Americans have no idea how bad inequality is

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Americans Have No Idea How Bad Inequality Is

Robert Johnson for Business Insider

If Michael Norton’s research is to be believed, Americans don’t have the faintest clue how severe economic inequality has become—and if they only knew, they’d be appalled.

Consider the Harvard Business School professor’s new study examining public opinion about executive compensation, co-authored with the Chulalongkorn University in Bangkok’s Sorapop Kiatpongsan. In the 1960s, the typical corporate chieftain in the U.S. earned 20 times as much as the average employee. Today, depending on whose estimate you choose, he makes anywhere from 272354 times as much. According to the AFL-CIO, the average CEO takes home more than $12 million, while the average worker makes about $34,000.

In their study, Norton and Kiatpongsan asked about 55,000 people around the globe, including 1,581 participants in the U.S., how much money they thought corporate CEOs made compared with unskilled factory workers. Then they asked how much more pay they thought CEOs should make. The median American guessed that executives out-earned factory workers roughly 30-to-1—exponentially lower than the highest actual estimate of 354-to-1. They believed the ideal ratio would be about 7-to-1.

“In sum, respondents underestimate actual pay gaps, and their ideal pay gaps are even further from reality than those underestimates,” the authors write.

Americans didn’t answer the survey much differently from participants in other countries. Australians believed that roughly 8-to-1 would be a good ratio; the French settled on about 7-to-1; and the Germans settled on around 6-to-1. In every country, the CEO pay-gap ratio was far greater than people assumed. And though they didn’t concur on precisely what would be fair, both conservatives and liberals around the world also concurred that the pay gap should be smaller. People agreed across income and education levels, as well as across age groups.

How much should CEOs earn compared with the average low-skill worker?

Researchers Sorapop Kiatpongsan and Michael I. Norton asked 55,000 people around the world how much they thought CEOs in made compared with the average low-skill factory worker, and how much they should make. Here are the estimated, ideal, and actual ratios. All ratios are to 1, so 93:1, 40:1, etc.




This is the second high-profile paper in which Norton has argued that Americans have a strikingly European notion of economic fairness. In 2011, he published a study with Duke University professor Dan Ariely that asked Americans how they believed wealth should be split up through society. It included two experiments. In the first, participants were shown three unlabeled pie charts: one of a totally equal wealth distribution; one of Sweden’s distribution, which is highly egalitarian; and one of the U.S. distribution, which is wildly skewed toward the rich. Then, the subjects were told to pick where they would like to live, assuming they would be randomly assigned to a spot on the economic ladder. With their imaginary fate up to chance, 92 percent of Americans opted for Sweden’s pie chart over the United States.

In the second experiment, Ariely and Norton asked participants to guess how wealth was distributed in the United States, and then to write how it would be divvied up in an ideal would (this, it seems, served as the template for Norton’s most recent study). Americans had little idea how concentrated wealth truly was. Subjects estimated that the top 20 percent of U.S. households owned about 59 percent of the country’s net worth, whereas in the real world, they owned about 84 percent of it. In their own private utopia, subjects said that the top quintile would claim just 32 percent of the wealth. In fact, the ideal looked strikingly like Sweden.



As in Norton’s more recent study, responses varied a bit by age, income, and political party, but there was overall agreement that America would be better off with a smaller wealth gap.




“People drastically underestimate the current disparities in wealth and income in their societies,” Norton told me in an email, “and their ideals are more equal than their estimates, which are already more equal than the actual levels. Maybe most importantly, people from all walks of life—Democrats and Republicans, rich and poor, all over the world—have a large degree of consensus in their ideals: Everyone’s ideals are more equal than the way they think things are.” Theoretically, Americans aren’t exceptional in their views about distribution at all—they have a sense of fairness similar to that of Germans, French, and Australians, and most Americans would be offended if they actually knew the degree of economic inequality that exists in this country.

But let’s say all of America woke up one morning and could cite Thomas Piketty chapter and verse. Would today’s moderates suddenly demand Scandinavian tax rates and mass wealth redistribution? Would our politics become more progressive?

It’s one thing to talk about fairness in the abstract; it’s another to agree on policies that would address it. Gallup, for instance, has consistently found that a solid majority of Americans believe wealth should be distributed more evenly. But fewer support the idea of imposing heavy taxes on the rich in order to do it. The Pew Research Center reports that 45 percent of Republicans already believe the government should at least do something to reduce inequality. But good luck finding GOP voters who are begging for a more robust welfare state.

Americans broadly support ideas that don’t require them to make an obvious personal sacrifice, like raising the minimum wage; they’re less happy to make tradeoffs. Europeans have long had social democracy baked into their politics; we have a libertarian streak. Maybe that would change if more Americans knew just how dire inequality has become. But I wouldn’t bank on it.

This article originally appeared at Slate. Copyright 2014. Follow Slate on Twitter.

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Inequality Delusions

Via the FT, a new study compares perceptions of inequality across advanced nations. The big takeaway here is that Americans are more likely than Europeans to believe that they live in a middle-class society, even though income is really much less equally distributed here than in Europe. I’ve truncated the table to show the comparison between the U.S. and France: the French think they live in a hierarchical pyramid when they are in reality mostly middle-class, Americans are the opposite.


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As the paper says, other evidence also says that Americans vastly underestimate inequality in their own society – and when asked to choose an ideal wealth distribution, say that they like Sweden.

Why the difference? American exceptionalism when it comes to income distribution – our unique suspicion of and hostility to social insurance and anti-poverty programs – is, I and many others would argue, very much tied to our racial history. This does not, however, explain in any direct way why we should misperceive real inequality: people could oppose aid to Those People while understanding how rich the rich are. There may, however, be an indirect effect, because the racial divide empowers right-wing groups of all kinds, which in turn issue a lot of propaganda dismissing and minimizing inequality.

Interesting stuff.

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And do we realize how much luck plays an often determining role in life?

Robert Frank was playing tennis one cold Saturday morning in Ithaca, N.Y., when his heart stopped. Sudden cardiac arrest—a short-circuit in the heart’s electrical signaling—kills 98 percent of its victims and leaves most of the rest permanently impaired. Yet two weeks later, Frank was back on the tennis court. How did this happen? There was a car accident a few hundred yards away from where Frank collapsed. Two ambulances responded but the injuries were minor and only one was needed. The other ambulance, usually stationed five miles away, reached Frank in minutes.

Why Luck Plays a Big Role in Making You Rich - Bloomberg

There is another book that has explained this very well, which is fooled by randomness by Nasssim Nicholas Taleb, although mostly limited to the world of investment. Many rich investors basically got rich because of luck, he argues. Just like if you let a very large population toss coins and predict the outcome, statistically a small fraction of that population will emerge which predicted the outcomes correctly. It all depends on the size of the population.