## Friday, December 14, 2007

### More Fun and Sexy Economic Analysis for You

Courtesy of Paul Krugman who writes about the new income inequality measures on his blog. The data now available comes to 2005. This is how after-tax incomes grew from 2003 to 2005:

Bottom quintile: 2%
Next quintile: 2.4%
Middle quintile: 3.9%
Fourth quintile: 3.7%
Top quintile: 16%

Top 10%: 20.9%
Top 5%: 27.7%
Top 1%: 43.5%

And what does this econobabble mean in plain English? The bottom quintile refers to the poorest 20% of all earners. The next quintile refers to the 20% which earn more than the poorest 20% but less than all the other Americans, and so on. The top quintile consists of the richest 20% of the country.

(NOTE: A commenter in the thread called the following popularization effort "craptacular math illiteracy", and the person is correct in that the effort doesn't work. I was trying to figure out how to make the percentage increases more meaningful for someone who doesn't like statistics, but I used the wrong base in the attempt.)

One way of making sense of the percentages is to think of the people as being just one hundred income-earners and the gains in income of being an extra 100 chocolate donuts. In this version, the data tells us that the poorest twenty people got two extra donuts for the whole group, whereas the richest person (the top 1% equivalent) got 43 additional donuts. And half a donut over that.

Clearly income inequality is getting worse. Krugman links to an article which addresses the question whether income inequality increases more under Republican administrations. The answer appears to be an affirmative one, but the reasons for that are not quite clear. This is because the presidents' power to affect income inequality is usually seen to lie in tax and transfer policies, and these affect after-tax income inequality. But the article found that Democratic presidencies seem to be associated with less pre-tax income inequality. In other words, Democratic administrations were found to be correlated with less unemployment and greater Gross Domestic Products (the value of what the country produces within a year).

It could be that the Democratic administrations have just been lucky in terms of the general economic conditions. Or it could be that the macroeconomic policies the Democrats pursue are more likely to keep the economy strong. It could even be that Republican administrations want greater income inequality and let that determine the macroeconomic policies they pursue.