The Pope, the President and the Mayor on Income Inequality.

The Pope Francis, the President !ama and the "a#or $ill de $lasio complain a!o%t the dip in the middle of the income distri!%tion. The income share of the ver# rich in ind%striali&ed nations, variedl# defined as the richest ' to '( percent of the pop%lation are increasing while that of the middle class is decreasing. The changes in income distri!%tion are meas%red %sing the Gini coefficient. )f ever#one was receiving the same income, '( percent of the pop%lation will !e receiving '( percent of the income and *( percent of the pop%lation will receive *( percent of the pop%lation. )f graph showing the shares of income against the percentage of national income the# receive is a straight line as shown in the diagram. The greater is the ine+%alit#, the more the line depicting act%al distri!%tion will depart from the straight line, the poorest '( percent will !e receiving less than '( percent of income. The Gini -oefficient is the ration of lightl# shared area . to the area /.0$1. The Gini -oefficient has varied across nations and over co%ntries. )n the middle of twentieth cent%r#, ro%ghl# from '*2( to '**(, the share of national income of the top '( percent in the 3nited 4tates was less than it was !efore or after.' This was also the #ears when the marginal income ta5 rates were declining. F%rther, share of inflation 6ad7%sted income paid to local, state and Federal governments, have declined from '*8( to 2('(. For those earning more than 9:;(,(((, the share declined from 2* to 22 percent. For those %nder 92;,(((, it declined from 2( to '* percent.2 )nternationall# there is considera!le variation area (A+B). in Gini -oefficient among nations. http://en.wikipedia.org/wiki/File: <etherlands, German# and <ew =ealand had Economics_Gini_coefficient2.svg modest declines while 34, <orwa# and >enmark had increases slightl# a!ove that of E-> average of '.2. ?ooking at growth of real income, the !iggest gainers !etween '*88 and 2((8 are the top '( percent of earners in 34 and si5 other rich nations as also the middle classes in emerging co%ntries like -hina and )ndia. $eca%se of the pop%lation of )ndia and -hina, the world Gini -oefficient declined.:
'

Figure 1. Gini Coefficient: ratio of area A

4ee also m# earlier posting: http://www.scri!d.com/doc/'@*;;(@2'/)ncome6share6of6top6'6percent. . ver# reada!le introd%ction to 34 ta5 s#stem is ?eonard $%rman and Aoel 4lemrod, Taxes in America /<ew Bork: 5ford 3niversit# Press, 2(':1. 2 http://www.n#times.com/2('2/''/:(/%s/most6americans6face6lower6ta56!%rden6than6in6the68(s.htmlC _rD( : http://www.ft.com/intl/cms/s/(/2a(!8'@86@!c(6''e:6a2'@6(('22fea!dc(.htmlEa5&&2oFk4Ga H

The diagnosis is clear, the treatment is not. )s the increase in ine+%alit# in western nations an e5ample of wages leveling across nations as trade is li!erali&edC )s this inevita!le or can ind%striali&ed nations adopt policies to improve the middle classes witho%t resorting to protectionC )f so, sho%ld it concentrate on ta5 polic# or on ind%strial polic# to enco%rage to promote ind%stries that offer higher wages to !l%e color workersC 4ho%ld minim%m wages !e increased as agreed %pon !# the German coalition government and de!ated in 34 as a means to %plift the low earnersC Going !e#ond foc%s on market policies is the +%estion whether economic anal#sis and policies sho%ld !e val%e ne%tral. I4tandard economic reasoning ass%mes that commdif#ing a good 6p%tting it %p for sale 6 does not alter its character, market e5change increase economic efficienc# witho%t changing the goods themselves. . . . growing !od# of research confirms what common sense s%ggests: financial incentives and other market mechanisms can !ackfire !# crowding o%t nonmarket norms.I2 The a%thors refer to man# e5amples of how making a vol%ntar# transaction into a market one do not necessaril# make it efficient as !%#ers and sellers act differentl# The# point o%t to !lood or organs !anks working efficientl# when contri!%tions are vol%ntar# and the a!s%rdit# of %r!an rich proc%ring right to have a second child in -omm%nist -hina !# pa#ing a fi5ed !%t steep fine. This seems to !e one wa# to interpret Pope FrancisJs criti+%e of Iidolatr# of mone#.I P%!lic polic# in a democrac# cannot !e separated from political concerns. The ine+%alit# of income will have to !e addressed in the coming #ears. Kama L. Kamachandran http://www.vis%aleconomicanal#sis.info/inde5.html Face!ook :Kamanomics -op#right M2('2 Kama L. Kamachandran

"ichael A. 4andel, I"arket Keasoning as "oral Keasoning: Nh# Economist 4ho%ld Ke6engage with Political Philosoph#,I Journal of Economic Perspectives Fall 2(':. p.':2.