Perceptions of Income Inequality

A friend alerted me to "Building a Better America -- One Wealth Quintile at a Time," an article by Michael Norton of the Harvard Business School and Dan Ariely of Duke University and that appears in the current issue of Perspectives on Psychological Science. Although a discussion of the paper kicked around in the blogosphere last fall, I missed it. Credit Slips readers might find the paper interesting but, if you're like me, might not otherwise see it. Here is the abstract:

Disagreements about the optimal level of wealth inequality underlie policy debates ranging from taxation to welfare. We attempt to insert the desires of “regular” Americans into these debates, by asking a nationally representative online panel to estimate the current distribution of wealth in the United States and to “build a better America” by constructing distributions with their ideal level of inequality. First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: All demographic groups – even those not usually associated with wealth redistribution such as Republicans and the wealthy – desired a more equal distribution of wealth than the status quo.

A full version of the paper can be found on Professor Norton's web site.

Comments

[Greg Raven]

This is why they call democracy the tyranny of the masses. First, there is no place for a policy on "wealth inequality" in a free society. Any policy that attempts to create equal outcomes -- or even to equalize outcomes -- is anti-freedom. Second, who cares what a bunch of panelists think about "wealth inequality" or "ideal wealth distributions"? Certainly you must have seen the YouTube videos (including those by Jay Leno) where average-looking persons are posed simple questions about historical and current events ... and they have absolutely no clue what the answer is. This doesn't stop them from answering, of course, but these people vote! A panel of these willful idiots would produce nothing of interest. What we need is a free society, governed by the rule of just laws that apply to everyone. We do NOT need government morons adjusting the "wealth distribution"!

[Knute Rife]

Careful, Greg, you're taking a political position. That hacks certain people off around here.

[Leigh Kimmel]

The problem isn't inequality per se, but the sense that a small group of elites have rigged the game in their favor, resulting in not just an enormous and disproportionate accumulation of wealth, but one that is effectively stolen from those against whom the game was rigged.

Politicians are so beholden to big business for their offices that they no longer represent the little people. The banksters who played Enron-style accounting games with the entire economy are pocketing big bonuses while people who played by the rules and worked hard all their lives are losing their homes and their livelihoods. We're rapidly moving into a Standard Cyberpunk Future in which the government is at best window-dressing for rule by megacorporations accountable to nobody but their shareholders, with its attendant cynicism about authority.

The people who are talking about how a society's distribution of wealth ought to look are the people who are trying to sandbag the levees of civil society against the flood-tide of cynicism. The alternative is to take the attitude that since the game is rigged and the rules are lies, you might as well look out for #1 and just make sure you don't get caught, like Case and the other characters of Neuromancer.

[ltk]

To be clear, the paper compares the USA's wealth distribution against Sweden's income distribution. So the survey is a meaningful comparison between the distributions, but not between the countries. (And in any case, one could argue, for example, that a meaningful estimate of an American's net worth should include the actuarial present value of their Social Security payments, if we wish to maintain the fiction that it's an enforced savings program and not a tax. That would at least get the bottom two quintiles visible to the naked eye.)

So for a stupid question: The figure on p. 11 seems to indicate that in Sweden, the bottom quintile earns 11% of total earnings, the second 21%, third 15%, fourth 36%, and fifth 18%. Unless they're using a weird definition of "quintile", the number of people in each quintile is the same. So on average, people in the second quintile make more money than people in the third quintile. But if these are quintiles by income, then the highest earner in the second quintile should make less than the lowest earner in the third quintile. So how can this be?

[Raymond Bell]

Amazing commentary and responses.There is a big difference between giving than earning. Study what you want. Make assumptions and suggestions. Goes back, in my opinion, to President Lincoln who said, "if my father's son can become President, then your father's son can be his heart's desire.

Maybe getting out from a desk to look at what is available to people in this Country versus others one can understand that while not perfect, which the founding fathers knew when they said "...in order to form a more perfect union.." understood that earning rewards requires work, not gifts.

[Transor Z]

@Raymond Bell:

I agree that the key is social mobility, or lack thereof, coupled with the relative amount of wealth distributed. "Low-income" Americans are not competing for micro-loans to buy a second goat.

But longitudinally, we've seen a degradation in features of our culture that help ensure social mobility, namely public education. Coupled with that, or most likely because of, IMO, we've seen a more dramatic capture of government by the wealthy few than in most other eras. I am very concerned that, over time, this is causing government function to decouple from serving the public good in a true democratic (little "d") sense.

So yes, there has to be some concession to the existence of societal largesse that provides a safety net for the poorest Americans. But this is currently under renewed political attack by the forces representing the wealthiest. We don't want to lose sight of the trend given a temporary snapshot of enough societal wealth to keep most of the poor in homes and fed.

[Raymond Bell]

Transor Z:
I agree with your observation and have first hand experience in helping those who need help. As a Veteran, we have a saying: "We do not need a handout, just a helping hand." Thanks for your insight.