This viral video is right: We need to worry about wealth inequality

March 6, 2013

Here's a sentence I didn't expect to write Wednesday: Dan Ariely and Michael Norton's 2011 study on wealth inequality went viral on YouTube this week.

Do you remember the Ariely and Norton study? It's a beautiful piece of work. First, they asked Americans what their ideal distribution of wealth would be. The answer? Much more equal.

Then they asked Americans what they thought the actual distribution of wealth was. Less equal than their ideal, came the answer. But the truth, as Ariely and Norton noted, was that America was much less equal even than that. Reality was twice as far from the average American's ideal as the average American thought. Here's their graph:

That's a decent graph. But it's not particularly striking. A YouTube user named "Politizane," however, made a mind-blowing video visualizing the findings. So far, this video -- which, again, is a visualization of an academic study on wealth inequality -- has been viewed more than 3 million times. You'll see why when you click play:

When we talk about economic inequality, we tend to talk about income inequality. But wealth inequality is much more skewed, as these numbers from the Economic Policy Institute show:

The top 1 percent has about twice as large a share of the national wealth as it does of national income.

There's a strong case to be made that what we worry about when we worry about economic inequality makes much more sense in terms of wealth than income.

Take social mobility. A family might be doing fine on the income scale but still living hand-to-mouth, with little left over to pay for the child's SAT prep or college tuition. A family with wealth, on the other hand, can always liquidate some assets to invest in their child's future, and they can do so without worrying that they won't be able to pay next month's mortgage.

Political power works similarly. A young hedge funder who just got her first big bonus might show up in the top 1 percent of the income distribution. But she's still paying down college loans and saving up for a house and waiting to see whether these incredible checks keep coming. She doesn't have the security to be trying to purchase politicians.

But someone in the top percentile of the wealth distribution? They've probably been very comfortable for a long time, and they know they have the resources to continue being very comfortable for a long time, and so they can make speculative investments in politicians.

And then there's the role of wealth in creating income inequality. One thing we've seen in this recession is that financial assets have recovered much more quickly than wages or housing. Moreover, gains from financial assets are taxed much more lightly than traditional income, as Mitt Romney's tax returns so brightly reminded us. So if the income from financial assets is spread very unevenly, that will have a magnifying affect on income inequality -- which is, of course, what we've been seeing:

This might all be cheering if the trends in wealth inequality were different than the trends in income inequality. But they're not. As this graph from the Economic Policy Institute shows, the bottom 60 percent has seen their wealth shrink over the last 30 years, while the top 5 percent has seen huge gains:

So then, here's what you should know about wealth inequality in the United States: It's worse than Americans want it to be, much worse than they think it is, and it's increased over the last few decades. Which is one reason that there's been more talk of a wealth tax lately.

Update: Josh Barro points out that when Ariely and Norton say Americans preferred a Swedish wealth distribution, they're actually using Sweden's income distribution in order to draw a sharper contrast. That's not reasonable, so I've removed the mentions of Sweden from the post. The other points stand unchanged.

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