Entropy and Income Inequality

The Mises Institute adjusted individual income to deduct taxes and then add back in what one receives in 'benefits' from one's government. The result:
Since Sweden is held up as a sort of promised land by American socialists, let's compare it first. We find that, if it were to join the US as a state, Sweden would be poorer than all but 12 states, with a median income of $27,167.

Median residents in states like Colorado ($35,830), Massachusetts ($37,626), Virginia ($39,291), Washington ($36,343), and Utah ($36,036) have considerably higher incomes than Sweden.

With the exception of Luxembourg ($38,502), Norway ($35,528), and Switzerland ($35,083), all countries shown would fail to rank as high-income states were they to become part of the United States. In fact, most would fare worse than Mississippi, the poorest state.

For example, Mississippi has a higher median income ($23,017) than 18 countries measured here. The Czech Republic, Estonia, Greece, Hungary, Ireland, Italy, Japan, Korea, Poland, Portugal, Slovenia, Spain, and the United Kingdom all have median income levels below $23,000 and are thus below every single US state. Not surprisingly, the poorest OECD members (Chile, Mexico, and Turkey) have median incomes far below Mississippi.

Germany, Europe's economic powerhouse, has a median income ($25,528) level below all but 9 US states. Finland ranks with Germany in this regard ($25,730), and France's median income ($24,233) is lower than both Germany and Finland. Denmark fares better and has a median income ($27,304) below all but 13 US states.
No surprises here, though: there's significant entropy involved in taxing and spending. If you make $10,000 and I make $110,000, our average income is $60,000. If the government takes $50,000 from me to distribute to you, it's going to have to pay taxmen and bureaucrats to administer the program. You'll probably only get $25,000 of the money, the rest being lost to the systematic entropy. Our average income will now only be $47,500.

That's what these societies are striving for -- a more level field of incomes. That doesn't come without a cost.


Ymar Sakar said...

Feudalism is more efficient than this. It's closer to the Iqta system practiced by Islamic religious/secular lords.

Grim said...

Well, the idea is that efficiency isn't the point. They accept inefficiency in order to effect a greater income equality. American states are richer because they are more efficient, but the cost of that is that while the "average" is higher the terminals are further apart.

E Hines said...

American states are richer because they are more efficient, but the cost of that is that while the "average" is higher the terminals are further apart.

And as we've seen in this article and others, our lower-end terminal tends to be pretty well off compared to those other, more closely spaced by forced design societies.

Eric Hines

Texan99 said...

The problem goes beyond what you suggest. It's not just that there are administrative friction or losses when the government redistributes $50K from you to the guy with $10K a year. It's that the total wealth of an economic system depends in large part on the degree to which it creates incentives for productivity. Even if there were zero waste in the redistribution, you'd still find that total production dropped. Inequality is a big part of the driver that causes productivity to increase in the first place; eliminate it, and you find you've got more equality and less average wealth. That may be a trade-off that a lot of us like--balancing the benefits of a safety net against a loss in overall wealth--but there's no point hiding the cost of the safety net. We pay for it not only in the cost to the net taxpayers, but in the per capital wealth of the whole country.

Grim said...

OK, although it only 'goes beyond' if you're right that there's an additional causal factor. The numbers don't get any worse: they are what they are.

I suppose it's worth pointing out the additional cause you posit, though, insofar as it suggests that merely finding ways to increase the efficiency of the transfer wouldn't end the problem. People who advocate for it have to accept that they're going to make their "state" poorer overall as a consequence of it being -- by their lights, at least -- fairer overall.

Texan99 said...

Exactly. When we see a cost--a reduction in wealth--it's incredibly important to think clearly about what caused it, if we think we're going to be able to make a change that might eliminate the cost and thereby increase wealth.

Often there's a lot of talk about how much cheaper various necessities of life would be, for instance, if only we could eliminate profit, or the middleman. If we don't understand what profit and middlemen contribute to the system, we'll only muck things up by targeting them for elimination.

Assistant Village Idiot said...

I recall seeing similar numbers a decade ago for black Americans compared to Swedes.