What is income inequality?

What is inequality?
Everyone talks about income inequality but no one defines it.  There's the technical definition which is called Gini - the coefficient of dispersion around the mean value for all incomes.  But that really doesn't do it.   Because equality is not just a statistical phenomenon, it's a status - the experience of equality if you will.  It's the same sentiment that causes 90% of Americans to describe themselves as 'middle class'.

I would define 'practical equality' (as opposed to statistical equality) as being able to afford without means tested subsidy the classic 'middle class' lifestyle - 'decent' home in 'decent' neighborhoods with 'decent' schools and able to pay for your own expenses with a little left over for savings and a vacation.   I submit that a society where 80% can afford that lifestyle is more 'equal' than one where only 50% can regardless of what the Gini shows.

And while Gini can be manipulated via higher taxes on the 'rich' or more means tested subsidies to the poor, the only ways that practical equality can be improved is by either increasing wages or reducing the cost of living for the great majority.  And this is where governance becomes so important.

A tale of two cities
Lets compare two cities:  Dallas-Fort Worth and Boston.  Both are about the same size and surprisingly, both have relatively low population densities.  DFW is growing at about 25% a decade, meaning it will add about 1.5 million people in the next ten years, by contrast Greater Boston is growing less than 4% a decade.  Adjusted for cost of living DFW is the fourth richest city in America out of the 49 largest metro areas, behind Houston, San Jose, Detroit and just ahead of Austin*.  By contrast, despite having a gross household income that is $13,000 higher, Boston is 32nd richest out of 49, just ahead of San Francisco and behind Cleveland. You can see the entire list here (scroll to the bottom).

But our question is not who is richer, it's who has more practical equality?  Let's look at three measures:  housing, health insurance, and state and local taxes and try to understand their impact on equality.

Housing
In Boston, the median home costs 5.2 times the median income, making it a 'severely unaffordable' market, according to Demographia's annual global housing affordability survey.  DFW's multiple is 2.9, which makes it an 'affordable' market.  The great majority of Bostonians cannot afford the typical home, by contrast, the majority of Dallasites (Dallasians?) can.

Health Insurance
According to online broker EHealth.com, the average individual premium for a family plan in Boston runs over $11,000 per year while the average family in Dallas pays just over $5,000.  The difference in cost is not quite as big as it seems because the Boston plan mandates much more prepaid healthcare with a lower deductible)   The upshot?  Most Bostonians can't afford the average individual health plan without subsidy, most Dallasites can.   Incidentally, Massachusetts has a healthcare system that is a simpler, less irrational version of the 'Affordable' Care Act.

State and Local Taxes
Massachusetts residents on average pay 10.4% in taxes while Texas residents pay 7.9%.  MA has a more 'egalitarian' system with a significant income tax, while TX has none.

Who's more equal?
It's pretty clear that a far greater proportion of the residents of DFW can achieve a standard Middle Class lifestyle than those of Boston.  This is despite the fact that DFW has far, far more immigrants, Hispanics and African Americans as a share of its population.  Not only that but DFW has maintained much lower housing prices and taxes despite having to add housing and infrastructure at the rate of 25% a decade.  This probably explains why so many people are moving to DFW and away from Boston.  I would also observe that DFW's affluence isn't due to oil and gas activity.  I could have compared Houston to Boston but that wouldn't be fair because per capita, Houston is so much richer (42%).

Blue vs. Red governance
Differences in housing policy illustrate the difference in governing philosophy.  Boston has very restrictive real estate controls.  You can see this when you travel there:  outside of a fairly dense inner city the suburbs quickly become sparse - there are lots of houses on large lots (or next to green space set asides which is effectively the same thing).  It's all very pretty but affluent suburbanites consume a lot of space. And that space is maintained by regulation that ensures that no one can sell out to a developer who would put higher density housing on it.  And despite high land costs, it's been my observation that Boston hasn't allowed very many new inner city high rise developments in the last decade.

The DFW area has far fewer real estate controls.  The result is that rich suburbanites in Dallas live more densely than they do in cities like Boston or even New York.  In a city with a free market in land, large plot rich housing is inherently unstable because one's neighbor tends to sell out to a developer who replaces it with much denser housing.  And downtown Dallas has seen a massive high rise apartment boom that in my estimation is second only to that of Chicago's.  Again, the more flexible governance has led to a much greater supply of housing and far lower costs.

The same differences in philosophy can be seen in health care (although with the ACA's implementation I'm afraid we will all look like Boston before long) where Boston has a tops down comprehensive insurance solution that is extremely expensive (and frankly doomed to collapse if ACA didn't come along) while Dallas has a system that is much more laissez faire (and actuarially rational) but accepts a lot more uninsured (although everyone is treated in both cities).

 So, who is the government working for?
I would submit that in Boston, the government is working for the affluent elites - it is protecting their bucolic neighborhoods and  urban sight lines, driving up the cost of real estate.  To cope with the high, high costs of housing and health insurance, MA (and the Feds) throw a bone via more means tested subsidies to people who if they lived in Dallas would not need them.

By contrast government in Dallas is working for the middle class:  it keeps the cost of housing, taxes and health insurance relatively low so that 'normal' families can afford a 'normal' lifestyle without relying on means tested social welfare benefits.  And somehow government in TX delivers far more tangible improvements like roads, schools, sewers, etc. than MA for far less money.

Why the difference?
A cursory glance will tell you that Massachusetts and Boston politics are utterly dominated by one party.  There are virtually no Republicans.  This means that the affluent in Boston dominate the only source of political legitimacy and manage it so that it benefits them while spouting impeccably progressive rhetoric.  By contrast, despite it's reputation TX and DFW politics are far more competitive -Democrats run the biggest cities and the Republicans run the suburbs and while the Republicans run the State now, it is still competitive.  This means that the rich and powerful of each party contend with each other for control and influence.  And the result?:  the dominant voting block (aka:  The middle class) benefits.  Given these facts it's not surprising that Massachusetts has a much larger class warfare constituency then TX - they really are getting screwed - just not by who they think.

It's interesting that the cities in the US with the highest costs of living and really horrible levels of practical inequality (NYC, SFO, LA, etc.) are all deep blue one party towns where Republicans are all but extinct.  And there simply aren't any major metro areas which have one party Republican governance so we can't know if one party red governance would deliver as bad a (for normal working people) result (I suspect it would be bad in a different way).

Perhaps it's deep blue governance's horrible record of providing a decent standard of living for its citizens that causes them to focus so much on abstract, statistical measures of equality.  When you're doing such a bad job, distraction is the better part of valor.  But one thing is certain: real practical equality - decent people having a decent standard of living without having to grovel to some apparatchik - will not be advanced one iota by more taxes on the rich.  Indeed, the places that tax them the most today are doing the worst.

*The two richest cities by far (Houston, San Jose) just happen to be the global centers for the two mega-industries that the US dominates more than any other.  Detroit's high standing reflects both the collapse in real estate values and to some extent its historical legacy of being the third dominant industry center.  And Austin?  With metro population growing at about 40% a decade, San Jose is hearing footsteps behind it.