Income Inequality: Why you should care

I recently came across a great article written by Charles Wheelan, PhD, Why Income Inequality Matters. I urge you to read it.

Wheelan compares the poverty he recently experienced in Brazil to the $50 million bonuses Wall Street paid out recently. Some fine point in the article are:

1. The income inequality in America has increased between 1970 and 2005 as measured by the Gini coefficient - an index that measures income inequality across nations, where 0 represents perfect equality and 1 represents absolute inequality. The U.S. score jumped from 0.39 to 0.47 between 970 and 2005.

While one can argue about the merits of the coefficient, it would be a useless exercise as this number - while not perfect - is widely accepted as a good measure of income inequality amongst those in academia. Moreover, if there are any other measures that you deem better than this one, please let me know.

2. Our sense of well-being is determined more by our relative wealth than by our absolute wealth. In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000. (Directly quoted from Wheelan).

3. Although the "tournament effect" (i.e. higher salaries not only motivate those who receive them, but also those who hope to receive them) provides a good argument for the rags-to-riches story, many nations such as Brazil, do not have the infrastructural mechanisms to support such paths. In so doing, then, illicit behavior and activities may be encouraged as all hope to share the pie is lost.

A fascinating article, one I strongly encourage you to look at.

Merry 2007!

And so ends the Christmas break, New Year's celebration and a host of other parties. So long 2006 - you brought times of great joy, fascinating challenges, deep sorrow, and even mystery.

Most of all, 2006, you created a historic year for the world's equity indices. I applaud your hard work and thank you for it. As for the rest of us - we were the people who made 2006 what it was - according to Time magazine. We, the people, were Time's Person of the Year. Yay us!

To all my readers: may you have a superb 2007; may it bring you great joys you have not imagined, love you have always wanted, and wisdom you have always lacked!