Income Inequality & its Effects on the MD-GPI
When I give public presentations or policy briefings, I often get asked which of the 26 indicators has the greatest impact on the MD-GPI. When I’m outside of work, friends and colleagues inquire which policy I focus on or am interested in the most. The answer to these seemingly disparate questions is coincidentally the same: socio-economic inequality.
Why? Well, if you’ve spent more than two minutes online or watching the news, it’s hard to ignore. According to the international Organisation for Economic Cooperation and Development (OECD), the United States – when compared with 20 peer countries – has the greatest inequality of incomes.
Want details? Ok, according to this recent study, the richest 1% of Americans own 40% of the country’s wealth while the bottom 80% own just 7%. And if you think the issue of a growing disparity between the rich and poor is just ranting by the far Left, check out this Business Week article that illustrates the very real and dire consequences of income disparity to our already reeling economy.
I could go on and on. This blog, however, is on how Income Inequality affects the MD-GPI. But before I can get to that, I need to briefly explain how the MD-GPI is calculated.
The MD-GPI begins with the sum of everything Marylanders spend money on: Personal Consumption Expenditures (P.C.E.) – which is easy to calculate, just count up receipts. Next, we take Income Inequality (which I’ll explain in greater detail below), and we divide the P.C.E. by Income Inequality to end up with the Adjusted Personal Consumption (A.P.C.). And this is our real starting point. Put as an equation:
(Personal Consumption) / (Income Inequality)
= (Adjusted Personal Consumption)
Now, on to the tough part: How do economists come up with a figure that quantifies the separation between Bill Gates and Joan Q. Taxpayer? Well, the quick answer is a tiny number between 0 and 1 called a Gini Coefficient.
If you want to know more, go ahead and click on the link. But before you do, grab coffee…trust me!! If you want the Cliffs Notes, a zero means that every Marylander earns the exact same salary, and a 1 means one person holds every cent in the State. Neither is ideal, but we definitely want the number closer to 0 than 1 – somewhere between 0.3 and 0.4. Today, we’re at 0.451, and Maryland hasn’t been below 0.4 since the mid-1980s.
Now you’re probably thinking, How can that tiny number make a difference? Plain and simple – Income Inequality is by FAR the biggest factor of the MD-GPI. For 2010, Income Inequality (I.I.) totaled $40.378 billion. To put that in perspective, the next largest impacts are Services of Consumer Durables ($33.3B), Value of Housework ($32.2B), Value of Higher Education ($21.0B), and Cost of Nonrenewable Energy Resource Depletion ($20.3B).
We know that wealth allocation has been diverging for decades in Maryland and in the U.S. So let’s look at how inequality affects the current MD-GPI when compared to 2000. For this, I’ll walk you through the chart below.
|Total I.I.||% of P.C.E.||2010 A.P.C.||2010 GPI||2009-2010|
|2010 - Actual||$ 40.378 B||21.8%||$ 144.686||$ 146.933||+ 0.25%|
|2010 - 2000 I.I.||$ 34.666 B||18.7%||$ 150.403||$ 152.650||+ 4.15%|
All figures adjusted to year 2000 dollars
I.I.: Income Equality
P.C.E.: Personal Consumption Expenditures
A.P.C.: Adjusted Personal Consumption
In 2010, Income Inequality was $40.378 billion, or 21.8% of Personal Consumption Expenditures. For 2000, the ratio was only 18.7% – which is good, as less is better. If we use 18.7% instead of 21.8%, the result is Income Inequality decreases to only $34.666 billion. Substituting that $34.666 billion into the 2010 MD-GPI – holding every other indicator just as it is – the result is dramatic. The Adjusted Personal Consumption leaps up to $150.403 billion, which then bolts the 2010 GPI up to $152.650 billion from $146.933 billion. And what does that mean?
It means that if we enjoyed the same equality conditions in 2010 as we did back in 2000, our MD-GPI would have increased 4.15% as opposed to the actual paltry rise of 0.25%. In comparison, our Gross State Product (GSP) increased 1.23% from 2009. That hypothetical new MD-GPI more than TRIPLES the State’s GSP, and we’re only talking 10 years!
The bottom line is this: If Maryland as a whole and as a community – policymakers and consumer-voters alike – were to focus our efforts toward socio-economic equity, our social well-being would be far outpacing our economic improvements. Providing equal opportunities for ALL Marylanders not only supports a growing and sustainable community, it can also spur progress in both economic growth and quality of life.
Sean McGuire, Maryland DNR
Previous questions and dialogue available below.
- Happiness is Oppressive?
- Location Matters
- Valuation Part II: How We Quantify Full Value
- New Interactive Tools at MD-GPI
- Beyond GDP: Year in Review
- Triple Bottom Line
- DYI GPI: So You Want to be a Czar?
- How Much are Those French Hens?
- The End Game: Happiness & Well Being
- Giving Something Back: Your Time
- Meet the Elephant: Valuation
- Income Inequality & its Effects on the MD-GPI
- The Case for New Measures of Growth & Prosperity
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