Perception and reality of economic inequality

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We see a lot written about how political views in the US are very polarized. As an example, the April 17, 2011 “Doonesbury”, portrays Donald Trump bragging that he is polling 41% against President Obama and is not even running yet; the interviewer, Mark, replies “It’s a divided country. Virtually anyone who’s not Obama gets 40%. My mailman could get 40%.” The idea is that we cannot reach accommodation because we have such different basic understandings, “belief systems”, “worldviews”.

Certainly this has been the case in Congress, although recently, in passing a budget for the remainder of FY 2011, there were actually some Democrats and Republicans voting on the same side. It is important, however, to note that the Republicans who voted against the budget condemned those who did precisely because they did not hold rigidly and intransigently to their positions, even if, as in the case of Congressman Paul Ryan’s budget proposal, those positions are based in mythological faith rather than in data. Paul Krugman, (“Who’s Serious Now?”  April 16, 2011, writes that Ryan’s proposal was “In fact, it was a sick joke. The only real things in it were savage cuts in aid to the needy and the uninsured, huge tax cuts for corporations and the rich, and Medicare privatization. All the alleged cost savings were pure fantasy.” The threat to Medicare is critical, given both the role that health reform, ACA, “Obamacare”, has played as a touchstone of evil in the fantasy world of Ryan and his party, and the real loss of healthcare, along with their jobs, faced by so many Americans.

A lot of people wonder how it is that such a large portion of the US population, can support Republican proposals that are so obviously about increasing the financial benefit to the richest Americans while hurting most everyone else, including, obviously, most of those supporting the Republicans. Are they selfless advocates of big money, such that they are willing to sacrifice their own interests to aid the least needy? Do they truly believe that each of them, despite the mathematical odds, has a good chance of becoming part of that select group? Are they stupid? It may be that either or both of the last two are true, but the first, unsurprisingly, is not. This is demonstrated in a very interesting study by Michael I. Norton, of the Harvard Business School, and Dan Ariely, a psychologist from Duke, recently published in Perspectives on Psychological Science.

In “Building a better America: one wealth quintile at a time”[1], Norton and Ariely present a large (5522) random sample of Americans three pie charts showing possible distributions of wealth among income quintiles as possible ideal models. One is equal: 20% in each. One is less equal and is in fact the distribution of income (not wealth) in Sweden The third is the distribution in the US. (That the second one is not in fact the wealth distribution in Sweden is not really important here; it could be called “Mars”; it is just an intermediate distribution).  About equal percents chose the “equal” and “Swedish” distributions, 77% preferred “equal” to the US, and 92% preferred the Swedish to the US. Given that people were told to assume that they had a random chance of themselves being in any quintile in any of the distributions, the preference for a more equal distribution may be unsurprising; indeed it suggests that more than half of those in the top quintile are less selfish and would support a more equal distribution of wealth. This, by the way, is consistent with a report by CBS news report from April 17, 2011 “The US Tax code: a ‘huge convoluted mess’”, in which several multi-millionaires argue against the idea that “…the rich can't afford higher taxes.“ One says “Every time I get a tax cut, I get richer…‘I don't buy one thing that I don't already have. I don't put money back into the economy. I just get richer.”

An even more interesting part of Norton and Ariely’s study involved asking their subjects what they though an ideal distribution of wealth among Americans should be and what they thought it actually was.  While their ideal was not “equal” – it assigned over 30% to the highest quintile and just over 10% to the lowest –it was much more equal than their perception of the actual distribution, which had the top quintile having nearly 60% of the wealth, and the lowest quintile only about 2%.

But, as the figure shows, their estimates were way off; in actuality the top quintile has 84% of the wealth, the third (middle) quintile well less than 5% (not much more than their estimates gave to the lowest quintile), and the two lowest quintiles are not even visible on the graph, with a total of 0.3% of the wealth. More important, there was little difference between various groups such as men and women, income levels (<$50K, $50-100K, >$100K), or whether they had voted for Bush or Kerry in 2004 (the data was collected in 2005). All groups felt that the ideal wealth distribution should be significantly more equal than they believed it to be, and all groups believed it to be far more equal than it actually is.  

Norton and Ariely express the hope that this study will inform public policy creation; that by showing that the American people are much closer together in their vision of a just distribution of wealth in society than are the politicians and pundits we hear so much from, there is a chance of reaching some greater consensus in terms of economic policy. This hope is endorsed, from several different perspectives, by the 4 commentaries that accompany it in the same issue of the journal, by Dunn et al (“Consensus at the heart of division”), Tyler (“Procedural justice shapes evaluations of income inequality”), Kagan (“Unclear implications”), and Schwartz (“A new veil of ignorance?”).

So why do we have such divisions? Schwartz notes that “T. Frank (2004) argued, somewhat insultingly, that average Americans are being duped to vote against their real economic interests. But the Norton and Ariely data suggest that people vote against their preferences. How can people be duped to vote against their preferences?” That he can ask this question means perhaps Frank was correct. Kagan beings to get to the answer when she writes “To start with the obvious, precisely because such a huge portion of American wealth is held by such a tiny percentage of individuals, these individuals have an extraordinary interest in maintaining the currently inegalitarian distribution. And unlike the vast majority of Americans, who have so little and thus have so much to gain, this tiny minority has the immense resources to see to it that their interests are carefully attended to by lawmakers.”

Moreover, people do not vote on one issue, even if the issue is their economic self-interest. Indeed, this is what Thomas Frank writes about in “What’s the Matter with Kansas?” Frank says people may vote for candidates because of their stands on social issues (e.g., abortion, gay marriage) rather because of their positions on economic issues. On the other hand, in the recent (2010) elections, we observed a justified anger at the economic situation that led to a massive shift to those who were not in power (the Republicans), who have responded not with plans to increase jobs or equalize wealth but to dismantle all the progressive reforms of the last 100 years; not to get government out of people’s lives, but even more into their bedrooms.

And the economic arguments, as Krugman notes, have tremendous implications for health and health care, given the size of health spending as a portion of our economy. Rep. Ryan’s “solution” for the deficit relies in great part on the restructuring of Medicare to reduce its support for the health needs of American seniors, when indeed what is needed is the expansion of Medicare, as a single-payer, more-controllable, health financing model, to all Americans. Ryan’s attack on Medicare is part of his attack on any semblance of a social contract or social justice, and is part of the continued redistribution of wealth from the less-well-off to the rich.

In the CBS report discussed above, David Cay Johnston, who teaches tax regulation at Syracuse University Law School, notes that  "All the data are overwhelmingly showing that for the last 30 years, we've been redistributing wealth upwards….It's not trickle-down economics; it's Niagara-up!" The Norton and Ariely data suggest that the American people do not support such a flow, and this is consistent with the fact that every poll for the last 20 years notes that we would support a universal health insurance plan. Maybe Paul Ryan’s attack on Medicare will finally be the impetus for us to go beyond the limitations of ACA and get real health-care-for-all.

[1] Norton MI and Ariely D, “Building a better America: one wealth quintile at a time”, Perspectives on Psychological Science, 3Feb2011;6(2):9-12 doi: 10.1177/1745691610393524