"Neutrality" in statistics: comparing the Palma inequality ratios of the United States with the social democracies

Image: Palma ratios--a measure of inequality--of selected countries (ordered by Palma v.3, source)


As the graph at the top of the page shows, the social democracies (marked with red squares) have lower inequality as measured by Palma ratios compared to the liberal countries, including the United States (marked with blue squares). My goal here is to argue that the social democracies really are better and limiting inequality, and since the Palma ratio is rarely used and the Gini coefficient has become the standard measure of inequality, the rest of this post is about why the Palma ratio is a better measure of inequality than the Gini.

I wrote previously about Gini coefficients and Palma ratios as measures of inequality. At that time, I noticed a nonsense conclusion someone had made: based on the fact that the pre-tax pre-transfer Gini coefficients of the United States and the social democracies are approximately equal, this writer had concluded that taxes and transfers were the only reason why the social democracies had less inequality than the United States.

Even at a glance, this simply cannot be correct. McDonald's workers in Denmark, for example, make three times the hourly wage of McDonald's workers in the United States. There's simply no way that pre-tax pre-transfer inequality can possibly be similar. Indeed--as I pointed out then--the richest 1% in the United States take home 18% of all pre-tax income, but the richest 1% in Denmark take home just 4%. Clearly, the Gini coefficients are wrong; pre-tax, pre-transfer inequality is not similar between the United States and Denmark.

This matters greatly from a social policy perspective. Taxes and transfers may indeed be effective policies for limiting inequality, but they're not the only effective policies. As I pointed out at the time, full employment is probably a more powerful tool against inequality than taxes and transfers, and I argued that inequality was too complex to capture with a single number, though the Palma ratio was probably the best option for a single measure of inequality.

Alex Cobham and Andy Sumner penned a review of the evidence against the Gini coefficient and in support of the Palma ratio. Before diving into their review, some background on inequality measures is necessary.

The Lorenz curve is simply a graph of the distribution of the wealth of a country. As you can see, perfect inequality would yeild a straight line, whereas any inequality bends the line downwards:

Greater inequality will result in a line that deviates further from the perfectly straight line running diagonally across the graph, but the Lorenz curve can also visually illustrate where inequality occurs. For example, take these hypothetical Lorenz curves:

We can see that inequality in the country represented by the green line is primarily due to the poor being very poor. The green line deviates most from the straight diagonal at the bottom of the income distribution; since the line rises so little for the first 30% of the population, it's clear that the bottom 30% are very poor relative to the standards of this country. And since the line is relatively straight after 30%, the richest 70% are fairly income equal to each other; inequality is thus caused by deprivation of the poorest 30%.

The red line, however, is nearly straight for the first 85% of the population. Since this line is so straight, it indicates that the bottom 85% are pretty equal in their share of national income. The abrupt turn upwards of the red line indicates that the richest 15% are far richer than the poorest 85%.

Finally, the country represented by the blue curve--because it does not bend as far away from the straight diagonal--has less inequality than the countries represented by the green and red lines.

As this hypothetical example shows, comparing Lorenz curves can be very valuable as Lorenz curves visually display both the magnitude of inequality and well as the points in the income distribution where inequality occurs.

Cobham and Sumner explain the limitations of the Gini coefficient:

Atkinson (1973) demonstrates just why this matters, and how it ensures that the Gini is far from a ‘neutral’ measure of inequality. He first highlights that, in comparing two countries where the Lorenz curves do not intersect, we can say--and the Gini will suffice to do so--that the country with the curve closer to the line of complete equality is more equal than the other. When Lorenz curves cross, however, things become less clear.

Atkinson presents the case of the United Kingdom and West Germany, for which the Lorenz curves then crossed at around 50% of the population. The income share of the lowest-income 50% is higher (closer to the 45-degree line) in West Germany, while that of the highest-income 50% is closer to the line in the UK--but the Gini coefficient shows the UK to be less unequal. Atkinson concludes:

Summary measures such as the Gini coefficient are often presented as purely 'scientific', but in fact they explicitly embody values about a desirable distribution of income (p.66).

Falling through the cracks of the American welfare system

Image: On this map, the darkened counties in Mississippi are some of the poorest counties in the entire United States. These counties were not served by Obamacare health insurance subsidies. (source)



A look back at three of the worst examples I have ever encountered of neoliberal welfare programs letting eligible individuals fall through the cracks.

First, a 2013 warning about Obamacare in Mississippi (emphasis added):

No insurer is offering to sell plans through the federal health law’s marketplaces in 36 of the state’s 82 counties, including some of the poorest parts of the Delta region, said Mississippi Insurance Commissioner Mike Chaney.

As a result, 54,000 people who may qualify for subsidized coverage would be unable to get it, estimates the Center for Mississippi Health Policy, a nonpartisan research group.

Many make a living picking soybeans, working on tree farms or in fast food restaurants, earning too little to buy coverage on their own.

“That’s the place where it’s most needed,” said Roy Mitchell, executive director of the Mississippi Health Advocacy Program. “There’s a high uninsured population there. One of the highest infant mortality rates in the country is in that area.["]

Second, a 2001 study of the Child Care and Development Fund--a program that is supposed to pay for child care for young children so their parents can go to work (emphasis in original):

Based on recently released and revised data from the U.S. Department of Health and Human Services (HHS), CLASP estimates that states served about 14 percent of federally-eligible children (approximately 1 out of 7) in FY 2000.

You did not misread that: CCDF was so poorly funded that 86% of eligible children did not receive benefits.

When communism means free markets and capitalism means central planning

Image (left to right): Josip Broz Tito (President of Communist Yugoslavia), United States President Nixon, Pelagija Broz (Tito's wife), and Pat Nixon (Nixon's wife) en route to a 1971 Presidential dinner hosted by Nixon in Tito's honor. (source)



This post is meant to address one of the most common misconceptions about what, exactly, are communism and capitalism. It is nearly universally assumed (even by those whose job it is to write about social policy) that communism means a centrally planned economy and capitalism means a free market economy, but this is totally false. Communism and capitalism can exist--and have existed--in a free market or centrally planned economy. Indeed--as we will see below--the Yugoslavian Communists believed that communism should exist in a libertarian free market paradise, where government "withered away" to nothing and everyone was supposed to get their social welfare services (like health care) from their employer. If you couldn't get health insurance from an employer, you were on your own--there was no government program to provide medical care as a last resort, because the government had "whithered away" entirely. To these libertarian communists, the government was not even supposed to build roads and other infrastructure. The Yugoslavian Communists believed that this was the most faithful plan to bring about Karl Marx's vision of a communist worker's paradise, and for several decades following World War II, this type of free market communism existed in Yugoslavia.

It's equally preposterous that capitalism is synonymous with free markets; capitalism and central planning have gone together well throughout history, as we shall see below.

Communism and capitalism have nothing to do with the structure of markets and everything to do with ownership. To see what this means, let's take a very simplified example, then we'll apply it to real world examples like former Yugoslavia.

Comparing poverty rates (absolute and relative) of the United States to the social democracies

Image: Relative poverty is confusing for most Americans. (source)



I've got a series of posts on relative poverty that I started in 2013 but never published. The reason I moved them to the back burner is that my goal here is persuasion, and Americans simply don't care about relative poverty. They should--relative poverty kills--but it's a somewhat complicated argument.

Second, and more importantly, I'm interested in comparing the United States to the social democracies, and the data don't match up. I assumed it was impossible to do a comparison of poverty because the United States uses an absolute poverty measure, while the rest of the developed world uses relative poverty and does not keep data on absolute poverty (I found some data on absolute levels of income for this post, but it's not on poverty).

So while I couldn't compare absolute poverty rates, I could compare relative poverty rates (because those data do exist for the United States), but nobody cares about relative poverty in the United States.

In short, I gave up on comparing the poverty rates of the United States versus other countries.

Fortunately, Dylan Matthews highlighted the complicated research that translated income data for several European countries into absolute poverty rates using the absolute poverty line of the United States.

It actually is possible to use the Luxembourg Income Study database to estimate more precisely how many people live under the US poverty in America versus Finland. If you use the granular microdata and follow the same procedures in looking at the US as in looking at other countries, you can come up with a fair comparison...Stockholm University's Markus Jäntti, a senior scholar with the Luxembourg Income Study, did just that kind of number crunching for me. Using the same poverty line as Petrilli and Wright, he found that the absolute poverty rate in the US in 2010 was about 10 percent, and in Finland it was about 4.5 percent. Finland's rate wasn't slightly lower — it was more than halved compared with the US.

Jäntti and Gornick also produced numbers for a wider range of countries in a 2011 paper. They used data from 2004, which included not just Finland but all four major Nordic nations. And they found that poverty rates in those countries — as measured using the US poverty line — were much lower than in the US. Child poverty in particular was much lower: 11.8 percent in the US, and a mere 1.9 percent in Denmark.

The real world evidence that a strong welfare state encourages entrepreneurship

Image: A job creator


Walter Frick has a must-read piece on the relationship between welfare and entrepreneurship. A taste:

Pundits and researchers often note the negative correlation between government spending and entrepreneurship, both within the U.S. and internationally, and conclude that growth requires trimming social welfare programs. Jim Manzi of the National Review, for example, a thoughtful commenter on economic policy, wrote last year that, “we must accept some amount of social dislocation in return for innovation.” But correlations can be misleading. A series of more recent studies challenge the view that larger or more activist government necessarily threatens entrepreneurship. In fact, that may get the relationship precisely backwards...

In another paper, Olds looked at the creation of the Children’s Health Insurance Program (CHIP), which offers publicly funded health insurance for kids whose families don’t qualify for Medicaid. By comparing the rate of entrepreneurship of those who just barely qualified for CHIP to those whose incomes just barely exceeded the cutoff, he was able to estimate the program’s impact on new business creation. The rate of incorporated business ownership for those eligible households just below the cutoff was 31 percent greater than for similarly situated families that could not rely on CHIP to care for their children if they needed it... 

A 2010 study by RAND found a similar effect with Medicare. American men were more likely to start a business just after turning 65 and qualifying for Medicare than just before. Here again, government can make entrepreneurship more appealing by making it less risky.

Links worth reading

David Minzer pens an absolutely must-read piece on the military intervention in Libya

Top military brass claims that drones create more terrorists than they kill


And here are a bunch of links I assembled back in December but forgot to publish:
Amanda Gailey on how gun enthusiasts believe government has run amok with power, then support the government in killing unarmed black men.

Marcy Wheeler makes the case that the CIA torture program successfully met all of its goals, none of which were creating accurate intelligence.

CIA was recently forced to declassify a large trove of documents; here is one detailing their involvement in starting a brutal 50-year-long civil war in Guatemala. (h/t Cora Currier) 

Connor Friedersdorf on epidemic rates of domestic violence in United States police officer families.

Over at Jacobin vox.com, Dylan Matthews makes the case for abolishing all immigration restrictions.

"Watch this video of an armed, drunk, disobedient white man -- and his encounter with the cops. Something seem odd?"

Financial criminals have been paid billions, but they rarely pay.

On the multi-billion dollar textbook and standardized test industry:

This is because standardized tests are not based on general knowledge. As I learned in the course of my investigation, they are based on specific knowledge contained in specific sets of books: the textbooks created by the test makers...Put simply, any teacher who wants his or her students to pass the tests has to give out books from the Big Three publishers.

And only wealthy schools can afford these textbooks

The human case against means testing

Image: A paper food stamp from 1980 (source)


I've already spilled quite a bit of ink (1 2 3) criticizing means testing on administrative grounds. Means testing is an extraordinary waste of resources; it's the reason the administrative costs of TANF are 15 times that of Social Security despite the fact that both programs fundamentally do the same thing (income transfer). And means testing in Obamacare is so irrational that Obamacare essentially spends billions of dollars to prevent millions of people from having health insurance.

But focusing on the administrative issues of means testing ignores the terrible human burden of means testing, which I hope to address now.

Before diving in, a few words about what I'm not writing about. I'm not discussing the cruelty of income or asset tests that are too low;* that injustice is obvious. Nor is this piece about the cruelty of benefits that are too low, or programs that are so poorly funded that the vast majority of eligible individuals don't receive benefits. These injustices are obvious. Less evident, however, are the ways that means testing itself places a burden on individuals and society generally, regardless of where the border between eligible and ineligible lies.

There are an endless number of tragic ways for means testing to destroy people's lives, but they all boil down to two basic issues. First, people who aren't eligible but need benefits must destroy their lives in order to attain and maintain eligibility. Second, means testing is necessarily imperfect. We will never design a perfect means testing bureaucracy, and some eligible people will always be incorrectly found to be ineligible. How many lives are we willing to destroy through imperfect means testing decisions?

"You'll have to get rid of everything"
Go and read this first person account of a family who needed to qualify for Medicaid because a family member became disabled in a horrible car accident in which she was not at fault. Only Medicaid covers the long term care equipment and services mommy needs to live, but Medicaid only covers poor people--so the entire family must live in poverty for the rest of their lives (they have to meet the so-called income and asset tests). The family had to liquidate their 401(k) (and pay the early withdraw tax penalties), sell their cars, empty their bank accounts, and sell all their valuables in order to meet the asset means test. Daddy had to cut his hours at work to 133% of the poverty line to meet the income means test; thereafter, 100% of any wages in excess of this level would be taken by Medicaid. Baby can never attend preschool when she gets older because the family can never earn or possess enough money to pay for tuition; auntie can't pay for baby's preschool because that would be Medicaid fraud. And baby can't have a college fund because any savings would make them ineligible for the Medicaid services that keep mommy alive. The entire story is so totally inane that it doesn't make any sense to blockquote it; it is well worth your time to read in full, even if you think you already understand that cruelty of our welfare system.

This may be an extreme example, but means testing necessarily results in distorted incentives. As the above story makes plain, when people depend on benefits, working more hours or saving any money becomes an impossibility. Thus, at the aggregate level, America's poor are forced to liquidate or forego savings and income in order to remain eligible for programs they depend on. For TANF (more commonly known as "welfare"):

Two of the first states to eliminate asset tests (Ohio and Virginia) actually saw declines in program enrollment and improvements in their overall bottom line.....What our research suggests, [] is that asset limits simply are not necessary to prevent misuse and actually discourage self-sufficiency.

You did not misread that: eliminating asset tests results in lower overall program costs and fewer people in need of benefits. Thus, by preserving asset tests, our political system demonstrates that poverty is a conscious goal: states are willing to pay money to ensure people remain in poverty.