The “Irrationality” of American Inequality
Dan Ariely, the behavioral economist and author of Predictably Irrational, has done some research into the gap between what Americans say they want and what our political system (and their voting behavior) has given us. From Radio Open Source:
First, when he asks his thousands of respondents to estimate the real division of wealth in the US, and then to propose an ideal distribution, we Americans confirm our sentimental attachment to a polite tilt of privilege. We cherish our mythic legacy of quasi-egalitarian social democracy, with no extreme concentrations of wealth or poverty. But what our answers really confirm is our delusion about the economy we live in now. The top 20 percent of the people in fact own 84 percent of the goods, and the bottom 40 percent of us, barely floating on a sea of debt, own less than half of one percent of the wealth of the nation. We live across roughly double the rich-poor gap measured in Germany, Japan and Denmark. By the standard “Gini coefficient” of wealth inequality, the US ranks with Turkestan and Tunisia, just a tad more equal than Chad and Sri Lanka.
The second key question in Ariely’s survey is even simpler; the answer is a slam dunk. Respondents were shown two pie charts — one with the actual American shares of wealth, in which 60 percent of the population nearly disappears with less than 5 percent ownership altogether; in the alternative, modeled on Sweden, the top 20 percent owns 36 percent of the wealth (almost double its claim by sheer numbers) and the bottom 20 percent owns 11 percent (about half its numerical share). In Dan Ariely’s study (with Michael Norton of the Harvard Business School), 92 percent of us Americans want to live Swedish-style instead. Women (93 percent in favor of the Swedish model) are a ever so slightly more egalitarian than men (90 percent for Sweden). But the results come out very nearly the same — Republicans and Democrats, richer and poorer, NPR listeners and readers of Forbes Magazine.
Among the most interesting things Ariely describes in the interview is why this happens. Ariely has done significant work around anchoring, the cognitive bias that explains the common human tendency to rely too heavily, or “anchor,” on one trait or piece of information when making decisions.
Ariely seems to suggest (@7:15) that politicians act as anchors for our understanding of income inequality and taxation, education and healthcare, and the size and role of government. Politicians want passion, not reason, and those passions act to move our voting patterns away from our own expressed interests and values.
Still, he’s ultimately optimistic:
It might take a generation. That might be a reasonable time scale. The current generation that is running things might not be the right one. It might be that the generation that went to college during the financial crisis is the right generation — even if a lot of them are out of work. They’re thinking about what to do. They don’t have the Princeton-to-Wall Street path. They’re thinking of other things they might do with their lives, and because they don’t necessarily have jobs they are open to following their passions. My understanding is that volunteering is up. People are trying all kinds of things. There’s an increasing interest in graduate degrees — education is always counter-cyclical to the economy. This is a generation that saw the breakage of some ideologies of perfect capitalism, ready to revise their thinking. And they might be the right people to envision a new approach.
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To think that the seeds of the “economy wreckers” destruction were sown in the effects of that wreckage on debt ridden college students (I assume at least some of them are going to work at bringing back Glass Stegal – and at prosecuting the fraud committed – and I’ll bet it doesn’t take a generation). Karma really can be a bitch.
I think every time any GOP candidate is quoted on TV as saying we need to lower taxes and make sure the rich don’t pay more, there should be a graph of the distribution of wealth by quintile in the background. I think a visual representation of the absurdity of their words placed right next to their face would really help.
The rats are leaving the ship they sunk. Ex-patriates (or should that be ex-patriots?) are giving up their citizenship rather than pay taxes on their overseas stashes.
http://skimthat.com/1961/wealthy-americans-queue-to-give-up-their-passports
Meanwhile Rand Paul hopes to slow the exodus.
http://www.bloomberg.com/news/2012-04-29/rand-paul-seeks-to-block-tax-treaty-change-on-swiss-accounts.html
Great post Joe. Thanks for sharing this. Until and unless American voters start informing their choices with more “reason”, they will be doomed to mediocre (but well-heeled) and distinctly non-egalitarian minded candidates. I find it fascinating this pining for a fair system transcends idealogical lines because when it comes to voting patterns one would be hard-pressed to see how it could be. Somehow I find it encouraging though – in a too little too late sad sort of way.
Wow, I was writing up a mild rebuttal, but before doing so I did some searching to make sure I understood the study (did anyone else?). It turns out it’s worse than I thought: http://blogs.reuters.com/felix-salmon/2011/03/25/swedish-inequality-datapoint-of-the-day/
The Sweden numbers are based on *income* inequality, not *wealth” inequality, which of course are two very different things, and in retrospect this should have been obvious. The idea that the bottom 20% of *any* country have any significant amount of wealth is a fantasy. In reality, Sweden’s wealth distribution, at least as represented in a pie chart, looks much closer to the US chart than the the chart used in the study.
So what does this mean in terms of the study (apart from the fact that it’s authors are hugely biased)? Does it means that 92% of Americans prefer a wealth distribution that is not just like Sweden, but is *significantly* more egalitarian than one of the most egalitarian nations in the world? Sorry, that just doesn’t seem plausible. I think a more reasonable explanation is that people don’t grasp proportions very well. They know, generally, that rich people are really rich, but if you ask them to draw a pie chart to represent that they are likely to underestimate, not so much because they don’t think some people are really rich, but because their intuitive grasp of proportions are skewed.
I’m sure I’ll be labeled an apologist for saying that. But the alternative just isn’t plausible. For the record, I agree that excessive income and wealth inequality is a problem. I agree with Felix’s (from the link) last paragraph:
“Wealth inequality is a problem — but it’s one of those things, like homeownership rates, where public policy only makes a very small difference to some very large numbers. Norton told Gimein that he and his colleagues are now exploring “whether educating Americans about the current level of wealth inequality (by showing them charts and pictures) might increase their support for policies that reduce this inequality.” Well, it might. But it’s important not to mislead people about what’s possible.”
P.S. here’s a link to what appears to be the actual study (pdf): http://www.people.hbs.edu/mnorton/norton%20ariely.pdf
In my shock at the inaccuracy of the portrayal of this study (by the authors of the study and the media), I forgot one of my original points:
Clearly one of the most significant drivers of wealth inequality is age (http://en.wikipedia.org/wiki/Wealth_in_the_United_States). Younger people have had less time to save, and therefore are much more likely be in the bottom 20% or 40% of the wealth distribution compared to older people. Most of us would not consider that a problem, and yet the study suggests that Americans think that people landing their first job should have some wealth already, which of course is impossible unless you are in favor of large inheritances (which I don’t think is where the authors are headed with this). How could this be? A reasonable explanation is that people are looking at the charts as static. Not being told to consider the factor of age, most people would not think of it, and therefore they would assume we are talking about static values where age is already factored in. So, it is assumed that the wealth percentile that you are in is the one in which you stay, at least for the purpose of the exercise. In fact, by introducing “Rawl’s rule” (a decision that is questionable anyway), the study’s authors reinforce this interpretation.
In the end, I think the authors do show that people misunderstand what wealth distribution is, how skewed it is, and the factors that underly it, but the misunderstanding is more complicated and less partisan than the authors and the media suggest, and is equally problematic among the media and political punditry as it is in the study’s sample.
Interesting piece, Joe.
As AD points out, there may be some inaccuracies or “skewedeness” in the data and stats, and some differences of opinion about the drivers to or reasons for the American — or whatever country’s — wealth inequality and even in people’s perceptions or understanding of the “problem,” but I believe we all agree that there is such an issue. Whether we mere humans will ever be able to do anything about it, however, is questionable.