yardstick created by Gabriel Palma, a Chilean economist now at Cambridge University.

In almost every society, Palma’s research shows, the income share of people who make less than the most affluent 10% and more than the poorest 40% tends to remain fairly stable.  Substantial shifts in income share typically only turn up in that top 10 and bottom 40, not in the middle 50.

The “Palma ratio” addresses this volatility by defining income inequality as a ratio between the top 10 and bottom 40.  In a society with a Palma ratio of 4, the top 10% is grabbing four times the income of the bottom 40%.

This simple relationship gives every Palma ratio figure a readily understandable meaning.  Where the Palma ratio has gone from 2 to 3, households in the top 10% went from making double the income of that society’s poorest 40% to making triple the share.

So last March, 90 noted social scientists urged a key UN economic development panel to place the Palma ratio front and center.  The top 10-bottom 40 inequality that Palma measures really matters, they argued.  Nations with shrinking Palma ratios, as researchers detailed, turn out to be three times better at reducing extreme poverty and hunger than nations with rising Palma ratios.

Nobel Prize-winning pro-worker economist Joseph Stiglitz endorse Palma’s yardstick, too. Stiglitz and co-author Michael Doyle are asking world leaders to add a ninth goal — eliminating extreme inequality — to the eight the UN adopted in 2000.

Top-heavy income distributions, Stiglitz and Doyle note, “undermine both political equality and social stability” and generate chronic underinvestment in infrastructure, education, and other public goods that make for “long-term economic prosperity.”

Stiglitz and Doyle, a former UN assistant secretary-general, suggest a specific target for ending these top-heavy distributions.  By the year 2030, the two analysts advise, all nations should have their top 10 percents taking in no more income than their bottom 40 percents, a Palma ratio of just 1.

Scandinavian nations already at or near this 1:1 ratio, the pair adds, benefit from an “equality multiplier” that makes them more “equitable and stable” economically and more “efficient and flexible” as well.  “Sustainable development,” Stiglitz and Doyle sum up, “cannot be achieved while ignoring extreme disparities.”

And shoving Gini aside for Palma might make that ignoring all the harder.

-PAI

Veteran labor journalist Sam Pizzigati edits Too Much, an online weekly publication about income and inequality, sponsored by the Institute for Policy Studies, a Washington, D.C., think-tank. E-mail: editor@toomuchonline.org