Monday, 17 August 2015

Crooked timber, dodgy chart

Crooked Timber comment on a chart which has been doing the rounds.

This is a perfect application of interocular trauma econometrics – it hits you right between the eyes. It’s all up-and-down or left-and-right. The sort of thing that generates the difficult cases for liberal political philosophy – increases in inequality which nevertheless benefited the worst-off, which would have showed up as a southwest-to-northeast upward slope – never happened.
The chart looks at median household income versus inequality. That sounds sensible (we care about the average Joe) but it is an odd way to think about the growth versus inequality tradeoff. (It's a fine way to think about the Rawlsian inequality-versus-helping-the-worst-off tradeoff, but who ever thought Thatcherism was Rawlsian?)

Growth normally means the growth in average wealth, i.e. the mean. If you are only going to count growth of median incomes then you have already decided that any growth which only goes to the richer half of society is purely harmful – it does not change median incomes and it does increase inequality. But that is just the issue we want to discuss when we think about the growth-inequality trade off. Suppose poor, middle and rich incomes change from £20K, £40K and £60K a year to £20K, £40K and £100K. I can think of many legitimate reasons that might be a bad thing. Inequality may be bad for society even if it does not increase (absolute) poverty. But we must at least acknowledge that somebody has got richer and might like it. The median statistic ignores that: it stays fixed at £40K.