Krugman, Income Distribution, and Gini Coefficients, oh my!

In chapter 2 of The Age of Diminished Expectations, Paul Krugman discusses income distribution in the United States. “The surge in inequality in the United States after 1973,” he states, “completely reversed the movement toward equality…By the 1990s, America was probably about as unequal a society as it had been in the Great Gatsby era of the 1920s” (23). He concludes that no one knows exactly why there has been a dramatic widening of income inequality in the U.S., and although income distribution affects individual American’s standard of living, it is not a major policy issue. Although Krugman is very correct in his statement that no one knows exactly why there has been a dramatic widening of unequal income distribution in the U.S., by comparing the U.S.’s demographics, population size, nature of the economy, and Gini coefficient to other countries that share similar qualities, we can see that there may be a positive correlation between these specific qualities and the growth of unequal income distribution.

            The below graph is from the CIA World Factbook in 2009. It color-codes each country based on their Gini coefficient. The U.S. ha a Gini coefficient in the range of .45 to .49. India has a Gini coefficient between .35 and .39. China has a coefficient between .45 and .49. These countries have populations of 311,591,917 people, 1,241,491,960 people, and 1,344,130,000 people respectively. All of these three countries have a wide range of ethnicities, languages, and religions within their borders; China has over 8 languages spoken in its different regions, and 15 different ethnicities, while India has 2 major ethnic groups, over 14 languages spoken, and three major religions practiced. The U.S., being known for its ‘melting pot’ culture, has over 5 ethnicities, four different languages spoken, and over 7 different religions practiced within its borders.

Now lets compare the inequality in the above countries’ income distribution to those of Norway, Sweden, and Finland. Norway population of 4,952,000, Sweden has a population of 9,103,788, and Finland has a population of 5,262,930. All of these countries have a Gini coefficient that is either in the .25 - .29 bracket, or below .25. Not only are these countries small in population and in geography, but they are also relatively homogenous. 96% of those who live in Norway are Norwegian; 3.6% are from other European countries, and 2% are from elsewhere. It has one official language, and a majority of its people (85.7%) practice with the Church of Norway. Sweden and Finland are similar to Norway in the sense that they have one official language, and a majority of their populations (over 85%) are Lutheran. When comparing these smaller, homogenous countries with the large, heterogeneous U.S., India, and China, we see that these smaller, homogenous countries have a more equal income distribution.

The distinction between income distribution in large, heterogeneous societies and homogenous smaller ones evokes Barro’s argument in favor of the optimal size of a nation and the attraction of secession. When there is either a shock (the Arab Oil Embargo in 1973 as hinted at by Krugman, or the American Civil War as pointed out by Barro) or a change (modernization/becoming more open to international trade) to the system, heterogeneous countries with a free market and large population have a harder time managing the divergence of their income distributions. After making this comparison between countries, we have to ask whether growing income distribution is and inevitable consequence of a large, free-market, heterogeneous society that undergoes modernization.