What'sthe best way to measure economic inequality? By CarmelLobello At http://theweek.com/article/index/254366/whats-the-best-way-to-measure-economic-inequality The three differentmeasurements paint very distinct pictures of the health of the labor force. 1. A few things are clear about economic inequality in the U.S. We knowthat it exists, that it's worse than it was 50 years ago, and that it variessomewhat from state to state. 2. Other aspects are less clear. For example, economists are split on"how much inequality there is and how best to measure it," says DrewDeSilver of the Pew Research Center . 3. Take these three statistics about economic inequality in the U.S.: 1. The top 20 percent ofhouseholds by income are responsible for nearly 40 percent of overall spending,while the bottom 20 percent are responsible for less than 10 percent. 2. The top 5 percent of householdsearned about 22 percent of aggregate income last year, while the bottom 60percent brought in about 27 percent. 3. The top 1 percent of householdshold 35.4 percent of the population's wealth. Meanwhile, the bottom 40 percenthas held between 1.5 percent and -1 percent (to account for negative net worth)over the past four decades. 4. Though all three depict an unequal society, they paint three distinctpictures — the third being the most worrisome by far. 5. So which is the "truest" measure? 6. The first stat, from a study by the American Enterprise Institute,measures inequality by expenditure. The idea is that "what matters issomeone’s actual standard of living, regardless of how it is attained,"according to the National Academy of Sciences. Whether you're buying grocerieswith a Social Security check, a year-end bonus , or a credit card is irrelevant; it only matters that you're buying groceries. This method ofmeasurement usually depicts the smallest gap in equality. The American Enterprise Institute used it to argue in 2012 thatit shows that inequality has remained steady for decades, though other economists were quick to refute this . 7. The second stat measures inequality by income, using data from the U.S.Census Bureau. The National Academy of Sciences described the income stat as"appropriate to the view that what matters is a family’s ability to attaina living standard above the poverty level by means of its own resources."In this scenario, your paycheck counts, but the amount you receive infood stamps doesn't. 8. This is the measure the Census Bureau uses to calculate the Giniindex — the most commonly used formula for economic inequality, according to the World Bank .The Gini is a number between zero and one, where zero represents a societywhere every person makes the same income, and one represents a society whereone person makes all of the income. In the U.S. , the Gini reached .463 lastyear. 9. But the income measure is not without fault. As DeSilver at Pew putsit, "Some economists say that income data have too many flaws to be theprimary measure of inequality. For one thing, most income-inequality measuresuse income before taxes and transfer payments (such as Social Security, foodstamps, and unemployment benefits), which act to reduce inequality." Hesays the Gini index for the U.S. drops to .380 when adjusted accordingly. 10. Scientific American explains other challenges with using the Ginito measure wealth: 11. The Gini coefficient cannot tell that person X is a 24-year-oldmedical student who has negative income because of student loans, whereasperson Y, who has the same amount of negative income, is unemployed and withoutjob prospects. It samples people at random points of their lives, which meansthat it can't separate those whose financial futures are reasonably secure fromthose who do not have prospects. Its results are also sensitive to outliers—afew very wealthy or very poor individuals can change the statisticsignificantly, even in a large sample. [ ScientificAmerican ] 12. In other words, for a clear picture of economic inequality, say some economists , data on income and expenditure areboth necessary. 13. As for the third stat: This one accounts for something often left outof income analysis: Overall wealth, including stocks and otherinvestments. It also accounts for people who have high expenses, like childrenin college, for example. That stat comes from Edward Wolff, an NYU economistwho used data from Survey of Consumer Finances and other similar surveys. A 2011 study by Dan Ariely, a professor at HarvardBusiness School, and Michael Norton, a behavioral economist at Duke, backs itup. 14. "There's a strong case to be made that what we worry about whenwe worry about economic inequality makes much more sense in terms of wealththan income," says Ezra Klein on The Washington Post's WonkBlog .He uses the example of political power: 15. A young hedge funder who just got her first big bonus might show up inthe top 1 percent of the income distribution. But she's still paying downcollege loans and saving up for a house and waiting to see whether theseincredible checks keep coming. She doesn't have the security to be trying topurchase politicians. 16. But someone in the top percentile of the wealth distribution? They'veprobably been very comfortable for a long time, and they know they have theresources to continue being very comfortable for a long time, and so they canmake speculative investments in politicians. 17. All of the measures — income, expenditure, and wealth — tell adifferent story about income inequality in the U.S., and they're all useful forunderstanding the big picture. But added up, one thing is clear: The gapbetween rich and poor is a big one. Reading Comprehension Decide whether the following statementsare true (T) or false (F). 1. It is agreed that economic inequality exists and is wider than half acentury ago in the U.S. but it is not agreed on the degree and measure of theinequality. 2. Among the three measures mentioned in this passage, the measure ofinequality by expenditure shows the biggest gap. 3. The measure of inequality by income is used to calculate the Giniindex. 4. Economists may argue that the measure by income may not be precisebecause of its many flaws. 5. Gini coefficient has the ability to distinguish the financial futuresof different people and is thus reliable. 6. The example of the young hedge funder mentioned in para. 15 shows thatincome is a more reliable measure than wealth. 7. The three measures, though different in nature, reveal the same truth:the alarming economic inequality. What are the best way to measure inequality.docx