Wednesday, June 23, 2010

Correlation Between Increased Government Size And Equality

The Organization for Economic Cooperation and Development (OECD) has made some data available to everybody. So I thought I would replicate some of my previous analysis. In particular, income inequality is negatively correlated with the size of government (Figure 1). Income is measured by the Gini coefficient, and the size of government is expressed as a percentage of Gross Domestic Product (GDP).
Figure 1: Inequality Versus Government Size

The Gini coefficient is a measure of inequality, with a higher Gini coefficient denoting a more unequal distribution of income. It is defined as follows: sort the population in order of increasing income. Plot the percentage of income received by those poorer than each value of income against the percentage of the population with less than that value of income. This is the Lorenz curve, and it will fall below a line with a slope of 45 degrees going through the origin. The Gini coefficient is the ratio of the area between the 45 degree line and the Lorenz curve to the area under the 45 degree line. A Gini coefficient of zero indicates perfect equality, while a Gini coefficient of unity arises when one person receives all income and everybody else gets nothing. Consequently, the Gini coefficient lies between zero and one.

I take the data as given from the OECD. I'm not worrying about whether income is found per family, household, or individual. Nor am I worrying about whether government expenditures include transfer payments and include both state and Federal spending. I took data from the year 2000 because that seems to be the most recent year with data for both dimensions and in which the Gini coefficient is given for a definite year. The OECD lacks 2000 data in one or another dimension for Iceland, South Korea, Mexico, the Slovak Republic, and Turkey. The plotted points consist of data from Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Among advanced capitalist nations, countries with bigger governments tend to have a more equal distribution of income.


Lorraine said...

What makes Ireland so 'efficient' in this regard? For that matter, what makes Britain so inefficient?

Anonymous said...

I wonder what's the meaning of all this. Apart the blunders of the Gini coefficient, what is relevant is the absolute position of each of us. Why I should be badly affected by living in a country of millionairess just because I earn 50,000€ a year?

Robert Vienneau said...

I don't know what accounts for why certain countries deviate so much from the trend lines. The causation could go both ways. Maybe countries with more equal distributions can support politics that lead to increased government spending. Since a large part of US government spending is on war, I thought the US might deviate from the trend line. I'd expect inequality to have increased in Ireland with the global financial crisis.

I don't know what evidence supports the idea only absolute position matters. I imagine recent happiness studies might address the question. I think many goods are positional. Even more pragmatic considerations enter, some of which David Ruccio and I have recently gestured at.

Lorraine said...

The 'absolute' position serves the cause of public relations. There's always some snarky marketist or anonymous troll in the room who will point out goods (inevitably high tech luxury goods) enjoyed by today's poor, that were unknown to the kings and princes of old. This is small comfort in the face of trends that transform luxuries into necessities. And somehow it is never the necessities that are governed by Moore's Law. Don't even get me started on the relationship between wealth and power...