American Income Inequality: Gini in a Bottle

The Gini coefficient is an economic measurement of income inequality in a given society. It’s a number drawn from an economic model called the Lorenz curve, which is a linear representation of the relationship between households and income. In essence, the Lorenz curve is a graph where every point in the curve tells us the answer to the question “what percentage of households have a given percentage of national income”? Above is a good example from Wikipedia.

If income was perfectly even in its distribution, the Lorenze curve would be the green line shown above because there would be a 1:1 ration of households and income (i.e. x=y in that 10 percent of households would have 10 percent of the income, 26 percent of households would have 26 percent of the income, etc). If one person has all the income and no one else has any, than we get the blue line where only the 100^th percentile of income earners—this one hypothetical mogul—owns 100 percent of the income.

So the Gini coefficient is a measure of the degree to which the relationship between households and incomes for a given society diverges from the green line (perfect equality) and resembles the blue (perfect inequality). It's calculated thusly:

Area between the red line [actual distribution] and the green line [perfect] inequality
divided by
the total area of the region below the red line.

The higher this resultant fraction is (so, the bigger the 'distance' between the red line and the green line), the more unequal a society is in terms of income distribution. The US has always had a bigger tolerance for inequality than most other advanced nations (aka has a higher Gini coefficient).

The Gini coefficient has also been steadily rising for thirty years. But it's increase hasn't been even across administrations. From 1993 to 1999, the US Gini coefficient grew by .003, which breaks down to an increase of about .0004 per year. From 2000 to 2005, the Gini coefficient grew by .009--three times as much as in the 1990s.

Let’s say that the Gini coefficient grows at the accelerated rate that it has been since 2000—by .009 every six years. In thirty years, the number would increase by .054, to .523. That would make the US more unequal than Mexico, Bangladesh, Malaysia, Nigeria, and Ethiopia—amongst many others—are today.

Are these nations we want to emulate? There's a lot of talk, and rightly so, about increasing inequality in the US. It's important to consider that even at the most long-term macro level, current rates of inequality are blowing past developments out of the water.

Problems with Health Savings Accounts

Two weeks ago, President Bush has declared his opposition to expanding the Children's Health Insurance Program (CHIP). Bush's opposition to the plan, according to White House spokesman Tony Fratto, is at least in part due to the fact that the reauthorization of CHIP does not incorporate health savings accounts (HSAs) into its provision.

So what's the deal with HSAs? According to a Treasury Department information sheet, HSAs are accounts that "you can put money into to save for future medical expenses." There are, of course, more to them than just that.

First up, HSAs are supposedly tax friendly, providing "triple tax savings" by giving account holders tax deductions when they contribute to their accounts, allowing for tax-free investments with HSA funds, and tax-free withdrawals for qualified medical expenses. Second, they are portable in the sense that, like a 401k, you can take an HSA with you from job-to-job, state-to-state, etc.

HSAs are only available for people who participate in a High Deductible Health Plan (HDHP). An HDHP is a plan with low premiums (i.e. you don't pay a lot for health coverage) and high deductibles (i.e. you pay a lot out-of-pocket, up front, for medical services).

A lot of folks, particularly conservatives, like HDHP's because, as the Commonwealth Fund succicntly notes, they allegedly (a) lower health care costs by causing patients to be more cost-conscious, and (b) make insurance premiums more affordable for the uninsured. You can why, in theory, this might make sense: if you have to pay more out-of-pocket you will be more wary of spending money on health matters, and if the basic 'membership fee' (i.e. the premium, i.e. what you need to pay to get basic coverage) is low, then more people can afford it.

The problem with the logic behind HDHPs, of course, is that if you don't have the cash on hand to pay deductibles, you have trouble getting access to care. In theory, HSAs are supposed to help you with this, by helping you save for health care when you need it. But studies (from places like the Kaiser Foundation to Families USA) have cast some doubt on this potentiality, particularly for low-income families.

First off, low-income families will not benefit from the tax breaks built into HSAs, because the tax deductions come from income taxes. Income tax is progressive: the more money you make, the bigger the tax rate. Thus, the tax breaks of HSAs associated with income--like tax-free investment and tax deductions for money put in the account--will greatly benefit the rich, and not so much the poor.

Second, as I've made mention in other blog posts, low-income households only have a limited amount of funds to spend outside of current expenditures. A reliance on high-deductible plans essentially presupposes that HSAs will allow everyone to be rich enough to cut-back on readily available funds for cost-of-living expenditures. This is no guarantee by any means, particularly given disparities in start-off wealth among socioeconomic groups and the skewed distribution of financial literacy. HSAs could end up preserving--if not exacerbating--existing inequalities.

Third, the goal of cost-consciousness is a risky one. If low-income families have to pay a bigger percentage of their entire pool of funds for out-of-pocket expenses, they might be less inclined to get health are for any reason, no matter how serious. Traditional insurance schemes pool the healthy and the unhealthy together, in order to dilute the cost of care. But with HSAs, the unhealthy may become too expensive to be effectively ensured.

This is problematic: health is positively correlated with socioeconomic status. A number of social factors, such as wealth and education, are strongly associated with health. This is also true for older Americans. Thus in a broad sense, the people who would benefit the least from HSAs need them the most.

Ultimately, HSAs--at least in their current form--just don't cut it.

Spending, Saving, and Social Policy

The question of whether or not we can reasonably ask poor people to save is a good one. I've addressed it in part already, but I think it warrants further discussion, or more appropriately I guess, additional monological rambling on my part.

















For the poorest Americans, expenditures exceed income. Check out this graph to the left I slapped together form the Consumer Expenditure Survey (CES). You'll note that it's not until you get into the middle quintile of income earners that income exceeds expenditures. For the bottom 40 percent of America, spendings outstrip income.

On its face, this suggests that poor Americans really don't have room to save. But, as I've noted, these expenditure measures include everything from shelter to cigarettes, meaning that there is some wiggle room to work with. Here I want to address the relationship between this wiggle room (i.e. non-essential expenditures that can be cut back to induce saving) and the graph above.

Let's take a collection of categories from the CES as our 'expendables': alcohol, smoking/tobacco, entertainment, and personal care products. We'll treat alcohol and smoking/tobacco as completely expendable, and the other two as only partially so (no one can reasonably go without entertainment or personal care). So let's say the average household in the bottom two quintiles cuts its spending in these areas by half. Over one year, eliminating booze/smokes and 50 percent of entertainment/personal care would save the lowest quintile $1,006; the second lowest would save $1,441.50 with the same cutbacks.

Of course, there are some significant caveats that dilute this scheme. Firstly, at least some of the households in CES were families (the average number of people in households for the bottom two quintiles hovered around two), meaning that expenditure cutbacks aren't always so easy, particularly with regards to personal care and entertainment (i.e. stuff kids need/want). Second, the $1,006 and $1,441.50 in savings do not make up the difference between income and expenditures represented in the graph above for the average household in these income brackets.

But before we close the book we need to look at two variables: the Earned Income Tax Credit (EITC) and Individual Development Accounts (IDAs). A qualified head of household with one qualifying child who brought in the reported CES income of the lowest quintile ($9,626) would be $2,740 in 2006. For the second quintile ($25,546) it would be $1,030. If this same individual had two kids, (s)he would bring in $3,870 (lowest income quintile) or $2,270 (second lowest quintile) from the EITC.

So as it stands, a head of household who cuts spending in the ways discussed here and qualifies for the EITC already has somewhere between $3,746 and $4,876 (if in lowest quintile) or $2,471.50 and $3,276 (if in second lowest). Now, what if this earner was to put this amount of savings in an IDA?

The usual match rates for IDAs are 2:1. meaning that for every dollar deposited by the account-holder, 2 are deposited by the matching bodies. Most IDA programs are built to last from 1 to 3 years, and some often are only matched up to a certain amount (e.g. $500). If we play it safe and take a 1 year IDA program with a 2:1 match rate and a max matching scheme of $500, this means that over the course of a year, we can in essence tack on an extra $1,000.

So now we have between $4,746 and $5,876 (if in lowest quintile) or $3,471.50 and $4,276 (if in second lowest) in saved funds. These amounts don't help the poorest quintile break even, but they do in fact make it possible for the second quintile to bridge the gap between income and expenditures in the graph above.

The message should be clear: helping working families is a patchwork pursuit that needs to be fought on multiple fronts. There's an important role for individual decision-making and personal responsibility as well as for creative social policies that feed into one another and help 'snowball' assets and well-being. The more we view poverty as a one-dimensional social condition, the more we tie our hands; the more we focus on viewing low-income individuals as active participants in their own life--in addition to being a policy-relevant population--the more we can get some novel ideas to surface.

Poverty and Smoking

So my last post introduced my new favorite toy, the Bureau of Labor Statistics' Consumer Expenditure Survey. Blair Benjamin over at Asset Almanac (one of few, and much-needed, anti-poverty blogs) had some kind words to say about my use of the data.

It really is a pretty powerful set of numbers, once you get to crunching them. For example, I mentioned that the proportion of income that the lowest quintile and highest quintile of US income earners spend on tobacco are vastly different: the bottom quintile spends 1.4 % of expenditures on tobacco, while the top only spends .03 %. That means that the poor proportionately spend 467% more on tobacco than do the top-earners.

The correlation between tobacco use and poverty is actually an international phenomenon: across the world, poorer (and poorer educated) people, especially men, are more likely to die than their wealthier counterparts, with smoking accounting for more than half the difference
between mortality rates.

Here in the U.S., the CDC found that

• smoking prevalence was highest among adults who had earned a General Educational Development (GED) diploma (43.2%) and those with 9--11 years of education (32.6%)
  
  
• prevalence generally decreased with increasing education. Adults aged 18--24 years (24.4%) and 25--44 years (24.1%) had the highest prevalence.
  
  
• the prevalence of current smoking was higher among adults living below the poverty level (29.9%) than among those at or above the poverty level (20.6%)

The health consequences of concentrated disadvantage are major, and smoking is the most blatant offender. Obviously the two major issues here are economics and health: people are spending money on a self-destructive habit that they could be saving or putting toward more productive use.

The pressing question is why we think there's such a socioeconomic disparity when it comes to smoking: why do poor people smoke more? There are three lines of thought that come to mind:

(1) Lack of education. This is somewhat obvious in the sense that education is strongly correlated to smoking behavior. Interestingly, the correlation seems to be to general education, rather than particular anti-smoking campaigns. In fact, education correlates with pretty much every measure of success, including good health.

(2) Culture. Culture is often thrown around as an (irritatingly) obtuse term, but here I think it has some use. Back in 2002, sociologist Philippe Bourgois wrote a book called In Search of Respect that clearly detailed the social patterns and cultural cues that differentiated low-income urban communities in the midst of social disorganization and 'mainstream' America. What Bourgois makes clear is this: what it takes to 'make it' in poor neighborhoods is a hell of a lot different than what is needed for conventional success. Smoking then, could serve as a social tool, a status symbol, regardless of how much information is had about it. To what extent is smoking part of a subculture (the same way that other drugs can be), rather than an individual vice?

(3) Stress/strain. Studies have found that women smoke to suppress negative feelings, and men smoke to promote positive ones. Low-income individuals have also articulated their habits as a tool of boredom, release, and privacy (page four of this study). In this case, smoking is kind of a social 'fix', trying to compensate for strain or social isolation.

Taking these three together as possibilities, we have a pretty overwhelming picture where smoking is related to education, culture, and social isolation. Assuming more than one of these possibilities is true (which seems likely based on existing research), than we have smoking being less of a pure health issue and more of a comprehensive poverty issue. Our initial concern--cutting down the amount that low-income folks spend on tobacco--may be much more closely linked to general community development and poverty relief than initially assumed.

The more we think of issues in this multi-layered sense, the clearer it is that 'quick fixes' are no replacement for the fundamentals of life--education, integration, connection--that bring with them a wealth of positive consequences. That's why it's so important to keep pushing on these fronts, because of their cumulative impact on all facets of life--even how much of your paycheck you blow on a pack of smokes.

Expect me to keep babbling on about the Consumer Expenditure Survey and its implications in the near future.

Do Working Families Have 'Room to Save'?

At this past weekend's Policy Expo (which was a great success thanks to the hard work of Roosevelt staff), an attendant asked me a great question after I presented on strategies for asset-building in low-income communities.

I had just discussed how Individual Development Accounts (IDAs)--matched savings accounts for low-income individuals and families dedicated to long-term productive goods--could be a great mechanism for helping working families save their Earned Income Tax Credit (EITC). Afterwards I was asked: "don't low-income working families need to channel all of their available funds to immediate, day-to-day survival? Can we really expect them to have the luxury of putting aside money for savings?"

This actually wasn't the first time I'd heard this question. Intuitively, it seems like a valid point of skepticism: how can you save what you don't have? Indeed, the 2007 edition of the Bureau of Labor Statistics Consumer Expenditure Survey (CES) tells us that lowest quintile of households in terms of income spend 70% of their expenditures on food, housing, and transportation, while the top quintile of income-earners spends 59% on these must-haves.

But a closer look at the CES data set reveals some interesting trends in the remaining 30% that low-income households are not spending on the essentials. Despite having less money to spend—in both absolute and relative terms—on non-essentials, the bottom quintile of Americans spends at a similar proportion to the top quintile when it comes to some of the ‘nice-to-haves’ in life.

Both the bottom and top quintiles of Americans spend 5% of their annual expenditures on entertainment and 1% on alcohol; they spend 1.3 and 1.1% on personal care products respectively. Troublingly, the bottom quintile spends 1.4 % of expenditures on tobacco, while the top only spends .03 %. Generally though, the poor spend more than the rich on the essentials, but spend similar proportional amounts for some other things.

The idea behind IDAs is not to suck money from the essential costs of life, but to channel some of this income that is diverted to recreation, fashion, electronics, etc, for long-term productivity. Yes, low-income households will have to curb spending in some non-essential categories in order to put aside savings. The idea is to encourage a sort ‘compensatory spending’: a proportional reduction in consumer activity in those categories that are expendable in the quest for long-term social mobility.

Is it fair to ask that IDA accountholders sacrifice certain consumption patterns in order to accumulate savings? Some might say that doing so is tantamount to asking impoverished households to give up (1) status goods, which might be the only marks of distinction they can manage to acquire, or (2) recreational respites from their day-to-day struggles.

The compassion in these objections is admirable, but their logic is not. Saving demands discipline; it always has, and it always will. We can’t change the essential chemistry of saving: consumptions and savings are in a zero-sum tug of war. Of course, as importantly, it would be wrong to encourage working families to put aside income for IDAs without addressing socio-structural factors that make it difficult for them to do so. IDAs can’t do it alone. But there is a small window of wiggle-room to intervene at the household level and help working families achieve through IDAs that we shouldn’t overlook.

References
Bureau of Labor Statistics. (2007). ‘Consumer expenditures in 2005.’ U.S. Department of Labor. http://www.bls.gov/cex/csxann05.pdf

The Economics of Gay Marriage

Ah, 2004. Shrek and Spider-Man battled at the box office, the excellent Funeral from Arcade Fire was released, and the banning of gay marriage was a hot topic in political culture.

Now it's 2007 and we've witnessed Round 2 of Shrek v. Spidey, Arcade Fire's follow-up Neon Bible, and continued political activity surrounding gay marriage, but in a direction vastly different than we witnessed in 2004. In the spirit of changing political winds, I just wanted to call attention to some of the unexpected benefits of gay marriage that may or may not be affecting the positions of leaders and officials. Back in 2004, the Institute for Gay and Lesbian Strategic Studies (IGLSS) reported that

"The Congressional Budget Office found that allowing same-sex couples to marry would boost federal income tax revenues by $400 million per year til the end of this decade, mainly because of the so-called “marriage penalty" [i.e. when individuals marry they, as a couple, are subject to higher taxes]...the net impact would be a federal budget savings of nearly $1 billion per year."

Another study from IGLSS and UCLA showed that "California would have a net savings of $22-25 million per year if same-sex couples could marry. A 2003 study of New Jersey’s Domestic Partnership Act, which goes into effect in July, predicts that the state is likely to see a net savings of $61 million per year by giving same-sex couples rights."

From these same datasets, a short piece in Mother Jones in March of this year outlined additional fiscal benefits stemming from gay marriage:

Newly formed gay households move up in income and are cut from programs such as Medicaid, resulting in savings of $50 to $200 million
 

 



Uninsured gays and lesbians, whose health care costs are now paid by the government, join their spouses’ insurance plans. If a third do so, federal costs drop by $190 million

If half the same-sex couples now living together get married (the rate seen in Vermont and Massachusetts) and spend a quarter of what straight couples do, it results in a wedding-industry boon of $2 billion

TOTAL SAVINGS: Up to $3.1 billion

Now, according to Citizens for Tax Justice, a D.C. based research/advocacy organization, the cost of President Bush's tax cuts over the calendar period from 2001 to 2010 is--ready for this?--between $2.4 and $2.6 trillion. Additionally, From fiscal 2002 through 2006, on-budget federal deficits totaled $2.4 trillion. According to CTJ,

the largest cause of these enormous deficits has been the remarkable drop in personal income taxes, which fell from 10.1 percent of the gross domestic product in fiscal 2000 to an average of only 7.3 percent of the GDP in fiscal 2002 through 2006 — a 28 percent drop. In fact, income tax revenues have been at or near their lowest levels as a share of the GDP in 55 years.

So, lower taxes contribute to a huge deficit. The Right remains committed to the mantra of low taxes, even in the face of a myriad of fiscal obligations (many of their own creation). For number-crunchers inside State Houses and inside the Beltway, the creation of a whole new category of taxable populations, and the reorganization of a demographic along cost-effective grounds, is probably looking mighty appealing just about now.

How much longer can symbolic acts of 'shrinking government 'be reconciled with realities? It might not be too long before a vocal economic consensus is reached regarding not only the moral, but the financial, need for gay marriage. If there is, any urgency will be a product of willy-nilly, tunnel-visioned policies that grow the deficit. One can only imagine the chaos in the conservative tent if such an economic movement should arise.

Progressive Enterprise: Innovation Through Intervention?

Entrepreneurship is a wonderful thing. New businesses account for about half of all job creation in the U.S. and represent the fullest vision of the American dream. Underlying much right-wing animosity toward Liberals is the sentiment that we just don't 'get' the free market. There is a notion that Liberals dislike autonomy and innovation; that they are unable to appreciate the majesty of enterprise; and that all 'leftist' activity is in opposition to the market.

Obviously, this is hogwash. But I found some intriguing data that suggests that such attacks are not just wrong-headed, but flat-out self-contradictory. Lo and behold, 'leftist' policies of aiding low-income minority populations and socioeconomically disadvantaged demographics might just make a lot of sense from an entrepreneurial perspective. A 2005 Assessment of entrepreneurship found that:

• Black men with graduate experience are three times as likely to report participation in a start-up activity than white men with the same educational background; Hispanic men are 50% more involved than comparable white men.
  
  
• While educational attainment and household income are not associated with more participation in start-ups for the majority, for blacks and Hispanics educational attainment is associated with much higher levels of participation.
  
  
• The impact of income is often a distinction between those with the lowest annual income, under $30,000 year, and all other individuals. In a similar fashion, the impact of education generally involves those that have gone beyond high school compared to those that have no training beyond high school.
  
  
• The determinants of if people got involved in start-ups were if they answered affirmative to the following sorts of questions: (1) Do you know someone personally who started a business in the past two years? (2) In the next six months do you think there will be good opportunities for starting a new business where you live? (3) Do you have the knowledge, skill and experience required to start a new business?
  

So what can we take away from these points? Let me repackage the above points a bit to make their relevance to progressive policy a bit more clear:

Blacks and Hispanics are very engaged in entrepreneurship, but their degree of participation is more dramatically contingent on educational achievement than it is for whites. Thus they represent an active demographic that is generally more 'uneven' with regards to the dynamics of educational distribution.

Indeed, the poorest and least educated people--who are more likely to be African-American or Hispanic (both have a poverty rate of about 20%)--get the least changes at entrepreneurship. So minorities are more active, but more vulnerable to conditions averse to entrepreneurship (poor education, poverty).

Lastly, social capital and community context--who you know, the immediate hopes you have, and the conditions in which you have to function--are critical determinants of entrepreneurship. Thus again, those in disorganized, struggling, or marginalized communities are probably less likely to have the first-hand experience and contextual encouragement necessary to take commercial risks.

See where I'm going with this? Progressive policies aimed at helping working families and low-income individuals aren't strategies to keep 'undeserving' people fat and happy. Its a recipe for helping to build whole new demographics of dynamic, productive individuals. Individuals who represent a high-potential group of innovators and entrepreneurs, but who are disproportionately inhibited by some of the socioeconomic correlates of entrepreneurship.

See, right-wing blowhards? We're actually looking to infuse the American economy with a shot in the arm. It's just going to take a bit of compassion and progressive pragmatism to give would-be Google guys a fair shake at changing the world.