Wednesday, August 10, 2016

The Age of Inequality

This post is a continuation of the previous one and is a result of some questions that I have received. It is quite astonishing that a glaring divide exists between our ideals, our beliefs, and the grim reality. Chauncey Alcom, writing in Fortune yesterday quotes a thirty-year research study (1983 - 2013) of the Corporation for Enterprise Development and Institute for Policy Studies to show that Black families in America would need hundreds of years to amass the same amount of wealth that whites have now. The study concludes that the average wealth of white families has grown by 84% - three times the rate of African-American families and 1.2 times as fast as Latino-American families. Juxtapose this statistic with the projection that whereas Americans of color will outnumber white Americans by 2043, the wealth divide is expected to double by the same year. A 2015 study of global wealth by Allianz called America the "Unequal States of America" for its position as the country with the second highest inequality among the developed countries.
Screen Shot 2016 08 08 at 11.30.32 AM
  ( Sumana Manohar and Hugo Scott-Gall, Goldman Sachs; The Gini coefficient is a measurement of the income distribution within a country that aims to show the gap between the rich and the poor; zero represents perfect equality and one represents perfect inequality; it is worth noting that the U.S. is an outlier among the developed countries; when it comes to income inequality, it is in the same league as Russia and China, albeit with a much higher GDP per capita)

Michael Norton and Dan Ariely, in their excellent analysis in Perspectives on Psychological Science (Sage Publications 2011), have shown some startling results. Following the philosopher John Rawls (1971), the researchers asked 5,000 Americans representing the population demographics including political affiliation to identify (guess) the wealth (assets minus liabilities) held by the population segmented into five quintiles. Next, the same group was asked to construct what they thought was a just distribution. Three unlabeled pie charts were presented to the respondents - one representing an equal distribution (20%) for the quintiles, the second representing the wealth distribution in Sweden, and the third, unknown to the respondents, representing the actual wealth distribution in the U.S. The pairwise combinations of pie charts were presented in random order to the respondents. 92% of the respondents preferred the Sweden distribution to the United States. The strong preference for the Swedish distribution was found among all groups divided by gender, income, and political affiliation. Also, there was a slight preference for the distribution that resembled Sweden relative to the equal distribution. The authors suggest that Americans prefer some inequality to perfect equality, but not to the extent currently found in the U.S.

The average American believes that the richest one-fifth own 59% of the wealth whereas in reality they own 84%. The average American believes that the bottom 40% own 9%. In reality, the bottom 40% own a paltry 0.3%. In the ideal distribution, the top 20% would own 32% and the bottom 40% would own 25%. As the journalist Chrystia Freeland has written: "Americans actually live in Russia, although they think they live in Sweden. And they would like to live on a kibbutz."

The level of ignorance is hard to believe. In another study, Sorapop Kiatpongsan and Michael Norton (How Much (More) Should CEOs Make? A Universal Desire for More Equal Pay; 2014; Perspectives on Psychological Science; Sage Publications) asked 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 the CEO-to-worker-pay-ratio to be 30:1, and that ideally it should be 7:1. If the comparison is between the Fortune 500 CEOs and the factory worker, the ratio is 331:1 in 2016. Of course, you can play with the figures. As Mark Perry has shown (http://www.aei.org/publication/blog/carpe-diem/) if you take into account all the 7 million "CEOs" that includes owners of small businesses, the ratio would be a very healthy 3.9:1.

Wish it away if you want, but this is the hardest reality: the United States is today the most unequal of all western nations. And yet, the average American appears to think that anyone who works hard can move up economically irrespective of her or his social circumstances. Why is there such a huge gap between perception and reality? Stephen McNamee and Robert Miller have pointed out in "The Meritocracy Myth" that the term meritocracy (coined by Michael Young) was meant to criticize a society ruled by the talent elite. The creator of the phrase wishes that people would stop using it because it underwrites the myth that those who have money and power must deserve it (and the more sinister belief that the less fortunate don't deserve better). The American dream overemphasizes individual mobility and blissfully ignores the social determinants of success. Thus, economic inequality is worse than what people think, and social mobility is less than what people imagine.

As noted by George Carlin in Brain Droppings, "the reason they call it the American dream is because you have to be asleep to believe it." When will we wake up?


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