Sunday, April 17, 2011

Americans want more equality.

I heard an interview on the radio today with Dan Ariely of Duke University, one of the authors of a study asking Americans how much inequality in income distribution exists, and how much is desirable. The vast majority of respondents seemed to have no idea just how unequal our country's income distribution has become. The rich are much richer, and the poor are much poorer, than people think they are. Most people apparently think the wealthiest 20% control only about 59% the nation's wealth, when they actually control about 84%. Respondents in this survey were also asked what sort of income distribution they would prefer. The overwhelming majority, across all ideological lines, when asked to choose whether they would prefer to live in an unspecified country where the top twenty percent control more than 80% of the country's wealth (USA) versus a country where the top 20% only control about 40% of the wealth (Sweden), chose a distribution resembling that of Sweden.

People also may not realize that this condition has changed significantly over time. As I discussed in a previous post, we had levels of income inequality similar to today's levels in the 1920's and 1930's, then a relatively equal period from the 1940's through the 1970's, then rapidly rising shares of income going to the wealthiest among us, as this chart shows:

What is a "natural" state of inequality? To what extent have government policies increased or decreased inequality over time? To what extent must we accept the existing state of affairs, and to what extent should we try to fix it? While many of the causes and cures can be debated, the cited study suggests that people would find it more just and harmonious to live in a place where the incomes and shares of wealth are more equal than those that currently exist. One thing Ariely said he does not understand is why people have such an aversion to any talk of taxes that they seem unable to contemplate that raising taxes might be a way to get to a place that they evidently want to reach.

If people had a better understanding of these facts, would they have less of an aversion to making the tax system more progressive? And now that Republicans and Democrats have staked out such divergent positions on the budget, with Republicans seeming to favor taking even more from the poor so as to give even more to the rich, will the issue of inequality itself will come to the forefront in next year's election campaigns? Would that debate foment social unrest? Or is it the rising level of income inequality that is posing risks to social cohesion?

(chart from Animal Spirits)

23 comments:

  1. Although I've always believed that income inequality is a good thing, I have to agree with you that too much inequality is a bad thing.

    I don't think that the income inequality right now is as bad as it was in, say, the Guilded Age, but I do think that the rich need to have a bit of a higher tax percentage. I'm not about the distribution of wealth, but I think they can and should shoulder more of the tax burden than the rest of us. I know that technically they do, because 30% of their income is way more than 30% of mine, but they would not suffer too much (if at all) from a tax hike.

    I'm wondering though if the size of our population has anything to do with it. Is a country of 350 million more likely to have a much wider range in incomes than in a small country like Sweden?

    We need to remember, though, that higher taxes is not going to mean that the income gap is going to close. Most of those tax dollars are going into entitlements that don't necessarily translate into more wealth. Doesn't income inequality have to do more with wages and salary than it does social programs?

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  2. Nothing is stopping anybody from becoming wealthy.

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  3. Except ability, and that's the way it should be.

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  4. "Americans want more equality".

    Joe, you are a master wordsmith. You are not a policy wonk but most policy wonks are wordsmiths.

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  5. Harrison, to the extent that what you are saying is true, hasn't it always been true? And if so, why do you think that we have such extreme levels of inequality today as opposed to the period from the 1940's to the 1980's? Maybe you think that the government was redistributing wealth too much during that period, and that the present distribution is more "natural." If so, how do you respond to the poll results which suggest that more than 90% of Americans are not happy with the way that wealth is currently distributed in our society?

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  6. Wow I'm surprised that people w/out money wish they had more. I'm not interested in living in a world of Harrison Bergerons. I think people w/out money should perhaps concentrate on wondering why that's the case and what they can do about it.

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  7. The use of the words "equality" and "rights" can be used to mislead people -- even anger them. Both sides are famous for this.

    After 50 years, Vonnegut's equality vs equity is alive on the blogs. We're not equal, nor should we be.

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  8. Of course people are different in their talents and abilities, just as they are different in their heights or weights. So what? What follows from that? How does that answer the question of the degree of inequality we should tolerate?

    People are equal in one quality, perhaps the most important quality of all. We are all equally human. No one can say they are more human than anyone else. And that counts for something also. It is the basis of our democracy; it is the reason that no person's vote is worth more than anyone else's. But that kind of absolute equality doesn't answer the question of how much inequality in wealth or income we should tolerate either.

    In other words, it makes just as much sense to argue that because we are all equally human, we should all be equal economically, as it would to argue that because we are all different in abilities, some of us should live in mansions and others should live in the gutter. The question is still, how much equality is fair or desirable for social harmony?

    If you listen to the clip recorded in the 1950's, from the beginning of the NPR show I linked to, it justifies our capitalist system by saying that contrary to the claims of our socialist or communist critics, capitalism is actually spreading the wealth around pretty well. What happens when we can no longer make that argument? I would argue that when capitalism cannot take decent care of ordinary people, when we are no longer spreading the wealth around in a way that people think is fair, then our system is in some kind of trouble. Now matter what your politics, it should concern people that 90% of the respondents in this survey do not think that our present distribution of wealth is fair. It could even be that what is keeping our system propped up is that most people are not even aware of how unfairly skewed our distribution has in fact already become.

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  9. I have a problem when some people start telling us how much (blank) we should "tolerate." How many tall people should we tolerate (they had access to better nutrition) or how many people without glasses we should tolerate (they could afford corrective surgery).

    We already have an answer for how much we should "tolerate" in terms of taxes... Congress sent it to the president and he signed it into law.

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  10. It's not the elite or the government telling the people how much they should tolerate. According to this survey, it's 90% of the people who say they would prefer a distribution of wealth similar to that of Sweden, to that of America. What that means is that right now, most people are tolerating a situation that is a lot different from what they think is fair. And part of the reason they are tolerating it is that most people do not even realize how large a slice of the pie the top 1% or top 10% are taking. At what point does that situation become intolerable? Do we wait for the revolution, or do we start taking steps to try to make our society more like what people think would be fair and desirable? And I'm not just talking about increasing taxes on the wealthy, even though I think that would be part of the solution. It might be more a question of social norms, e.g., how much conspicuous consumption people find acceptable, how much in executive salaries shareholders find acceptable, and things like that.

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  11. Joe, it is surprising to me you would hang your hat and blog post on an NPR interview with Dan from Duke and Michael from Harvard. And them continue to rerfer back to as if it is truth. It is a poll and polls are rather easy to manipulate. Even if it were truth, markets have changed. It's not surprising to me that the richest among us are even richer than ever before. They sell products to an entire globe now. In the past, reaching customers was far more difficult. Today, one click and you might as well be next door. Billions of customers vs a 100 million -- no wonder there is a huge gap. Seems normal to me. Of course, not if you are Jesse Jackson, Jr. He is busy demonizing the iPAD for costing Americans jobs. Genius.

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  12. I don't think there is much controversy about the way income and wealth are distributed in this country. Those are just facts. As far as the methodology of this survey goes, it seems pretty straightforward to me. They showed people two pie charts, one approximating the income distribution of Sweden and the other the income distribution of the US, and they asked people which country they would prefer living in. More than 90% of Americans chose the distribution of Sweden. Then they asked people to say what percentage of wealth each quintile of Americans had, and people vastly underestimated how rich the richest 20% are, and also vastly overestimated how much the poorest 20% have.

    I can understand how these results are disturbing enough that you might want to question the methodology or explain them away somehow, but I think it's better to deal with the fact that people just don't think that the way income is distributed in this country is fair. I also think it would be good for people to understand these facts better, but perhaps others don't. Maybe that's why Republicans want to de-fund NPR!

    As far as why income has become so skewed, you should take a look at the Slate series also linked in my post, which tries to come to grips with a whole series of explanations. But I don't think that the rise of global markets is the whole explanation. After all, we have had periods in our history before where wealth became highly concentrated, as it is today. I think that the economy goes through compressions and expansions over time, and for the last 30 years we have gone through a time where the most wealthy have just become much, much more wealthy relative to everyone else. You can look at statistics like the ratio of CEO pay to average wages in a company to see how much that ratio has increased over the years. If the size of markets have increased, there doesn't seem to be any reason why everyone in the company should not benefit proportionately from that increase. Why should the top employees profit from that disproportionately?

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  13. Thanks for your thoughtful comments.

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  14. "do we start taking steps to try to make our society more like what people think would be fair and desirable?"

    This is what is wrong with Liberals and Liberalism. I personally do not want to live some place where just the mediocre tell me how to live.

    You will never pull the bottom up by dragging the top down.

    And these people are not "taking" their percentage they are earning it.

    And I say this as someone who works in Sales and makes my income by 100% comission. I produce and won't carry dead weight thank you.

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  15. I don't want the mediocre telling me how to live either. But I do think that maybe shareholders of corporations ought to take stronger action to moderate the outrageous salaries of a lot of executives who are themselves often producing very mediocre results, and at the same time they might want to reward a lot of hard working people who are not making as much as they contribute.

    I don't think it is only liberals who should want to fix those kinds of distortions. According to the poll I cited, people who called themselves Republican or conservative were just as dissatisfied with our present income distribution as people who identified themselves as Democrats.

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  16. I have no problem with shareholders getting involved with issues of executive compensation. That is their job as part owners of a company.

    Regarding distribution of income, most people don't even know how our government works or who is Vice President so I don't know if their surprise says much or their advice.

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  17. That is just one example of how you cannot make the assumption that because one person makes ten or a hundred times as much as another, the first person must be ten or a hundred times more talented or deserving, or that compensation always reflects a fair determination of what people have earned.

    A lot of what drives salary differentials are social expectations and norms. If you go back to the 1950's and 1960's doctors and lawyers and stockbrokers did not expect to live like kings. Nowadays the top people in those fields do expect to live like kings, and they don't suffer that much social stigma for consuming such a disproportionate share of income. There are other factors that have contributed to these changes, such as the rise of new tech businesses. A few people have become billionaires as a result of starting these businesses, and their disproportionate share of the wealth might just be a temporary condition, like the Andrew Carnegies and John D. Rockefellers of old.

    My guess is that something will happen that will cause this curve to flatten out somewhat again, but while it exists it is a troubling thing.

    And it is especially troubling in these times when the rich are much richer and the poor are relatively poorer, for any politicians to be talking about cutting taxes even more from the rich and cutting services even more for the poor. Because that will only make the problem worse. Could it be that people like Scott Walker and John Kasich secretly want to cause a revolution?

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  18. Nowadays doctors, and lawyers expect to live like kings?! About half of graduating attorneys are unemployed and 200k in debt. They are close to the top if not the top of % of unemployed in a given profession. I have been a licensed physician in the state of California since 1981. Doctors made a lot more money in the 80s than they did in the 90s and even less in the 2000s. The last 20 years have been off the cliff. It's not even close. I would say it's closer to 50% less. People are not going into medicine because the cost is too high and the relative financial rewards are lacking. As for attorneys, my brother is an attorney in his mid fifties. A damn good one. He would tell you the same thing. I am happy for you that you are killing it. That's not the norm. Maybe we need tort reform? My two uncles have been stock brokers for fourty years. Again, you are off base.

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  19. I did not say that doctors and lawyers all expect to live like kings. What I said was that in the 1950's these professionals generally did NOT expect to live like kings, while nowadays the TOP professionals do expect that. I remember reading an article recently (sorry I can't find the link) that talked about how even lawyers at major Wall Street firms in the 1950's and 1960's did not expect to have the summer mansions and European vacations that many of them enjoy today. And I understand and sympathize with recent law school and medical school graduates who have loads of debt and are having trouble finding jobs. They aren't the people I was talking about.

    The people I'm mainly talking about include a few professionals, but they are mainly CEO's of major companies, partners in investment banking firms, hedge fund managers, and people like that who are making many times what their counterparts were making 50 years ago. It's just a fact, as shown by the chart above that the top 10% of earners used to earn 35% of the national income whereas now the top 10% earn 50%. That's a big jump, wouldn't you agree? For that to happen, incomes of the bottom 90% have for the most part either stagnated or declined proportionately. And that is why we see so much unhappiness all around us, and people are still having trouble figuring out why that is.

    It's just a fact that the world you and I lived in when we were kids was much more egalitarian than it is now. We did not see luxury boxes at baseball and football stadiums. We all sat together essentially because the price differential between the cheapest and most expensive seats was not that great. When Bruce Springsteen comes to LA, he loves to play the old-fashioned Sports Arena, and he hates to play at Staples, because he wants to hearken back to a more egalitarian time. When we were kids, we did not live in a world with a lot of private jets, and we did not see too many mega-mansions. But now we live in the world where those differentials exist much more prominently.

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  20. Joe, the fact that someone might have made $500 million in their job in no way impacts upon my happiness or ability to make money. And might I remind you how much charity people like the Carnegies and Rockefellars gave. Or the Bill Gates of the world, either.

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  21. Harrison, if you are satisfied with the way income is distributed in this country, that puts you among about 10% of the population. The other more than 90% of your countrymen would prefer a more egalitarian distribution according to the survey. And that 90% + was pretty consistent among liberals and conservatives, and among all income groups.

    You might be right that the wealth of the wealthiest doesn't hurt the rest of us one bit. But the point of the story was that most people do not feel comfortable with that situation. Who is to say whether they are right or wrong to feel uncomfortable? It's the fact that we live in a society that the vast majority of people believe is unfair or undesirable that should be of some concern. Wouldn't you rather see a situation where most people think that the distribution of income is fair?

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  22. I can read the white between the lines. Hope you don't mind me pointing it out. It's all friendly.

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  23. It's more gray than white, don't you think? I spent some time trying to pick a pleasant, easy on the eyes, background color.

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