November 8, 2017
Redefining the Problem: Inequality in the United States
By: Hannah Bauman
The United States’ image as the land of opportunity stubbornly persists despite mounting evidence to the contrary: American children’s prospects of earning more than their parents have fallen from 90% to 50% over the last century. According to Stanford University economist Raj Chetty, “It’s basically a coin flip whether you’ll do better than your parents.” The shock value of these facts masks a far more subtle and pervasive problem in our country—the way inequality, mobility, poverty, and success is measured in the United States is ineffective and incomplete.
To understand the scale and scope of poverty and inequality in our country today, we must rethink the way we measure differences. Researchers, journalists and economists are too attached to using income for measuring the gap between the wealthy and the impoverished. We use income as shorthand for social status, highlighting discrepancies such as the wage gap between men and women, to determine who in our country is eligible for social welfare programs and to measure changes in our children’s future success. Yet this proxy does not accurately reflect the level of inequality inherent in our society. A better understanding of how we conceptualize and discuss capital will help us grapple with the full extent of inequality for more efficient solutions.
How Big is the Problem?
All three common measurements: income, consumption, and wealth in the United States show that inequality is high and rising. Since the 1970s, income inequality has grown in every state. The Economic Policy Institute reports “In 24 states, the top 1 percent captured at least half of all income growth between 2009 and 2013, and in 15 of those states, the top 1 percent captured all income growth. In another 10 states, top 1 percent incomes grew in the double digits, while bottom 99 percent incomes fell.” In the 1990s alone, consumption inequality grew by five percentage points, and has since closely mirrored the trend of rising income inequality. In terms of wealth inequality, a wealthy family in 1963 had six times the wealth (or, $6 for every $1) of families in the middle, but by 2013 they had 12 times the wealth. Inequality, through every measure, is growing and growing quickly.
While these statistics may seem shocking, it is imperative we understand which category of inequality is being used. As income, consumption, and wealth inequality rise, each metric tells a different story about the levels of inequality in America and how we can begin to tackle the issue. News reports refer to “inequality” without specifying between wealth, consumption, and income. In turn, many Americans conceptualize inequality as looking quite different than it actually does.
In 2014, Harvard professor Michael Norton and Sorapop Kiatpongsan asked people around the world (including Americans) how much more they would estimate a CEO earns than the average unskilled worker. The average guess was a ratio of about 30:1. The real ratio is 354:1. Most admitted they thought the ideal would be a 7:1 ratio. “In sum, respondents underestimate actual pay gaps, and their ideal pay gaps are even further from reality than those underestimates.” The first step in tackling a problem is defining it, but people around the globe struggle to understand the size of the problem, assuming perhaps that it does not affect them, or that they themselves are not victims. This mentality stems from a misunderstanding of inequality due, in part, to inaccurate measurements and analysis.
High levels of inequality negatively affect everyone through many aspects of our economy. The Organisation for Economic Co-operation and Development’s 2014 report found “The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society.” Inequality slows economic growth for all, which makes understanding the scope of the problem essential for solutions.
Why Measurement Matters
In a working paper from the National Bureau of Economic Research, Vladimir Gimpelson and Daniel Treisman found most people are remarkably bad at gauging what inequality looks like in their own country. Similar to the Norton and Kiatpongsan study, their conclusion states “[I]n recent years, ordinary people have had little idea about such things. What they think they know is often wrong. Widespread ignorance and misperceptions of inequality emerge robustly…[W]e show that the perceived level of inequality—and not the actual level—correlates strongly with demand for redistribution and reported conflict between rich and poor.” Gimpelson and Treisman’s findings demonstrate that not only do people misunderstand the levels of poverty and inequality in their country, but that a better understanding of those facts could serve as impetus for real policy change.
The problem of inequality is implicitly intertwined with the way it is discussed. Closing the wealth gap requires policy intervention, and changing the way we conceptualize inequality requires a paradigm shift in how we discuss the problem. Simply earning more will not solve the full extent of the problem. The average black family, for example, would need 228 years to amass the wealth of the average white family today, regardless of income inequality. By limiting the discussion of inequality to a measure of income, we fail to account for historic and systemic factors that disadvantage specific groups within our society over others.
Correctly measuring the level of inequality in our society is critical not just for the way we understand the problem, but also for the ways we attempt to find solutions. Policies targeting wealth inequality look different than those targeting income or consumption equality. Data-driven public policy grounded in reality, can help mitigate the problems caused by our unequal society and help ensure America is indeed the land of opportunity for all.