Friday, January 17, 2014

Reducing Income Inequality: Growth Should Be The Goal

President Obama has made reducing income inequality a major policy goal for the remainder of his administration. While it is correct that U.S. income inequality, as measured by Gini Coefficients, has expanded each year of the Obama Administration reaching its highest level in 50 years at 47.7 in 2011, evidence from the 50 states and DC indicates President Obama is focusing on the wrong goal.

A Gini Coefficient is a number based on household income that ranges between 0 and 1, with 0 representing perfect income equality, and 1 representing perfect income inequality. The five states with the lowest 2011 Gini coefficients (i.e. least income inequality) -- Wyoming, Alaska, Utah, Hawaii, Vermont and Idaho -- experienced median GDP growth of 70.1 percent and job growth of 13.1 percent between 2000 and 2010.

The five states with the greatest income inequality -- New York, Connecticut, Louisiana, New Mexico and California -- suffered the lowest median GDP growth at 6.1 percent and job growth at 11.5 percent for the same time period.

In fact, correlation coefficients for the 50 states and DC show a negative relationship between Gini Coefficients and the two measures of growth from 2000 and 2010.

But does higher growth reduce income inequality, or does lower income inequality produce higher growth? It is found that 1999 Gini Coefficients had no statistical relationship or association with 2000 to 2010 growth. However 2000 to 2010 growth was negatively related to 2011 Gini coefficients, indicating less income inequality.

Thus, recent data indicate President Obama should focus on growing the economy, which will then produce less income inequality.

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