Wednesday, February 2, 2011

The Great Divergence

Here are some graphs from a post by Paul Krugman looking at how the rich are getting richer while the bottom 99% aren't doing so well.

In a world that is fair, the following graph would show a line that runs at a 45 degree angle, i.e. as the GDP grows (the horizontal axis) the incomes for ordinary people (the vertical axis) grow in proportion, or dollar for dollar. The did up until

Something happened around 1973. That is when the stupidity of a "guns & butter" war in Vietnam caught up with reality. Johnson -- like Bush -- refused to pay for his war. In the early 1970s that led to runaway inflation. The economy sank into "stagflation". It stayed in the doldrums until Reagan came to power to juice it up with a big dose of deficit spending called "Star Wars". Oh... and Reagan started the dismantling of the union movement in the US and began chopping the requirement that the rich participate in society by paying their way in taxes. Reagan's view of society was feudal: the poor had the job of slaving to allow the rich to live a sybaritic lifestyle.

The following graph shows that the median and mean -- two measures of "central tendency" -- began to diverge in the early 1980s as Reagan's tax policies allowed the rich to go on an extended "holiday" from paying their share of government.

The divergence between average and median can be illustrated by the great joke about a bar in Seattle: Twenty guys sitting around groused about times being tough and took a straw poll. Their average income was only $45,000 a year. But in walled Bill Gates. Suddenly everybody brightened up. They realized they were now wealthy men. Their average income had become $20,000,000 each. Wow! Let the good times roll!

In that bar, the median income was $45,000 before and after Bill Gates walked in. But the average jumped after Gates came in because his $4 billion/year income brought everybody up. Averages are deceptive, especially in countries where the Gini index is skewed by a income inequality.

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