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Distributional Economic Health

September 2, 2014

I am pushing an unusual way of considering economic health. I call it “distributional thinking.” It requires that you not aggregate everything into one statistic, but rather take a few samples from different parts of the distribution and consider things from those different perspectives.

So instead of saying “things are great because the economy has expanded at a rate of 4%” I’d like us to think about more individual definitions of “great.”

For example, it’s a good time to be rich right now. Really good. The stock market keeps hitting all-time highs, the jobs market is great in tech, and it’s still absolutely possible to hide wealth in off-shore tax havens.

It’s not so good to be middle class. Wages are stagnant and have been forever, and jobs are drying up due to automation and a lack of even maintenance-level infrastructure work. Colleges are super expensive, and the best the government can do is fiddle around the edges with interest rates.

It’s a really bad time to be poor in this country. Jobs are hard to find and conditions are horrible. There are more and more arrests for petty crimes as the violent crime rate goes down. Those petty crime arrests lead to big fees and sometimes jail time if you can’t pay the fee. Look at Ferguson as an example of what this kind of frustration this can lead to.

Once you are caught in the court system, private probation companies act as abusive debt collectors, and nobody controls their fees, which can be outrageous. To be clear, we let this happen in the name of saving money: private for-profit companies like this guarantee that they won’t cost anything to the local government because they make the people on probation pay for services.

And even though that’s an outrageous and predatory system, it’s not likely to go away. Once they are officially branded as criminals, the poor often lose their voting rights, which means they have little political recourse to protect themselves. On the flip side, they are largely silent about their struggles for the same reason.

Once you think about our economic health this way, you realize how comparatively meaningless the GDP is. It is no longer a good proxy to true economic health, where all classes would be more or less better off as it went up.

And until we get on the same page, where we all go up and down together, it is a mathematical fact that no one statistic could possibly capture the progress we are or are not making. Instead, we need to think distributionally.

Categories: economics, rant
  1. Gordon
    September 2, 2014 at 12:28 pm

    GDP has never been a proxy for individuals’ economic health – it’s simply an aggregated measure of output. Without being flippant, it’s always a bad time to be poor, and it’s always harder to stop being poor than it is to keep being rich; and, if the economy is expanding, the rich will always benefit disproportionately because of the returns they earn on their capital as well as the returns that all workers earn on their labour – but these aren’t problems that GDP is intended (or used) to measure.


    • September 2, 2014 at 1:31 pm

      GDP is always presented as a proxy for economic health.


      • September 2, 2014 at 1:41 pm

        Just like the Unemployment number (people collecting unemployment insurance) is presented as a proxy for unemployment (people, capable of working, but without jobs).


      • Gordon
        September 2, 2014 at 3:33 pm

        No, it isn’t. It’s always presented as a measure of economic productivity, which is related but not the same. It doesn’t try to measure equality, well being or anything else, and isn’t used as a proxy for those by anyone with more than a cursory understanding of how it’s calculated. Stiglitz (SURVEY OF EXISTING APPROACHES TO MEASURING
        SOCIO-ECONOMIC PROGRESS) points out that, “…such criticisms are almost as old as the concept itself and national accountants have repeatedly warned about limitations of GDP as a welfare indicator. At the end of the day, it is essentially a measure of economic activity…”.


  2. September 2, 2014 at 12:45 pm

    Clearly 3 groups are superior to the 2 group breakdown of 1% and 99%. Might I suggest breaking it down into even more groups or bins. It seems that in NY at least everyone who is not super-rich and not poor defines themselves as middle-class encompassing too wide a swath with respect to being affected by the economy.


  3. Min
    September 2, 2014 at 12:55 pm

    One thing I learned from statistics is that you cannot put Humpty Dumpty back together again. That is, once you have ascertained valid differential effects in different categories of your population, you can’t go back to the undifferentiated whole.

    Yet economists talk about “the economy” and “aggregate demand”, etc. Shouldn’t they know better?


    • September 3, 2014 at 1:49 am

      The ones who know better are microeconomists.


      • September 3, 2014 at 6:40 pm

        And the ones who know even better are the nanoeconomists. 😉


        • September 3, 2014 at 11:15 pm

          Agreed. If the wages of a member of the first world working class exceed the “dollar a day” folks (they are expected to compete with) who are estimated to be one or two fifths of humanity (or whatever this year’s report on that said) by three orders of magnitude, and the incomes of Fortune 500 CEO’s exceed those of their median employees by another three or four orders of magnitude, then economics is utterly useless unless its scalability is extreme.


  4. September 2, 2014 at 2:26 pm

    I agree and would take it further not just looking at the distribution but also looking at multiple variables.

    A lot of information along these lines already exists. But you are right that much too much focus is put on one number which isn’t even measured very well.

    Amartya Sen, among others, have long worked for multi-variate measures of well being. When the UN endorsed his measures, they combined them together into a single “Human Development Index”. He sensibly objected on the grounds that you can’t combine a measure of Life Expectancy and one for Education, for example, in any meaningful way. But he has since said that he thinks it is useful (basically for marketing reasons) to have a single headline number. Essentially, he is saying that aggregate statistics are foolish but nonetheless have their place.



    • September 2, 2014 at 2:58 pm

      Take each of the HDI components and break them out by income or wealth deciles (or maybe just quintiles). They’re useless in the aggregate, and suffer from all the problems Cathy has with GDP. With this you’ll be able to tell how unequally the economic, health, and educational gains/losses fall along the wealth spectrum.

      Maybe we just need to make Gini coefficients for everything.


      • September 3, 2014 at 1:50 am

        Yes. We absolutely should make Gini coefficients for everything.


  5. September 2, 2014 at 3:12 pm

    Dear MB – What you are suggesting is actually done in a segment of econ analysis. The Implicit Price Deflator is calculated just that way – weighting price changes in terms of expenditures. Thus the underlying basket of items is changing according to spending patterns. Vs. the fixed basket used in the CPI and WPI.


  6. September 2, 2014 at 10:53 pm

    I couldn’t agree more.

    Piketty goes a little bit in this direction, and advocates for avoiding a single statistic for inequality, instead looking from the perspectives of a few groups (the 1%, the 10%, the next 40%, the bottom 50%). I think this is great, but doesn’t go as far as what you are suggesting. In particular the constant focus on income or wealth inequality tends to forget that these are just proxies for inequality of well-being. This tends to blind us to some possible interventions that instead of reducing gaps in income or wealth, remove certain things from being buy-able. Think of the ideas that introduced monogamy, vote for non-property holders, public education, and universal health care. All of these interventions took their respective part of wellbeing (ability to have kids, voice in politics, access to basic education, access to healthcare) and separated it (at least partially) from the market. Sure, the separation is not perfect, if you are richer it might be easier to have a child, or influence politics more, or get a better education, or better healthcare, but the amount of wellbeing inequality in these domains was greatly reduced..


  7. Auros
    September 3, 2014 at 6:38 pm

    Fewer scalars, more sparklines! 🙂


  8. September 12, 2014 at 6:02 pm

    Your article made me think about my salary. I have had very few salary increases and several increases in the cost of medical insurance premiums. So I did some calculating. In the past 13 years, I have had a total 13% increase in gross salary. When factoring in the increased cost of medical insurance and also inflation, I’m actually making 15% LESS money in 2001 dollars.

    I’m fortunate enough to have had a good salary to start with in 2001. But it’s getting harder to make ends meet with increased expenses and decreased pay.


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