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Inequality wars fraught with ideology

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TORONTO — Andrew Coyne certainly raised hackles with a recent National Post column. Drawing on a TD Economics report, he noted that the rise in Canadian income inequality stopped in 1998. Since then, the income of the bottom fifth has grown by 20 per cent, while the income of the top fifth has grown by 18 per cent.

The response was rapid. Former NDP leader Ed Broadbent wrote an indignant letter to the editor, and the paper published an op-ed rebutting Coyne within days of his original effort. But probably the most comprehensive criticism came from economist Miles Corak, courtesy of two long blog posts.

Corak has a number of beefs. One of the biggest is the TD study’s reliance on the Gini coefficient as a measure of inequality.

A bit of background. The Gini is the brainchild of a 20th century Italian statistician, not TD Economics. And it’s been in widespread use for decades. The World Bank describes it as "the most commonly used measure of inequality."

Still, that doesn’t make the Gini perfect. For instance, it can be moved by social developments that are unrelated to the workings of the economy.

An example would be changes in household structure. The significant rise in the incidence of single-parent families increases the level of household income inequality. However, that’s a by-product of social change rather than the function of an inherently more polarized economy.

Corak has different concerns about the Gini. He believes that, in Canada’s current circumstances, it underestimates inequality. His rationale has to do with the mechanics of its construction, which he describes as "not sensitive to changes in the extremes of the income distribution." Accordingly, he believes the Gini should be supplemented with other measures.

One of his preferred supplements is the relationship between average and median incomes. By definition, the median mutes the effect of extremes, whereas the average doesn’t. So if the average is rising faster than the median — which it has been since the late 1970s — that indicates an ongoing increase in inequality.

(Mind you, Corak’s tracking of the average-median relationship also suggests that, when taxes and government transfers are taken into account, the rate at which inequality is increasing has slowed since the late 1990s.)

As for TD Economics, it responded to critics by refining its analysis to adjust for both taxes/transfers and household size. The result indicates that the bottom and top fifths experienced virtually identical percentage income increases since 1998.

Inequality comparisons also bring out the Canadian tendency to take a whack at the Americans whenever the opportunity occurs. Even as sensible a commentator as the National Post’s Jonathan Kay recently had a go, implying that perhaps one of the things ailing the American economy is an inequality-induced deficiency of mass consumption.

So let’s take a look at what has actually happened since the 1950s/60s, a period often remembered as the golden era of broad-based American prosperity.

Back then, personal consumption consistently ran at less than 65 per cent of the economy. It began to climb in the 1980s, subsequently peaking at around 70 per cent for the past decade. If the United States has many problems, Americans not buying stuff isn’t one of them.

And as I’ve pointed out in the past, Darwinian caricatures of America are misleading. Indeed, when tax expenditures — such as the ability to deduct mortgage interest and property taxes — are taken into account, the American social spend is proportionately bigger than Canada’s.

Of course, some tax expenditures benefit the more affluent. As a recent Congressional Budget Office study made clear, however, the pattern of the American welfare state over the last 30 years has been to increasingly redistribute income. For every 2009 dollar earned by the bottom fifth, another three dollars were added through the combination of transfers and taxes.

Most Canadians have no wish to be Americans. And we generally prefer our socio-economic arrangements to theirs. But let’s deal with the complexities of the real America, not some cartoon version.

So there’s a simple lesson for the casual reader. Be careful. Income inequality is a subject which is both complex and ideologically fraught. When presented with an assertion from whatever source, give it a good poke.

 

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