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LQD Gini Coefficient Explanation?

by melo Fri May 2nd, 2008 at 09:04:45 PM EST

Even after great neuronal sacrifice trying to make sense of Bondad, Jerome and the other financial gurus in blogistan, I confess myself still more than a tad mystified when it comes to deciphering the likes o' this:

Grand Theft: Economy IV | The Agonist

This leads to a phrase that you've been hearing more of over the last year, and will start to hear stated in the top down media: the Gini Co-efficient. It is another creeping colonization of mesoëconomic explanations into the macroëconomic environment.

Let's take this a step at a time. In microëconomics, the distribution of income does not matter, because, in theory, those who have deserve, or will lose it soon enough if they don't. In macroëconomics, the distribution of income doesn't matter, because aggregate supply and demand are aggregate supply and demand, and, if their is a maldistribution, it will show up as a drop in aggregate demand, a decrease in aggregate supply, at which point either production will drop, as demand drops, or prices will increase, as supply decreases over demand, or, in the worst case scenario, there will be a deflationary spiral. The net of this is to a classical Keynesian, the rich being to rich is a problem that will show up in aggregate measures and the government sector can correct this by taxing, spending, borrowing, or some combination of the above. Money, in macroëconomics, doesn't matter.

My gut tells me to persevere, Stirling Newberry can ring so true, when I do understand, that is...

more below


But what if it does? And what if, as is happening now, the wealthy can keep themselves busy and isolated from everyone else, and produce enough churn to create the illusion of an expanding economy?

Why then you can get a situation where the macroëconomic indicators are sufficiently stable not to call for government intervention - or worse to call for bad government intervention, like mailing partial rebates on the inflation tax, or large war spending bills - and exacerbate, rather than ameliorate the effects.

Now what is happening in open economy macroëconomics is that the economy is shifting from producing non-tradables like houses, to producing tradables at rates the global economy will pay for. Exports are where the effort is going to go. A rule of thumb from studying the neo-liberalization of other economies - developing economies, because effectively the US is becoming a developing economy - is that it costs 1% of GDP to convert 1% of GDP. Since this is often converting 1% of GDP from internal consumption to exports, and 1% of cost comes out of internal GDP as well, this means that the lower half of the economy takes a 4% hit - 2% doubled, since they are half of the economy - each year of conversion, and only sees an improvement when the exports start improving standards of living. So this generally means a 4% hit, a 2% hit, but that piles up for the entire conversion period, which is often 4-10 years (I'm looking here at Boliva, Columbia, Ecuador, Argentina, Indonesia, Vietnam, China and Russia as examples. If someone wants to pay for a year of my life to produce the doorstop statistic survey, I'm game.) Which is why neo-liberalization is generally unpopular with domestic populations. Worse if they get Thatcherized, and they see only about half of the benefits of exports, because foreign investors are taking half.

To summarize this, what Bill Clinton did to Russia and Argentina, Bush is doing to America. "And it's worked out pretty well so far." To quote the tag line from Iron Man. Open your eyes, the solution is not laborite socialism, nor a return to a slightly less nasty version, but a fundamentally different road.

I bet some here will be able to explain this using apples and oranges, sigh...


The Gini coefficient is a measure of inequality - basically a measure of how far a society's income distribution diverges from equality.  So a society where everyone has equal income has a Gini coefficient of 0, and a society with a vast class of poor peasants toiling for a small class of ultra-rich who fly around in private helicopters to avoid the resulting violence has a Gini coefficient of around 0.55 (to take the example of Brazil).  A rising Gini coefficient is a sign of moving further towards the latter type of society.

NeoLiberal economic "reforms" in western societies are strongly associated with an increase in the Gini coefficient.  That's certainly the experience of places like New Zealand and the UK.  The rich get richer, and the poor get screwed.

by IdiotSavant on Fri May 2nd, 2008 at 09:16:46 PM EST
thanks savant, wow that was quick...

insomniac night, here it's 3 am+, what time you got there in NZ?

anyway, that's a great summation, i understood it perfectly, first time around.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Fri May 2nd, 2008 at 09:27:28 PM EST
[ Parent ]
13:30.  When in doubt, assume GMT-12.

As for the rest of the piece, its basically saying that the US is transforming its economy, and the costs of that transformation are falling entirely on the poor.  meanwhile, the top 5% make out like bandits, and everything looks fine to them.

In 1789, such a situation led to the guillotine.

by IdiotSavant on Fri May 2nd, 2008 at 09:40:11 PM EST
[ Parent ]
... is that Stirling is confused.

He is trying to square a circle in terms of fitting reality into a microeconomic / macroeconomic picture where both the microeconomics is wrong and the macroeconomics is wrong.

If "in macroeconomics, in theory, money doesn't matter", throw out the theory you are using, and get one that is suitable for an economy like the ones we are living in. Of course money matters. Its only in a fantasy world, or, alternatively under economic institutions that tend to result in full employment, that money can possibly "not matter" at the macroeconomic level.

In the real world, macroeconomies are affected by the creation of money, whether via spending by national governments or via the creation of credit money through lending by commercial banks (and any other depository institutions whose liabilities function as money).

And its a pure fantasy world in which money does not matter at the micro level for monetary production economies such as ours.

Recognizing that the marginalist macro and marginalist micro is not the sum total of what is going on in the economy is an admirable thing ... however doing it by ceding each their chosen ground and carving out a middle ground where money does matter leaves me constantly saying "yes, but" as I read, because marginalist macro is also not the sum total of macro, and marginalist micro is also not the sum total of micro.

So while there certainly is a middle ground that they fail to completely explain, that failure to completely explain runs the gamut from the lowest micro level to the most generic abstract model of an actual monetary production economy.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat May 3rd, 2008 at 02:34:56 AM EST
thanks bruce, i think i dimly understand what you're saying!

plugging away...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat May 3rd, 2008 at 01:14:37 PM EST
[ Parent ]
Is Gini Index Important?

Rutherfordian ------------------------------ RDRutherford
by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Sat May 3rd, 2008 at 02:59:01 AM EST
... the be-all and end-all measure ... but we knew that already, because there is no be-all, end-all measure.

Consider the real question: if there were two countries, both with an average income of $30,000, and one had a high Gini co-efficient (high inequality), and the other a low Gini co-efficient (low inequality), which one is more likely to have political choices distorted by the preference of the wealthiest few? And which one likely has the higher median income?

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat May 3rd, 2008 at 06:53:52 PM EST
[ Parent ]
So this is a REAL question?
And which one is likely to have rent seeking activities by those that claim victimhood (in a democracy)?

So why is higher median income so important, although it could be slanted so that a high average but the same median income?

Anyway, good points Bruce...

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Tue May 20th, 2008 at 04:57:09 PM EST
[ Parent ]
A very readable introduction to Gini and other inequality measures is in this STICERD WP by Frank Cowell.
by Sargon on Tue May 6th, 2008 at 05:12:14 AM EST
[ Parent ]

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