Economic Inequality: It’s Far Worse Than You Think

http://www.scientificamerican.com/article/economic-inequality-it-s-far-worse-than-you-think/

March 31, 2015 |By Nicholas Fitz

In a candid conversation with Frank Rich last fall, Chris Rock said, "Oh, people don’t even know. If poor people knew how rich rich people are, there would be riots in the streets." The findings of three studies, published over the last several years in Perspectives on Psychological Science, suggest that Rock is right. We have no idea how unequal our society has become.

In their 2011 paper, Michael Norton and Dan Ariely analyzed beliefs about wealth inequality. They asked more than 5,000 Americans to guess the percentage of wealth (i.e., savings, property, stocks, etc., minus debts) owned by each fifth of the population. Next, they asked people to construct their ideal distributions. Imagine a pizza of all the wealth in the United States. What percentage of that pizza belongs to the top 20% of Americans? How big of a slice does the bottom 40% have? In an ideal world, how much should they have?

The average American believes that the richest fifth own 59% of the wealth and that the bottom 40% own 9%. The reality is strikingly different. The top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a paltry 0.3%. The Walton family, for example, has more wealth than 42% of American families combined.

We don’t want to live like this. In our ideal distribution, the top quintile owns 32% and the bottom two quintiles own 25%. As the journalist Chrystia Freeland put it, “Americans actually live in Russia, although they think they live in Sweden. And they would like to live on a kibbutz.” Norton and Ariely found a surprising level of consensus: everyone — even Republicans and the wealthy—wants a more equal distribution of wealth than the status quo.

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wealthy people drinking cocktails


According to Pew Research, most Americans believe the economic system unfairly favors the wealthy, but 60% believe that most people can make it if they’re willing to work hard.
Credit: Allan Danahar via Thinkstock


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In a candid conversation with Frank Rich last fall, Chris Rock said, "Oh, people don’t even know. If poor people knew how rich rich people are, there would be riots in the streets." The findings of three studies, published over the last several years in Perspectives on Psychological Science, suggest that Rock is right. We have no idea how unequal our society has become.

In their 2011 paper, Michael Norton and Dan Ariely analyzed beliefs about wealth inequality. They asked more than 5,000 Americans to guess the percentage of wealth (i.e., savings, property, stocks, etc., minus debts) owned by each fifth of the population. Next, they asked people to construct their ideal distributions. Imagine a pizza of all the wealth in the United States. What percentage of that pizza belongs to the top 20% of Americans? How big of a slice does the bottom 40% have? In an ideal world, how much should they have?

The average American believes that the richest fifth own 59% of the wealth and that the bottom 40% own 9%. The reality is strikingly different. The top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a paltry 0.3%. The Walton family, for example, has more wealth than 42% of American families combined.

We don’t want to live like this. In our ideal distribution, the top quintile owns 32% and the bottom two quintiles own 25%. As the journalist Chrystia Freeland put it, “Americans actually live in Russia, although they think they live in Sweden. And they would like to live on a kibbutz.” Norton and Ariely found a surprising level of consensus: everyone — even Republicans and the wealthy—wants a more equal distribution of wealth than the status quo.

This all might ring a bell. An infographic video of the study went viral and has been watched more than 16 million times.

In a study published last year, Norton and Sorapop Kiatpongsan used a similar approach to assess perceptions of income inequality. They asked about 55,000 people from 40 countries to estimate how much corporate CEOs and unskilled workers earned. Then they asked people how much CEOs and workers should earn. The median American estimated that the CEO-to-worker pay-ratio was 30-to-1, and that ideally, it’d be 7-to-1. The reality? 354-to-1. Fifty years ago, it was 20-to-1. Again, the patterns were the same for all subgroups, regardless of age, education, political affiliation, or opinion on inequality and pay. “In sum,” the researchers concluded, “respondents underestimate actual pay gaps, and their ideal pay gaps are even further from reality than those underestimates.”

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The researchers found Americans overestimate the amount of upward social mobility that exists in society. They asked some 3,000 people to guess the chance that someone born to a family in the poorest 20% ends up as an adult in the richer quintiles. Sure enough, people think that moving up is significantly more likely than it is in reality. Interestingly, poorer and politically conservative participants thought that there is more mobility than richer and liberal participants.

According to Pew Research, most Americans believe the economic system unfairly favors the wealthy, but 60% believe that most people can make it if they’re willing to work hard.

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We may not want to believe it, but the United States is now the most unequal of all Western nations. To make matters worse, America has considerably less social mobility than Canada and Europe.

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By overemphasizing individual mobility, we ignore important social determinants of success like family inheritance, social connections, and structural discrimination. The three papers in Perspectives on Psychological Science indicate not only that economic inequality is much worse than we think, but also that social mobility is less than you’d imagine. Our unique brand of optimism prevents us from making any real changes.

George Carlin joked that, “the reason they call it the American Dream is because you have to be asleep to believe it.” How do we wake up?