Bad Data In, Bad Policy Out

The Public Policy Research Center at the University of Missouri-St. Louis recently released the report, “An Equity Assessment of the St. Louis Region.” The report concludes that reducing trends in inequality will “build a strong, competitive economy in the decades to come.” This goal is laudable; the narrow approach advocated by the center’s report, however, is suspect. There are numerous aspects of the report’s use of data that are questionable. I will address only a few in this limited space. “Racial and economic inclusion,” states the report, “are the drivers of robust economic growth.” Actually, the preponderance of evidence from years of research shows that education drives economic growth. Education, especially educational attainment and not just years in school, is the single most important empirical factor explaining differences in economic growth across states and countries. In a recent Show-Me Institute essay, I show that Missouri ranks in the lower echelon of states when it comes to educating its children, and it is one of the slowest growing states in the union. If the report were to argue that better education leads to racial and economic inclusion, then I would totally agree. But a policy to reduce inequality by simply imposing greater inclusion is very different than one aimed at increasing educational attainment to achieve the same end. The report asserts that erasing racial income inequality in the Saint Louis region would improve economic output and raise incomes. They estimate that in 2012 the economy would have been over $13 billion larger if there were no racial inequality. But this is tautological. If I earn $20 and you earn $10, doubling your income by definition increases our joint income. The gnarly problem is how to increase your income, and mine as well. If higher income for you is mandated by the government regardless of your skills, this will only redistribute the current economic pie and not improve economic growth in the region. The movement to raise the minimum wage is based on such sophistry. Proponents of raising entry-level wages see only those lucky individuals whose incomes increase while they ignore the workers left behind because their skills are not worth the higher cost to employers. Mandating reduced wage inequality without concern for such harmful distributional outcomes is bad policy. The report measures income inequality using the Gini coefficient, a popular statistical measure of inequality. A Gini of one indicates complete inequality; zero indicates complete equality. The Gini for the Saint Louis region, 0.45, is slightly below the national average, and in the middle when ranked among other metropolitan areas. So, according to this measure, income inequality isn’t that bad in the region. The problem is that the Gini coefficient is well-known to have many flaws. Based on what is reported, the center’s report apparently relies on a Gini coefficient that does not account for the “income” generated by social assistance programs. By not properly accounting for programs that raise the income of lower-income groups, the Gini coefficient is misleading. Moreover, Gini coefficients can change dramatically depending on whether pre- or post-tax income is used in the calculation. Using Gini coefficients that account for these concerns would likely show that income inequality is less pronounced in the Saint Louis region than that indicated in the report. Everyone agrees that economic inequality is an important issue. Before we embark on a series of policy decisions to deal with inequality, however, better analysis than that provided in the UMSL report is needed.