Readers of this blog will probably not need convincing that inequality is not something to worry about. We’re more interested in reducing absolute poverty. If you become £100 richer, and I become £50 richer, I say that’s a good thing. But because we’ve become less equal, someone who is concerned with inequality alone would not.
But even given this, inequality might matter. Whether we think they should care about it or not, people do, and it makes no more sense to think of that as a ‘bad’ or unimportant desire than thinking a passion for expensive or high-tech watches is bad.
And because people care about it, they might act on it. If inequality makes a revolution or populist, anti-market governments more likely, as Noah Smith suggests it does, then it might reduce investment and growth as well.
Crucially, these harms from inequality come from people’s perceptions of inequality, not necessarily actual inequality. Which makes a new NBER working paper, “Misperceiving Inequality”, rather interesting (hat tip to Bryan Caplan, who quotes some of the key parts directly).
The paper shows that most people know very little about the extent and direction of income inequality in their societies, or where they fit in to the income distribution. This holds for wealth as well as income.
This isn’t a pedantic complaint about imprecision. One question asked people to choose which of five diagrams, above, best described where they live. Responses differed significantly between different countries (68% of Latvians chose Type A, 2% of Danes did), but in almost every country a majority got it wrong.
Globally, respondents were able to pick the “right” diagram only slightly better than randomly – 29% got it right, compared to a random baseline of 22.5%. Accuracy differed significantly between countries: 61% of Norwegians got it right, 40% of Britons did, 5% of Ukrainians did. In only five countries out of forty did more than half of respondents guess correctly. (All this uses post-tax-and-transfer data; people’s accuracy is much worse if you use pre-tax-and-transfer data.)
And respondents weren’t even close – looking at how many people were only one diagram off the right one, respondents only did one percentage point better than random (69% versus 68%). As the authors note, “with only five options to choose between, getting within one place of the correct option is not a very difficult task”.
The paper also shows that people are terrible at judging where they fall in the income distribution – 40% of British second-home owners said they were in the bottom half. 3% said they were in the top 10%.
Crucially, given worries about investment and political instability, “In countries where inequality was generally thought to be high, more people supported government redistribution. But demand for redistribution bore no relation to the actual level of inequality.”
There’s too much in the paper to cover in one blogpost, but the results are extremely clear: people’s perceptions of inequality are really, really inaccurate – that holds globally and in all but a handful of Scandinavian countries.
There are some good arguments in favour of reducing inequality based on how people perceive it – that it makes people unhappy, more left-wing, more prone to revolution, more hateful to the people around them.
But this paper shows that those perceptions are related to the realities of inequality only very slightly, if at all. Redistributive policies that reduce actual inequality are costly, and because actual inequality is barely related to perceptions of inequality they may do little to make the country more stable or market-friendly. If these are important problems, we can only solve them by making people feel less unequal – not by making them less unequal in fact. In short: even if people’s perceptions of inequality matter, the reality does not.