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How Americans spread the wealth

Amid raucous political debate over tax cuts for the rich and who owns most of America's wealth, university researchers have found at least one reason why we suffer such bruising public policy stalemates in this country.

When it comes to wealth inequity in the United States, we just don't know what we're talking about.

Two professors, psychologist Michael Norton from Harvard Business School and behavioral economist Daniel Ariely at Duke University's Fuqua School of Business, surveyed more than 5,500 Americans who had been chosen at random to create a nationally representative sample. Those surveyed were asked to do two things.

First, they had to estimate the current distribution of wealth in the United States. And second, they were asked to "build a better America" by spreading the nation's wealth among five quintiles, poorest to richest, based on their own, ideal or optimal level of inequality.

Key findings appear in Norton-Ariely's forthcoming paper for the journal Perspectives on Psychological Science: "Building a Better America — One Wealth Quintile at a Time." The results are startling and should raise a red flag in today's ill-informed national policy struggles over taxes, the federal budget and even the role of the government.

• First, those surveyed grossly underestimated the current level of wealth inequality. They figured the richest 20 percent of people in this country owned about 58 percent of the wealth. In fact, the top 20 percent own closer to 84 percent of the nation's wealth — a dramatic difference.

• Second, respondents chose their own "ideal" wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Ideally, those surveyed said the top 20 percent of the nation's richest should control about 32 percent of the wealth. That's 52 percentage points — more than half of the entire nation's wealth — lower than the actual portion of wealth in the hands of the richest 20 percent in this country.

• Finally and most significant to policymakers: All demographic groups — "even those not usually associated with wealth redistribution such as Republicans and the wealthy," the researchers say — desired a more equal distribution of wealth than the status quo. Not only did the 20 percent richest own less wealth in this scenario, but the remaining 80 percent of the population shared more even portions of the remaining wealth.

In this "ideal" and more equitable scenario chosen by the respondents themselves, the bottom or poorest 20 percent of the country would hold about 11 percent of the nation's wealth. In reality, the bottom 20 percent's share is a paltry 0.1 percent. The same fate holds true for the ever so slightly richer 20 percent that live just above the bottom 20 percent. They hold only 0.2 percent of the wealth. Both shares are too microscopic to even register on the graph below. Combined, we're talking about the bottom 40 percent of this country owning 0.3 percent of its wealth.

Who's left? The 20 percent just below the richest tier own about 11 percent of the wealth. And the third 20 percent — the dwindling core of America's "middle class" folks literally in the middle of the five groups — are left to divvy up roughly 4 percent of the remaining wealth.

If people more accurately understood how few people control so much of the wealth, there might be more of an outcry for fairness in the country. And policymaking would be better served.

"Part of our goal with the paper is to suggest that perhaps one reason why we don't see a groundswell is precisely because Americans are unaware of the level of wealth inequality," Harvard's Norton says. "This lack of awareness may be what impedes them from being more supportive of policies that make wealth more equal."

That's just dealing with the inequity of wealth. The inequity of income — what people earn, not what they own — also was reinforced last week when newly released Census figures showed that the income gap between the richest and poorest Americans grew last year to its widest amount on record.

The top-earning 20 percent of Americans — those making more than $100,000 each year — received 49.4 percent of all income generated in the country, while those below the poverty lines earned just 3.4 percent. That ratio of 14.5-to-1 — meaning $14.50 earned in this top-paid group for every $1 earned by those in poverty — was an increase from 13.6 in 2008 and nearly double a low of 7.69 in 1968.

A different measure called the international Gini index found U.S. income inequality at its highest level since the Census Bureau began tracking household income in 1967. In fact, the United States has the greatest disparity among Western industrialized nations.

Which brings us back to our current national dilemma.

Left to their own designs, most Americans would structure this country with far less wealth inequality than currently exists, professors Norton and Ariely found. Yet in practical terms, many still resist the idea of taxing the wealthy — more specifically, letting the Bush tax cuts for the richest Americans lapse — even though such actions would move the United States modestly closer to their own professed goals of less inequality.

Why do Americans prefer more economic equality but are loath to push the government to make it happen? Several suggested answers keep popping up.

Some say it is a belief in capitalism and social mobility that makes Americans of modest means resist higher taxes on the most wealthy. If the wealthy can be so well rewarded for presumably working harder and smarter, the thinking goes, then anyone who works harder and smarter should have the same chance to become wealthy. Like Rocky Balboa in Rocky, everyone wants to believe they have a shot — whether or not it really exists.

Others say the escalating distrust in government as a steward of good public policy makes people unwilling to give elected officials any additional control of people's money. Witness the rise of the tea party.

What's most alarming in the Norton and Ariely findings is the magnitude of the inability by so many Americans to grasp what a small minority of the people control so much of the wealth.

If the top 20 percent of Americans control close to 84 percent of the wealth, that of course means the other 80 percent are scrapping over the remaining 16 percent of the wealth pie. So, if Democrats still are supposed to represent more of the interests of the little guy in America (granted, that's a big if), why are so many antitax Republican/tea party candidates expected to win big come the Nov. 2 election?

At Duke, professor Ariely suggests our political discourse simply obscures the real facts. "It is really very sad and getting worse," he says. "But I do hope that over time we might be able to push how people understand this issue a bit."

The survey results get even more specific. The professors asked richer Americans, those with incomes greater than $100,000, to estimate how much the top 20 percent own of the nation's wealth. The answer: Just over 60 percent (the real answer, you will remember, is 84 percent). Then those same $100,000-plus earners were asked how much of the nation's wealth should be in the hands of the top 20 percent. Even among this well-paid subset, their "ideal" answer was less than 40 percent.

One of the more insightful answers to why wealth concentrates in the hands of the rich in America is found in the 1996 book The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us co-written by Cornell University professor Robert Frank. He argues our culture idolizes and enriches the "winners" in society, be they pro golfers, entertainers or Wall Street hedge fund managers.

During the 1980s and 1990s, the top 1 percent of U.S. earners captured more than 40 percent of the country's total earnings growth. That consolidation of wealth into so few hands, Frank wrote, is "one of the largest shifts any society has endured without a revolution or military defeat."

Since then, there's been little if any let-up in this winner-take-all trend of skewed wealth.

Some very well-off Americans can become so muddled by their own hefty incomes and upscale cravings that they falsely cry the cry of the stretched middle class. University of Chicago law professor Todd Henderson, who is married to a pediatric oncologist, lamented last month in a blog posting how hard it will be to make it on a household income north of $250,000 if the Bush tax cuts lapse. The professor was promptly lampooned by a range of commentators and economists as elitist and out of touch with more legitimate economic pressures of mainstream Americans.

No doubt Henderson has many household expenses, a certain lifestyle and high expectations to manage. But here in Florida, for example, the median household income actually fell 5.7 percent last year to a mere $44,736. That's one-sixth or even less of the pouting professor's household income. Let it serve as a stark reminder that, if anyone deserves lower taxes, the challenged "middle class" here has far more fundamental needs.

Our first job is to regain a grasp on the real state of America's wealth inequity. For every $1 of wealth in the country, 84 cents is owned by the top 20 percent of the public. It sure gets easier to consider fair and equitable public policy decisions when you actually know the facts.

Contact Robert Trigaux at [email protected]

Pick your pie chart: Where would you live?

In a national survey, respondents were given three pie charts showing wealth distribution among five segments of the population. Then they were asked: "Which nation would you rather join — if you were randomly assigned and could end up anywhere in this distribution, from the very richest to the very poorest?"

One unlabeled pie chart depicted a perfectly equal distribution of wealth. A second pie chart identified the wealth distribution in the United States. In between these extremes, a third unlabeled pie chart reflected the income distribution of Sweden.

The United States distribution was far less desirable than both the (unlabeled) Sweden distribution and the equal distribution. About 92 percent of Americans preferred the Sweden distribution to America in a head-to-head comparison when Pie C was excluded. Here are the results:

A, which was preferred by 10 percent of Americans, is the United States.

B, which was preferred by 47 percent of Americans, is Sweden.

C, which was preferred by 43 percent of Americans, isn't a real place.

Source: Building a Better America survey, Norton and Ariely

Want to read more?

Here's a link to the forthcoming paper by Michael Norton from Harvard Business School and Duke University's Daniel Ariely, "Building a Better America — One Wealth Quintile at a Time."

And here is University of Chicago law professor Todd Henderson's blog post on living on household income of more than $250,000.


Demographic variations on the ideal

How would different groups spread the wealth in an ideal America? Here are their responses broken down by income, politics and gender.

How Americans spread the wealth 10/01/10 [Last modified: Sunday, October 3, 2010 1:47pm]
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