Income inequality is not as extreme as many citizens think

by on January 23, 2014 at 3:58 am in Data Source, Economics | Permalink

Here is a recent Gallup poll of interest, suggesting many people are unhappy with the level of income inequality.  Alternatively, here is a new paper to warm Bryan Caplan’s heart, by John R. Chambers, Lawton K. Swan, and Martin Heesacker, entitled “Better Off Than We Know: Distorted Perceptions of Incomes and Income Inequality in America”:

Three studies examined Americans’ perceptions of incomes and income inequality using a variety of criterion measures. Contrary to recent findings indicating that Americans underestimate wealth inequality, we found that Americans not only overestimated the rise of income inequality over time, but also underestimated average incomes. Thus, economic conditions in America are more favorable than people seem to realize. Furthermore, ideological differences emerged in two of these studies, such that political liberals overestimated the rise of inequality more than political conservatives. Implications of these findings for public policy debates and ideological disagreements are discussed.

There is this bit:

Most participants (76%) incorrectly selected the higher value ($681,649) as the cutoff for the top 1% of earners, magnifying the level of income it takes to qualify as a “1 percenter.”

There are different measures, but I think of 380k as the relevant cut-off point for the top one percent.  Here is a useful Atlantic write-up of the piece.  I cannot find an ungated version, can you?

I thank Veronique de Rugy and Scott Winship for relevant pointers.

Harry January 23, 2014 at 5:09 am

Outstanding.

Millian January 23, 2014 at 6:00 am

People underestimate wealth inequality, but that’s because wealth and income are so easily conflated to ordinary people.

Rahul January 23, 2014 at 7:54 am

One-percenter is just so much easier to use. Point-one-percent-er is quite a mouthful.

Brian Donohue January 23, 2014 at 8:02 am

Not just ordinary people! Look at Tyler’s excerpt from the abstract:

“Contrary to recent findings indicating that Americans underestimate wealth inequality, we found that Americans not only overestimated the rise of income inequality over time, but also underestimated average incomes.”

Guh.

On the other hand, humans are excellent at having a sneaking suspicion that they’re not quite getting a fair shake from…whatever.

Benny Lava January 23, 2014 at 8:19 am

Good catch. The morons that created this study apparently don’t know the difference between wealth and income.

Marie January 23, 2014 at 3:21 pm

Actually, my read is that they know the difference very well, and selected income purposefully. It says to make things clearer, I’m thinking to make things swing the way the study writers wanted them to swing.

BC January 23, 2014 at 11:54 pm

I know the difference between wealth and income, but which is the bad inequality, wealth inequality or income inequality? Or is it millionaires that are bad? Or billionaires? Or people that make 680k? I’m starting to lose track.

Floccina January 23, 2014 at 4:22 pm

In my experience always have a sneaking suspicion that they’re not quite getting a fair shake from…whatever.

Owen January 23, 2014 at 6:10 am

Does anyone else find these results a bit underwhelming? Americans, having just been told that the top 20% earned more than 11 times those of the bottom 20 in 1967, expected that ratio to have risen to 30 percent by now. But it’s 15. Is this so horribly inaccurate? I don’t know what would have guessed, it’s such a weird statistical requiring math that most Americans have. Inequality has risen from a point in history where the US had just given black people civil rights. People understand the directionality of that trend, and are worried about it. If you want to say it’s not so bad, make that case, but the logic of “haha you overestimated the problem when we phrased it in abstract statistics, clearly everything is fine!” escapes me.

Michael January 23, 2014 at 7:42 am

It’s incredibly underwhelming and Cowen’s posting of this yet again belies his ideological position, and his lack of objective scientific credibility.

prior_approval January 23, 2014 at 7:49 am

Prof. Cowen is an economist – no economist has ever possessed ‘objective scientific credibility.’

dan1111 January 23, 2014 at 8:27 am

The ideological range of content that Tyler is willing to consider is about 1,000 times wider than the range of you two. Good grief!

The whole point of a blog is that you are getting content and commentary that reflect someone’s viewpoint. If you find that viewpoint interesting, then read the blog. If not, then why are you here?

Michael January 23, 2014 at 8:53 am

dan, do you catch the irony of calling out two people who disagree with Cowen’s ideological view and who also read Cowen’s blog daily?

prior_approval January 23, 2014 at 9:21 am

‘The ideological range of content that Tyler is willing to consider is about 1,000 times wider than the range of you two. ‘

And ‘ideological range of content’ has what to do with ‘objective scientific credibility’?

All I said was no economist (which should cover everyone’s ‘ideological range’) has ‘objective scientific credibility’.

Defending someone as being broadly instead of narrowly ideological would seem to miss the point of that simple observation.

Michael B Sullivan January 23, 2014 at 12:10 pm

You know Michael, it’s genuinely admirable to regularly visit the websites of those you don’t agree with, but it’s hardly the beginning and end of a non-dogmatic worldview. Yes, you read — though, it seems from your comments, only with an eye towards dismissing — viewpoints you do not agree with. Tyler clearly also reads viewpoints he does not agree with. Many of us do. This is not a blanket shield from all criticism of ideological blinders.

uffs January 23, 2014 at 5:35 pm

Pretty much this. People aren’t all that great at calculating the second derivative for income inequality, but that matters little.

Wealth inequality matters more over time anyway, but stagnation of wages and increasing levels of debt are the real problems of many Americans and their government. Or not, things might all be fine and dandy.

Rich Berger January 23, 2014 at 6:15 am

Are there really any other purposes to this blather over inequality other than to stoke envy and provide for more power to leftist politicians?

Hoover January 23, 2014 at 7:44 am

I’m getting interested in inequality because other people are interested in it.

That’s to say, I notice people rioting and so on. In Brazil, for example, youngsters are invading shopping centres in groups of a thousand or more. In London, my city, it’s alleged that some areas are dying on account of the influx of absentee landlords putting their cash into properties where their own governments can’t get it.

I don’t give a damn if Mr Gates earns ten thousand times what I earn. But I sense inequality beginning to affect my environment, so I’m beginning to gather data about it.

dead serious January 23, 2014 at 10:42 am

Great way of thinking. Good on ya.

Govco January 23, 2014 at 1:49 pm

Those rioters need to attend their Bible study classes.

Ricardo January 23, 2014 at 3:43 pm

People riot mainly for fun and profit.

The Other Jim January 23, 2014 at 8:38 am

>>”Are there really any other purposes to this blather over inequality other than to stoke envy and provide for more power to leftist politicians?”

Of course! It is also a useful tool to demonize those who oppose the leftist politicians. More power for the state, more rage against those who speak out. Win-win.

That covers it for “purpose,” however.

leftist conservative January 23, 2014 at 9:08 am

don’t worry–the politicians won’t tax the greedy yuppies. The pols will run on ‘inequality,’ and the white working class majority will vote for them, hoping the politicians will tax the rich, but when they get in office, the politicians will put in programs for more race spoils, with the aim of giving nonwhites more money and power. Bait and switch. Same as it ever was….

dstraws January 23, 2014 at 8:52 am

How about it is a short hand proxy for other conditions in the society.

Andrew January 23, 2014 at 9:15 am

Interesting, but how well does it do in that role?

Anyway, not a single leftist I know thinks the rise in inequality is best viewed as a consequence or proxy for real problems. Most think inequality is THE problem, though a few more sophisticated thinkers stop short and say reducing inequality is simply the magic elixir that will cure everything we find undesirable (I’m only slightly caricaturing).

Stan January 23, 2014 at 11:55 am

I’m less concerned about inequality per se than about the low income of American workers. Consumer spending plays a big role in our economy, and the lack of disposable income is bound to have an adverse effect on demand. That’s one point in favor of better pay for workers in the low and middle income ranges. A second concerns maintenance of our present free trade policy, which I favor, and the third concerns my fear of of a xenophobic reaction to immigrants. I prefer the US as it was in the period 1945 – 1970 to the present plutocracy, even though my wife and I are making out like bandits due to the Bush tax cuts on capital gains and dividends.

Regarding your personal contacts with leftists, you need to get out more.

Andrew January 23, 2014 at 2:05 pm

But some of my best friends are leftists!

Your concerns largely mirror my own. Are you sure you are a leftist? Some may be sufficientarians instead of egalitarians, but the rhetoric is becoming more and more tilted towards the latter. Congratulations on your success!

Marie January 23, 2014 at 4:03 pm

Yes, this is a big problem with this debate, and this study.

Inequality is the symptom, not the disease. We can spend all our time arguing about whether the fever is 106 or 105.5, and we can take a bunch of Tylenol (redistributive taxation). But the point is the underlying problem with a system that is supposed to be free market based but seemingly is not.

RandomCommenter January 23, 2014 at 6:25 am

Maybe the cutoff for belonging to the top 1% is a less relevant statistic than the share of total income pocketed by the 1%.

Jan January 23, 2014 at 7:02 am

Whatever, it’s all about the top 85….individuals! Eighty five people have as much wealth as the poorest 3.5 billion combined. The richest 1 percent control only about 50 percent of global wealth, suckers.

http://www.businessweek.com/articles/2014-01-20/the-worlds-85-richest-now-worth-as-much-as-3-dot-5-billion-poorest

Brandon Berg January 23, 2014 at 9:42 am

This really isn’t that interesting. All it tells us is that roughly half the world’s population has no savings.

I’m surprised that the left is still talking about income. The wealth distribution is much more fertile ground for demagogic sophistry.

Marcos January 23, 2014 at 11:08 am

Exactly that. Behond a certain level of income concentration, the cuttof for the top 1% reduces with further increases in contentration. It’s not a usefull indicator.

Jan January 23, 2014 at 6:59 am

In a Pew Research Center poll last year, 27% of people said they thought the income gap between rich and poor had gotten smaller or stayed the same in the last 10 years. Nine percent said they didn’t know. That’s over 1/4 of the country. Are they correct?

http://www.pewresearch.org/fact-tank/2013/12/05/americans-see-growing-gap-between-rich-and-poor/

daguix January 23, 2014 at 7:00 am

This study is very interesting. It may be the best explanation for the rise in income the rise of the top incomes in the US. It is just a shift in social acceptance of inequality. Apparently, people in the US are ready to accept the top 1% may earn up till $600k! In Europe, it is quite different, the answer will be much lower.

Rahul January 23, 2014 at 8:00 am

How well would American’s do if asked for the cut-off point for the bottom 1% (or 10%)? Rather than a specific bias this study may just indicate ignorance or innumeracy.

Nathan W January 23, 2014 at 7:05 am

The fact that many people overestimate income inequality does not mean that it is not a problem. The fact remains that, for some time now, real wages have been stagnating or decreasing for many age groups and sectors, and to me this is the most relevant piece of information with regard to the (changing) situation regarding income inequality.

MD2 January 23, 2014 at 7:45 am

Exactly. Are we really supposed to buy that “Thus, economic conditions in America are more favorable than people seem to realize” just because average incomes are higher than people think they are? Wouldn’t stagnant low-end wages and skyrocketing high-end wages create an average that’s higher than MOST people (being at the low-end and never having met someone who makes $380K) think it is?

JWatts January 23, 2014 at 8:03 am

“The fact remains that, for some time now, real wages have been stagnating or decreasing”

Yes, but total compensation and wage after taxes and income transfers has been increasing. So we pay higher taxes, but we get more benefits than we did 30 years ago. Isn’t that the real story?

odinbearded January 23, 2014 at 8:47 am

If wages are flat (only true if you discount insurance and transfers), then isn’t that the real problem? If the top earners are gaming the system, then isn’t that what we should care about?

Inequality itself is only a measure. Saying that inequality itself is a problem in modern America doesn’t do anything to advance the discussion.

asdf January 23, 2014 at 8:40 pm

Money = political, social, and cultural influence. If people are “gaming the system” then there is likely a feedback loop between that and income (power).

Almost all highly unequal societies tend to descend into corrupt oligarchy and crony capitalism.

Squarely Rooted January 23, 2014 at 7:27 am

Firstly, according to the chart in the article, people seem surprisingly good at estimating the distribution of income, considering how bad they are are estimating other things (like the size of the federal budget or the share of various components – here’s a poll from two months ago showing Americans think foreign aid is over a quarter of the federal budget).

Secondly, who cares whether people think the cutoff for being in the 1% is 5 times their current household income or 10 times? It’s still more money than they ever hope to make.

Thirdly, doesn’t it make sense that “exaggerated” perceptions of certain facets of income inequality would be an outcome of increasing income inequality in actuality? I’m sure if you surveyed the working classes of many nations throughout time and space, you would find a correlation between perceptions of being screwed by the elite class and actual bescrewedness.

Michael January 23, 2014 at 7:41 am

Yeah, of course–the issue has attracted greater awareness.

Back in 2009-2010, studies on income inequality showed that people massively underestimated inequality in the U.S. Now the pendulum has swung the other way because of things like Occupy Wall Street and greater access to information. If you don’t believe me, read it for yourself: http://www.people.hbs.edu/mnorton/norton%20ariely%20in%20press.pdf

So, Gallup and Chambers et al. are just demonstrating that Occupy Wall Street was a massive, resounding success.

Jan January 23, 2014 at 7:54 am

$717,000 is the _average_ income of the top 0.9%. When you’re nowhere near that level of income, the perceived differences of another couple hundred thousand are minor. In that context, $681k really isn’t that far off the mark.
http://www.nytimes.com/interactive/2011/10/30/nyregion/where-the-one-percent-fit-in-the-hierarchy-of-income.html

Tarrou January 23, 2014 at 8:04 am

Income inequality on its own is not a problem. It is only an issue if A) it affects the political and judicial processes too much, or B) engenders too much jealousy. We know it is very difficult for money to directly affect politics, it is much harder to buy elections than it is to buy favors. Maybe I’m off base here, but much of the complaints I see about inequality seem to fall directly into simple jealousy arena. All the stuff about the “1%”, or this latest tear about the “85″. Nothing is ever said about the complex effects of wealth globally, or how rising technology increases standard of living even with stagnant wages. People just say that X number of people have as much money as Y number of people and assume Ex Nihilo this is some sort of moral crime.

For instance, in the 1980s, suppose you wanted instant access to all TV shows, how much would that cost? Premium Cable plus a serious library of VHS tapes, tens of thousands of dollars plus a $150 monthly charge. Now we have Netflix, at a price of $8 per month, and someone is obscenely wealthy because of it. And everyone can afford better and more convenient entertainment. So are we more unequal now? Or less unequal, because poor people have access to a better standard of living? The money is going in separate directions, but the lifestyles may be closing.

Conservatives and libertarians should not dismiss the idea that wealth can be misused, nor underestimate how much human emotions can color perceptions of the issue. And liberals should not assume mathematical disparity equals a problem. As with the “wage gap”, there may be nothing to solve. I’m not convinced there is anything specifically about inequality as currently presented that is any sort of an issue.

Michael January 23, 2014 at 8:07 am

No, the problem isn’t jealousy. The problem is productivity per worker has risen while inflation-adjusted wages have not. Americans are all running to stay in place unless they’re in the top 1%.

Tarrou January 23, 2014 at 8:27 am

Think about it Michael. Wages have stagnated from when? The post-war boom high? Is it a long slide or a reversion to the mean? And has it adversely affected the lives of average people? Your very supposition that people need to “Stay in place” relative to the wealthy in cash alone is jealousy based. In 1990, only the richest had a cell phone, a clunky car model, usually. Twenty years on, wages may have stagnated, but the products it can buy have not. Is inequality abut how many zeros are in the bank, or how different lives are? You still haven’t shown any actual problems, you simply assert that people are working harder for less inflation-adjusted money than they did in the ’60s. Assuming you are correct, and I think you are, it’s not a problem on its own.

Michael January 23, 2014 at 8:56 am

Ah, yes, the cell phone argument. If talking about cell phones, you’re right when you say “Twenty years on, wages may have stagnated, but the products it can buy have not.” If talking about pensions, health insurance, or university education, then you’re completely wrong. And, frankly, I’d trade in my iPhone and laptop if I could have one of those magical unicorn-land money-giving animals known as a “pension”, let alone guaranteed health insurance for the rest of my life.

chuck martel January 23, 2014 at 9:39 am

Guaranteed health insurance? Aren’t you just saying that you want someone else to pay for whatever medical expenses you may encounter? That you want healthy people to subsidize your ill-health? A pension is a small matter, save. Engineered inflation may rob you of a portion of those savings but, what the heck, 2-3% annual inflation is a good thing, right? Or, you could educate your offspring to have the integrity to chip on Dad’s geriatric expenses, since you paid for raising them to adulthood.

Michael January 23, 2014 at 2:19 pm

1. What if I have no children and don’t want any?

2. I’m happy to subsidize others’ ill health in exchange for them subsidizing mine. Pooled risks mitigates costs.

3. A pension would be a small matter if the vicissitudes of the stock market weren’t so difficult for the non-professional to manage.

4. You obviously don’t understand the dangers of a liquidity trap.

chuck martel January 23, 2014 at 2:58 pm

1. Then save your money.

2. That can be and has been done on a voluntary basis. Why is there a need to coerce others into the plan when they disagree with it? If it’s such a great idea there should be no problem getting everybody to enroll.

3. The stock market isn’t the only avenue for retirement savings. Try bonds, precious metals, T-bills or even savings bonds.

4. I not only don’t understand the danger of a liquidity trap, I don’t believe there is such a thing.

Floccina January 23, 2014 at 4:56 pm

I’d trade in my iPhone and laptop if I could have one of those magical unicorn-land money-giving animals known as a “pension”, let alone guaranteed health insurance for the rest of my life.

you probably could. Take the money you spend on you cell phone and computing and save it and then buy an annuity that pays what those pensions paid and for about as long as they paid on average.
Also the rand health insurance experiment showed the healthcare in the 1970′s (beyond the cheap stuff vaccinations, antibiotics, Tylenol, aspirin, trauma care) was not worth all that much (whether or not health care (beyond the cheap stuff) today is worth much is still open to debate) .

asdf January 23, 2014 at 8:44 pm

In the past people could afford healthcare, education, and safe places to live. All of those are a lot more important then iphones and Netflix.

“That can be and has been done on a voluntary basis.”

Not for the sick and poor.

bluto January 23, 2014 at 10:54 am

Why do you assume productivity is due to people working harder, and not machines doing more work.

joan January 23, 2014 at 11:49 am

Machines working harder, that is better technology always increased wages before the 1970s. The question is why it has had so little effect on most peoples wages since then.

Brandon January 24, 2014 at 5:25 pm

The industrial revolution didn’t start in 1970.

Jan January 23, 2014 at 8:24 am

As income inequality has risen in recent years, so has the poverty rate. It’s not all about Netflix and smartphones. Cheap technology is not a measure of opportunity and whether people working full time jobs are meeting the basic income requirements to have a stable family life.

Tarrou January 23, 2014 at 8:31 am

Poverty rates are arbitrary lines. Cheap technology is a measure of lifestyle, not opportunity. And while I am happy to see a goalpost, finally, I don’t think stable family life is reliant on income. I agree stable families are a good thing, but it’s not a lack of money from jobs that makes modern America so family-unfriendly. And I don’t think a lack of stable families is what animates the inequality-obsessed.

dstraws January 23, 2014 at 9:00 am

You don’t really believe this do you? “Stable” families have certain financial requirements, not including the cell phone etc. You know money for food, utilities and housing. Its also nice to have a car and the ability to use it and repair it. Oh, and its important to have time to interact, guide and be involved with the kids.

chuck martel January 23, 2014 at 9:31 am

“You know money for food, utilities and housing.”

Evidently you’re saying that income inequality, or inadequate increases in majority income, have made eating, heating and housing relatively more expensive. Income inequality doesn’t have much to do with building codes, occupational licensing, zoning, taxes and all the other myriad factors that make home ownership far more expensive than it needs to be. Food in the US is cheap if the consumer stays away from value-added products like sugary breakfast “food” and pre-prepared meals, although government policies have a direct bearing on the increasing cost of eggs, milk, cheese and meat.

Jan January 23, 2014 at 12:27 pm

Do you think that laws, regulations, tax policy, and the political power that the rich wield are not central to explaining why wealth and income is are now so concentrated among so few?

Tarrou January 23, 2014 at 9:39 pm

So let me follow the logic.

1: You need money to have a family.

2: Because some people have more money, this somehow removes the money other people have.

3: Ergo, bad families are the result of the rich!

Seriously, have I misstated your argument? That looks like a strawman to me, but I honestly can’t think what you’re arguing here.

Marcos January 23, 2014 at 11:12 am

I’d say that inequality is much more a simptom than a problem.

blast January 23, 2014 at 5:06 pm

I, too, would like to see a study of trends in living standard inequality, with and without college education thrown in there as a consumer good.

Brian Donohue January 23, 2014 at 8:15 am

The rhetoric on this subject is ridiculous. Invariably, increases in come are described as “going to” or “flowing to” the 1% disproportionately, as if these increase are a river and the 1% sit upstream with big buckets.

It is at least as accurate to describe this as increases being “produced by” the 1% disproportionately.

I look at a bigshot lawyer working 80 hours a week and pulling down $1 million a year, and envy or resentment is not what I feel.

A substantial amount of inequality is down to choices people make. I have 4 siblings, we’re all between 40 and 50, and we’re all over the place.

agreeing with Brian January 23, 2014 at 9:14 am

I agree that the rhetoric is unhelpful and the framing in the post does nothing to improve it.

My problem with the inequality and mobility debate is there is no consensus about what are the good and bad outcomes.

I watched The Butler this week … I think (almost) anyone can agree that overt discrimination or a pay reduction based purely on the color of your skin is a bad outcome (for the individual and the society). When we look at income inequality today there’s still plenty of discrimination (including some statistical crap like employment ‘double jeopardy’ on ex-felons). But as Brian notes there are also a lot of choices too AND (I’m talking to you libertarians:) random shocks. In a society with limited social insurance (including government, communities, families, ect.) you will get a fanning out of income from all three forces. Income and wealth inequality are a very crude ex post measure of the opportunities, choices, and shocks that affect individuals. There are interactions but I honestly think we have to drill down into the details … and thus take a stand on what is acceptable and what is not acceptable. All inequality is not created equally.

Also one comment on the post: perceptions can matter a lot. Do you make decisions based on “the truth” or your perception of it? I get nervous when I hear researchers poking fun at individuals’ “misperceptions” … those “misperceptions” often tell us more than the objective “reality.”

Locke January 23, 2014 at 11:13 pm

+1 for bringing thoughtfulness to the internet today.

Turkey Vulture January 23, 2014 at 11:30 am

The bigshot lawyer can only make that kind of income because of the rules of the game in place, and the guild that creates barriers to entry and practice.

I don’t want to be him either. I chose family and lifestyle over money at a much lower salary. But that doesn’t mean his $1 million flows necessarily from the natural order of things, that he “deserves” it, or that a well-constructed legal system allows him the opportunity to make it.

Brian Donohue January 23, 2014 at 12:08 pm

Quibbles:

Your first paragraph may or may not be correct. I object to the word ‘only’. Presumably, all lawyers have cleared the magical barrier to entry, but only a few make $1 million per year. In my experience, these are the best lawyers who work the longest hours.

In your second paragraph, I never said this was ‘necessarily’ the case. As ‘agreeing with Brian’ says, a variety of factors conspire here, but you almost never here about individual merit and effort in stories about where the money “flows to”.

FYI January 23, 2014 at 12:29 pm

Brian, I think you’ll enjoy this post too. It’s a slightly different riff on your individual choice point but related: http://orderstatistic.wordpress.com/2014/01/22/inequality-in-adam-smiths-world/

Brian Donohue January 23, 2014 at 12:57 pm

Thanks. That was good. To me, the system of taxation is the ‘insurance mechanism’ intended to correct for non-merit/effort based sources of inequality.

This is hardly a new phenomenon, right James Madison?

“The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.”

Turkey Vulture January 23, 2014 at 1:15 pm

Who the “best” lawyer is, is itself determined by the rules of the game. The demand for lawyers is also determined by those rules. A more simplified tax system would greatly decrease the earnings potential of tax specialist attorneys. Similarly for other areas. Eliminating a private right of action in antitrust would destroy that practice area. And so on.

Even if it’s individual choice, effort, and skills at the current game that leads to these successes, it doesn’t mean we should laud those accomplishments or the system as it exists. I suspect that most people running drug cartels are quite skillful, and put in a lot of effort to get where they are.

Brian Donohue January 23, 2014 at 2:27 pm

I’m not lauding these lawyers, and I don’t envy them. I just don’t think they owe me some of their income because they make more than I do.

Turkey Vulture January 23, 2014 at 3:26 pm

Reducing inequality doesn’t have to be about ex post redistribution. It can be about changing the ex ante rules of the game, and thus the initial allocation.

We can do various things that would be expected to both increase overall welfare and reduce inequality. Say weakening IP law or destroying the professional guilds.

If we don’t do something about inequality in this way, it is more likely that something will be done about it in a less efficient way.

Turkey Vulture January 23, 2014 at 3:41 pm

What I’m trying to get at is that, although they don’t owe us anything, they don’t particularly deserve anything either. Anyone concerned with inequality should first look to the underlying rules and arrangements in our society that may lead to the excessive accrual of gains to particular people, and see if there is a way to change those rules that (1) increases total welfare while (2) leading to a less concentrated distribution of the gains.

Marie January 23, 2014 at 4:22 pm

This is it, this is it, this is it.

And it’s what good people are viscerally feeling when they balk at inequality.

If they think there’s a good reason for the inequality, good people don’t gripe — when I waited tables, I never ever begrudged the brain surgeon his massively larger income.

The gut feeling is that a big chunk (you can argue about how big) of the people making a ton of money are not making that ton primarily because their work has great value but because our economy has been distorted.

Same the other direction.

It’s not about the money, it’s about freedom.

agreeing with Brian, Turkey, and Marie January 23, 2014 at 5:47 pm

This is exactly why income inequality is such a poor metric. As just one example: as a government economist my pay reflects the fact that I went to school many, many years and have a scarce and needed set of skills. My salary also is competitive with university positions so it also reflects the inefficiency of low-competition tenure track jobs and non-profit management … I get that premium just because. Now after doing said government job for a while I get a headhunter call every few months to go to Wall Street and get a huge bump in my salary. Why? I never got those kind of calls in grad school. Well I know how to do certain things in my government job that are not exactly public information. Now I do know this stuff (and it was not exactly easy to learn it) but why in the world should I get paid for that rent? So what part of my salary is deserved? What part is distorted? These are not easy questions to answer but looking at my paycheck (or my potential paychecks) is almost certainly not enough information to answer it. Market values are not the same thing as social welfare … and even if they don’t know the technical terms, most people understand that difference.

Benny Lava January 23, 2014 at 8:18 am

Based on this sentence:

“Contrary to recent findings indicating that Americans underestimate wealth inequality, we found that Americans not only overestimated the rise of income inequality over time, but also underestimated average incomes.”

The study’s creators don’t understand the difference between wealth and income. And this passes in economics? My god you guys are stupid. I expect this stupidity from derugby but you Tyler? You social studies majors are a total fail.

Donnie January 23, 2014 at 8:31 am

“Contrary to recent findings indicating that Americans underestimate wealth inequality, we found that Americans not only overestimated the rise of income inequality over time, but also underestimated average incomes.”

I don’t think the word “contrary” is used correctly here. The authors are comparing recent findings where Americans correctly underestimate inequality, but incorrectly estimate that the current level of inequality is greater than it used to be. I don’t think they are making the contrary point they are trying to make. Also, if they underestimate average incomes, that would seem to flow from their underestimate of the level of inequality. If the wealthy/high income have a much greater level of wealth/income than Americans estimate, it would stand to reason that Americans estimate of the average level would also be skewed low.

Ironman January 23, 2014 at 8:34 am

Debunking Income Inequality Theory – how the top and the bottom of the U.S. income spectrum fared during the years of the Dot Com Bubble.

mishka January 23, 2014 at 9:01 am

This is ridiculous. The range of incomes *within* top 1% is a few orders of magnitude (hundreds of thousands to hundreds of millions). People were mistaken, in mass, by something like 1/3 order of magnitude? That’s quite accurate the way I see it. Is that supposed to be bad?

J Walker Smith January 23, 2014 at 9:26 am
Axa January 23, 2014 at 10:27 am

So, prediction markets are not perfect? Where is the wisdom of the crowd?

Martin Epstein January 23, 2014 at 1:56 pm

This was a survey, not a prediction market. We have no way of knowing which responders felt more confident than others. Also, “Institution X is not perfect” is tautologous.

Turkey Vulture January 23, 2014 at 11:07 am

People seem to assume the answer to income inequality has to be direct redistribution. It doesn’t. It could be changing those rules of the game that themselves affect the initial distribution. Off the top of my head, things like IP law and the Professional guilds allow certain people to take more of the pie than they could without those things.

Marie January 23, 2014 at 4:29 pm

Yup.

Thomas January 23, 2014 at 7:34 pm

I agree with your suggestions to change supply side policies, however I’ve noticed that the people most vocal about their concern with income inequality also tend to be opposed to removing barriers to entry for various jobs. Combine the income inequality–support of regulations in general with the direct and concentrated opposition to removing barriers from various trade groups and unions. Do those forces result in an insurmountable political task?

Forgive any errors, typed on phone.

Donald Pretari January 23, 2014 at 11:43 am

Exactly How do you convince someone than they’re wealthier than they think they are? Does a Chart or Study really work?

ObviousTruth January 23, 2014 at 12:58 pm

What the study shows is that people are bad with numbers: Study 1 reports that participants on average believed that only 23% of all Americans earn more than $75,000 per year (vs. 32% actual). Study 2 shows that respondents believe the average income of the top 20% to be over $2,000,000. Any plausible distribution within the top 20 % to make these views consistent???

Turkey Vulture January 23, 2014 at 1:21 pm

That’s 32% of households, not of Americans, right?

ObviousTruth January 23, 2014 at 2:05 pm

I just copied part of the text from the study: “For example, participants on average believed that 48% of all Americans earn less than $35,000 per year (vs. 37% actual) and that only 23% of all Americans earn more than $75,000 per year (vs. 32% actual).” It refers to Americans, but we are not told what respondents were exactly asked about, i.e. personal vs. household income, nor whether this was explicitly specified at all. The description of study 1 nowhere refers to “household income”. Now, the “vs. 32 % actual” must of course refer to household income (http://en.wikipedia.org/wiki/Household_income_in_the_United_States). From the description of study 2 it seems clear that respondents were asked to estimate “average household incomes”. It is a bit of an irony, then, that the study itself is not clearer in distinguishing households vs. individuals and wealth vs. income.

Turkey Vulture January 23, 2014 at 3:33 pm

Yeah they’re definitely referring to household income in the “right” answer, and makes it even more surprising people estimated as well as they did, given that learned researchers can’t keep individual and household income distinct in their discussion.

Dan Lavatan January 23, 2014 at 1:13 pm

I don’t think it is fair to compare a married couple earning 380k to an individual without dividing by two. It is hard to find really good numbers however, since one member of such a couple might earn more than the other.

Turkey Vulture January 23, 2014 at 1:18 pm

There seems to be a lot of bouncing back and forth between numbers referring to households vs. individuals, and wealth vs. income. To have useful discussions everyone really needs to be clear which they’re talking about.

Gabe January 23, 2014 at 4:55 pm

I agree Turkey Vulture.

This happens a lot in discussions on wealth and I find it very frustrating. Same with discussions on taxes. Regressive payroll and other taxes generate more than 43% of revenue for the government now compared to 57% of revenue from progressive taxes, yet discussions between reds and blues usually don’t acknowledge that and dance around many of the real issues so that they can have phony arguments about which is better progressive or regressive wealth confiscation schemes.

Lets get it out in the open. The monetary system is centrally managed now to an extant Marx could only dream of. Government power is at an all time high with the largest most militarized security state ever seen. Regulations/laws and goverment employees are at all time highs. Spare me your % of GDP arguments…the extent of the government’s reach is qualitative in many ways.

These powers have been used to help pummel the middle class and protect/expand the wealth of the top .1%. Tyler works for the New York Times and his job is not to promote this type of thinking…therefore we get posts like his saying “haha you guys can watch lots of TV and are bad at estimating wealth statistics…err income statisitics see how good you have it…ya it’s science!”.

Maqroll January 23, 2014 at 2:08 pm

The conclusion is that when average people are asked to play The Price is Right with specific economic figures, they don’t do that well. This doesn’t really speak to the accuracy of people’s perceptions of inequality as much as it does people’s inability to pin precise numbers to those perceptions.

For a non-economist, what is the difference between 15% rise in in equality and 30% rise? What point of reference can they even use to gauge that? A person may not be great at guessing the number of jelly beans in a jar, but that doesn’t mean they don’t understand what that amount of of jelly beans means: They can imagine the weight of the jelly beans; they know how bad their stomach would feel if they ate them all.

I also take issue with the paper’s biased interpretation of people’s systematic guessing errors: “The 1% is not as rich as people think” can as easily be presented as “the 99% are poorer than people think.”

Gabe January 23, 2014 at 5:01 pm

Maqroll, I think that is a good point. It really seems the study is biased and the data is being presented in a biased way.

Floccina January 23, 2014 at 4:18 pm

Most people I talk to have very strange ideas about the state of the economy ans other statistical matters.

Marie January 23, 2014 at 5:40 pm

I’d guess because most people probably don’t consider the state of the economy from a statistical perspective. It’s not the one they are likely to be most familiar with.

doug bennett January 24, 2014 at 2:19 pm

I wonder if there is selection bias where respondents have greater than average willingness to participate and lower than average income. Respondents with low income might not be interacting enough with the top 20% of the income distribution to make good guesses of the income at that percentile.

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