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Income Inequality in Key Countries

Why Norway looks great and the United States doesn't

U.S. Council of Economic Advisers - 2017 Economic Report of the President, Public domain, via Wikimedia Commons

Overview

A few of countries in the Income Inequality by Country study stand out from the rest because of their atypical results or their economic importance in the world. Their results for Norway, China, Russia, Nigeria, Hong Kong, Singapore and the United States are considered in more detail here.

Norway

Norway ends up looking like the all-around winner with low inequality, low corruption and high productivity and prosperity, but it also has comparatively low economic freedom. So why does Norway look like the envy of the world without as much economic freedom as some other countries? Is it because they have fantastic central government planning of the economy, or something else?

Norway has several unique characteristics, the combination of which is not shared by any other country, including:

A very small, homogeneous, healthy and health conscious population
Absence of a poor uneducated immigrant population
Vast natural resources that provide abundant extra income; oil alone provides 25% of its GDP
Extensive social services funding by its natural resources income
Uniformly high educational achievement, including a high proportion of advanced degrees in the sciences

China, Russia and Nigeria

China, Russia and Nigeria share high inequality, high corruption, low productivity, and poor economic prosperity. The current Chinese Communist leadership and former Russian KGB are filled with billionaires that made their money because of their political connections. Their striking income inequality is based on corruption and is a deplorably bad example of income inequality (23) that is created by the rich taking unfair advantage of everyone else. This impoverishes many, or at least denies them the improvements that a non-corrupt system would have provided. Their corrupt government controlled economies are some of the least productive in the industrialized world, denying most of their people the benefits enjoyed in the western world.

Hong Kong and Singapore

Hong Kong and Singapore are two of the most economically successful and productive countries in the world in spite of their lack of abundant natural resources like Norway. In fact they have almost no natural resources other than their people. They have made up for this lack through economic freedom and very low corruption. The result has been high income inequality. But this is a DIFFERENT kind of income equality than the bad kind that China, Russia, and Nigeria suffer from. It is the kind that benefits almost all of its citizens because it produces increasingly productive jobs that pay employees higher wages, consistently raising their standard of living.

United States

The United States occupies a unique position as the largest economy in the world. Inequality is high but so is productivity. As a result, billions of people the world over would love to immigrate to the United States, because being poor there is far better than anything they could ever hope for in their native lands. Economic prosperity, Economic Freedom, and lack of Corruption have been good but are currently deteriorating.

Influencing these measures are several relatively unique features that make it very different from Norway, including:

A large very heterogeneous population
A large poor and poorly educated immigrant population
Government regulation that stifles instead of stimulates production of natural resources
Extensive social services funded by debt instead of natural resource income
Large segments of the population with little interest in higher education
Abundance of advanced degrees in social sciences instead of hard sciences
A tradition of entrepreneurship, capital formation and job creation in small businesses
A strong history of property rights and economic freedom that built up wealth for centuries, that is currently being eroded

In spite of some of the limitations listed above, the United States has continued to lead the world in innovation and has the highest productivity in the Western world. It also has high inequality, higher than corrupt Nigeria. So how is wealth concentrated in the United States? It happens in two ways:

Through corruption, rent seeking including crony capitalism and government plunder that uses government power to take from the tax payers and consumers and give to the rich.
A legacy of entrepreneurial innovation that has generated one of the highest standards of living for its people and some of the richest people in the world, like Bill Gates and Steve Jobs.

But the standard of living and economic prosperity is declining according to the Legatum Prosperity Index because of increasing government interventionism. According to Legatum, the US has dropped out of the top 20 in their economy sub-index:

This year (2013), the US has moved down four places to 24th in the Economy sub-index. Countries that have overtaken the US in the Economy sub-index include New Zealand (17th) and South Korea (19th), among others.

The size and complexity of the United States means that many things are happening simultaneously. Both honest and corrupt wealth are being accumulated at the same time, creating both good and unfair income inequality; but the Gini-Coefficient doesn't differentiate between these two types of income inequality, and instead lumps all income inequality together.

Lesson

Comparing income inequality, as measured by the Gini Coefficient, in different countries tells one nothing about the justice or fairness of the political or economic systems in those countries because the Gini Coefficient is a grossly misleading over simplification of a complex process.

A much better measure of the relative quality of life in different countries is the Legatum Prosperity Index although the index values do not tell you why each country is the way it is. If one really wants to understand the “fairness” of life in different countries, one is going to have to dig much deeper into the factors upon which people’s quality of life depends.

Small Countries

A few small countries like Norway and Switzerland that have been able to maintain a high standard of living along with greater material equality. Norway and Switzerland have small, relatively uniform populations that they protect with strict controls on immigration. They also have exceptional natural or financial resources (oil in Norway and world banking in Switzerland) that greatly increase their per capita wealth. But they are also dependent upon other countries with less equality to buy their oil and use their banks.

Large Diverse Countries

Large diverse countries that have tried to enforce material equality upon their inhabitants, such as Communist Russia and Communist China, have ended up spreading equality of poverty and tyranny instead of equality of wealth. The same failure has occurred in smaller socialist countries like Cuba and oil rich Venezuela that have also attempted to enforce material equality.

Faulty Yardstick

The biggest problem with analyzing income inequality is the faulty yardstick used, the Gini coefficient. If you listen to Gini equal poverty is better than unequal wealth. It also makes no distinction based on what causes the income inequality.

No Simple Answer

Economic inequality is all the rage right now, with international leaders declaring it the greatest threat to the world. They view it as the result of greed and stealing from the poor, saying that it lacks any “plausible legitimacy.” Although a new book, “Capital in the Twenty First Century” by Thomas Piketty claims a simple solution to the problem, the immense complexity of human behavior in a free world cannot simplified into a neat division of “equal is fair” and “unequal is unfair.”

Poverty matters but maybe income inequality doesn’t because it is totally misleading.