Saturday, July 2, 2011

Misperceiving Wealth in America

How is wealth in America distributed?  We're a capitalist country so a certain degree of inequality is justified and appropriate. After all, a major motivational advantage of the wealth-generating power of capitalism is that it allows some people to amass a greater portion of a country's wealth than others.   But just how unequal is the distribution in America today? How accurately do people perceive the inequality? How close is the current distribution to what we might consider ideal?

Harvard Business School Professor Michael Norton and Duke Psychology Professor Dan Ariely have recently published a study that examines these questions (Norton & Ariely, 2011).  The results are timely, given the recent debates over our budgetary crisis and economic policies, and are likely to be very relevant for evaluating the election rhetoric that is already beginning to heat up.  Although our political leaders clearly disagree on the question of ideal wealth distribution,  it isn't at all clear what ordinary people think nor how much agreement there is among them.  Nor is it clear how accurately ordinary Americans perceive the current wealth distribution in America.

Norton & Ariely surveyed 5,522 Americans who were representative of the population in terms of income, voting record, gender, and state of residence.  The careful nature of their sampling technique allows confident generalization to the larger population.

The study revealed that people are generally pretty inaccurate in their perceptions of the actual distribution of wealth in America, tending to believe that wealth inequality is less than it really is.  For example, the richest 20% of Americans actually own 84% of the wealth, but people estimated they own just 59%.  For the middle 60%, where most of us fall, the actual amount owned is only 15%, but people think it is much higher, about 37%.  Estimates regarding the poorest 20% of Americans were most accurate -- they actually own less than 1% of the wealth, but people think they own 5%.  Although there were slight differences in the estimates among demographic groups based on personal wealth, party affiliation, and gender the level of consensus was very high -- inaccuracy was not much greater in one group than another.

In terms of their ideal distributions of wealth, there was a clear tendency to accept a certain degree of inequality, but to prefer a level that is much less than currently exists.  For example, in people's ideal distribution the wealthiest 20% would own 32% of the nation's wealth, a rather lower figure than the 84% they actually own, and the poorest would own about 11%, not the .1% they actually do.  For the middle 60% the ideal was 57%,  a dramatically higher figure than the 15% actually owned by this group.  Again, income level, party affiliation, and gender were associated with only small differences in ideal figures.  Compared to their estimates of current inequality,
All groups—even the wealthiest respondents—desired a more equal distribution of wealth than what they estimated the current United States level to be, and all groups also desired some inequality—even the poorest respondents. In addition, all groups agreed that such redistribution should take the form of moving wealth from the top [20%] to the bottom [60%]. In short, although Americans tend to be relatively more favorable toward economic inequality than members of other countries (Osberg & Smeeding, 2006), Americans’ consensus about the ideal distribution of wealth within the United States appears to dwarf their disagreements across gender, political orientation, and income. (Norton & Ariely, 2011)
In contrast to the conservative view voiced by congressional politicians who want us to believe that the historical trend in America has been for greater and greater advantage being given to those in lower economic brackets, resulting in overpaid workers, bloated welfare programs and an entitlement society, the reality is that inequality favoring the most wealthy has been steadily increasing, particularly since 1970.  Evidence for this is powerfully presented in a very informative interactive graphic recently published online by The Washington Post.  I urge you to look at these data yourself, but in the meantime I'll offer the Post's summary regarding income distribution in the US:  "Inequality in the U.S. has grown steadily since the 1970s, following a flat period after World War II.  In 2008, the wealthiest 10 percent earned almost the same amount of income as the rest of the country combined (my italics)."  These wealthiest 10 percent are those whom the Republican/Tea Party leaders are willing to defend to the point refusing to consider any budget that would lead to higher taxes on the rich, and in fact have proposed lowering taxes on corporations and on people in the highest income brackets, despite the fact that their tax rate is lower than it has been for most of the past 100 years.

This does not seem like a strategy that might get us closer to most people's ideal distribution of wealth in America. 
Related Blogs:

Punishing the Victims
Terminate Me, Please
Does Size Really Matter?
Tax Tips for Tea Time
The Real Lesson from This Election
These Will Be "The Bad Old Days"


SimoneStan said...

Thanks Richard for highlighting the inequalities in our economic system. But truth appears to have little value in the current political climate. I was very disappointed with the voters my own state, Washington, who voted overwhelmingly against a small income tax so the state will continue to rely only on regressive property tax and sales tax.

PaddleDoc said...

Somewhere in our national image is the ideal that we all will be wealthy someday and therefore we don't want the "exorbitant" taxes to affect our lofty incomes nor our ability to will our fortunes to our heirs. When 1% of the population has half the total wealth (a figure I read recently) we are nearing the banana republic figures for revolution while maintaining complacency through ignorance.