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Friday, January 16, 2015

Inequality and Power; the Curse of Financialization

My Friend Richard Torgerson introduced me to the "GINI" coefficient years ago. The Tax Justice Network put out a post that uses a measure based on the GINI and HDI measures. GINI-HDI graphed. And they tie this to something they call the "financial curse." Not being a professional economist, I'm more interested in this subject for what it says about what we should do as a society to do something about "financial curses" and inequality. [see http://www.taxjustice.net/2015/01/16/financial-sector-like-oil-industry-graph/?utm_medium=facebook&utm_source=twitterfeed]

Defining Terms
http://www.taxjustice.net/2015/01/16/financial-sector-like-oil-industry-graph/?utm_medium=facebook&utm_source=twitterfeed
GINI index is named after Corrado Gini, an Italian statistician
The World Bank defines the GINI coefficient or index this way:
"Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual or household. The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line." [SI.POV.GINI]
They sum it up: "Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality." [SI.POV.GINI]
Human Development Index (HDI)
The Human Development Index is a measure of the capabilities and education of a population.
"A tool developed by the United Nations to measure and rank countries' levels of social and economic development based on four criteria: Life expectancy at birth, mean years of schooling, expected years of schooling and gross national income per capita. The HDI makes it possible to track changes in development levels over time and to compare development levels in different countries." [http://www.investopedia.com/terms/h/human-development-index-hdi.asp]

Subtracting the Gini - HDI gives an index that shows what the authors call "The Financial Curse Index" or how relying on financial industries blows up an economy. I believe the curse is actually "financialization" -- which is essentially the economic transfers that go on when folks have power over money and can use that to transfer wealth to themselves.

Details

GINI

Princeton gives more definition to the GINI coefficient with their WIKI page [Gini Coefficient]:

The Gini coefficient is usually defined mathematically based on the Lorenz curve, which plots the proportion of the total income of the population (y axis) that is cumulatively earned by the bottom x% of the population (see diagram). The line at 45 degrees thus represents perfect equality of incomes. The Gini coefficient can then be thought of as the ratio of the area that lies between the line of equality and the Lorenz curve (marked 'A' in the diagram) over the total area under the line of equality (marked 'A' and 'B' in the diagram); i.e., G=A/(A+B). [Gini Coefficient]
"The most equal society will be one in which every person receives the same income (G = 0); the most unequal society will be one in which a single person receives 100% of the total income and the remaining people receive none (G = 1−1/N)."
"While the income distribution of any particular country need not follow simple functions, these functions give a qualitative understanding of the income distribution in a nation given the Gini coefficient. The effects of minimum income policy due to redistribution can be seen in the linear relationships."
"An informative simplified case just distinguishes two levels of income, low and high. If the high income group is u % of the population and earns a fraction f % of all income, then the Gini coefficient is f − u. An actual more graded distribution with these same values u and f will always have a higher Gini coefficient than f − u."
"The proverbial case where the richest 20% have 80% of all income would lead to an income Gini coefficient of at least 60%."
Src: http://en.wikipedia.org/wiki/Gini_coefficient#Calculation
"An often cited case that 1% of all the world's population owns 50% of all wealth, means a wealth Gini coefficient of at least 49%."

Gini Coefficients pretty much represent a refinement and follow on to Vilfredo Pareto's power curves. by Gini

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