Reports from the Economic Front

a blog by Marty Hart-Landsberg

The Inequality Mystery


Take a good luck at the chart above.   Businessweek published it, drawing on a soon to be published study by Norton and Ariely.  

In 2005, Norton and Airely did a large scale survey of Americans to see what they knew about the actual distribution of wealth in the U.S. and to learn what they thought that distribution should look like in an “ideal world.”  Here is what they found:

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.

Ok, back to the chart—the top bar shows the existing distribution of wealth—the top 20 percent owns 84% while the bottom 80% has 16%.  The second bar shows what those surveyed thought the distribution was, with the estimated distribution having the top 20% owning “only” 59% of the nation’s wealth.  The third bar reflects what survey participants would like to see in their ideal world–here, the consensus was for a world in which the top 20% owned only 32% of the wealth.

These results are pretty amazing and raise two obvious questions.  First, why do people have such a flawed perception of the extent of wealth inequality.  Second, why do so many people support policies that end up generating greater wealth inequalities when it appears they desire a world that is far more equal in terms of wealth distribution?

One possible answer, to at least the last question, comes from Businessweek itself.  After discussing the results of the study the author added the following:

What’s more, most economists would agree that the degree of wealth equality that the study’s respondents identified as ideal would be disastrous, because it would seriously retard growth—sapping incentives to work and innovate, perhaps even requiring coercive measures mandating that the poor save rather than spend their money on necessary consumption.

“It’s probably a good thing that the public underestimates how much wealth inequality there is,” says Bryan D. Caplan of George Mason University, since “they tend not to understand the ways that wealth inequality is good.”

Wow–one wonders what indicators Caplan and others are using to support their claim that wealth inequality has been good for our economy.  More to the point, one can only marvel at the ways in which the business press seeks to spin the disaster that is our economy, encouraging us to think that it is in our own best interest to encourage the very trends that worsen our living and working lives.

Oh–and just for completeness sake: Norton and Airely focus on the top 20% and their share of total wealth.  It is worth noting that the richest 1 percent actually own 35 percent of the nation’s net wealth; subtract housing, and their share is 43 percent.    

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