Saturday, August 29, 2015

Inequality: What If No One Has Any Idea What They’re Worried About?

Lots of economists are talking about a working paper that has just come out. Often these can be downloaded for free, but sometimes they are behind walls and cost money. SUU has no budget for this, so as I write this (June 5, 2013), I’m going from quotes rather than the whole paper.

The paper is by Gimpelson and Treisman and is called “Misperceiving Inequality”. What they did was go out and assess 1) whether peoples’ subjective perceptions of inequality matched up with objective measurements, and 2) which was more important for the political itch for income redistribution — subjective beliefs or objective measures.

So, what do people know?

Higher inequality is thought to increase demand for government income redistribution in democracies and to discourage democratization and promote class conflict and revolution in dictatorships. Most such arguments crucially assume that ordinary people know how high inequality is, how it has been changing, and where they fit in the income distribution. Using a variety of large, cross-national surveys, we show that, in 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, regardless of the data source, operationalization, and method of measurement.

And, how is that related to policy pressures?

Moreover, we 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. We suggest that most theories about political effects of inequality need to be either abandoned or reframed as theories about the effects of perceived inequality.

Those are quotes from the publicly available abstract. Bryan Caplan, writing at EconLog, has a university that actually supports professors reading new stuff that isn’t free. He quotes extensively from the article itself.

The actual poverty rate correlates only weakly with the reported degree of tension between rich and poor; but the perceived poverty rate is a strong predictor of such inter-class conflict.

Given 5 choices, could survey respondents identify the level of inequality in their own country?

Respondents turn out to be wrong about their country's income distribution most of the time. … Respondents worldwide were able to pick the "right" diagram only slightly more often than they would have done if choosing randomly.

Basically, perceptions of inequality are a multiple choice test on which respondents know so little they can’t even narrow down the choices to make a better guess.

But, inequality can follow a progression from more even to less even, so maybe respondents showed some inkling of what’s going on:

Were most people at least close? To check this, we examined what proportion of respondents were within one diagram of the correct one (for instance, if the correct diagram was B, we measured how often the respondents picked A, B, or C). With only five options to choose between, getting within one place of the correct option is not a very difficult task. … they were right 69 percent of the time, just one percentage point better than if they picked randomly.

So, perceptions are about as accurate as guessing the other player’s move in a game of rock-paper-scissors-lizard-spock.

It’s actually worse than that: quite a lot of the time peoples’ subjective perceptions of inequality are often negatively correlated with objective inequality. This is really bizarre: it’s like watching a game and thinking your teams’ turnovers are actually helping them win.

But, it’s even worse than that. No one thinks they’re rich themselves.

Owning two houses is usually a sign of wealth. … At most one in four respondents said that his or her family owned a second residence, and in all but three countries the frequency was less than one in six. Yet most such property owners did not consider themselves especially rich. On average, 60 percent of the secondary residence owners placed themselves in the bottom half of the income distribution. … Such anomalies were somewhat rarer in the developed countries. Still, in France, Italy, and Great Britain, 40 percent or more of second residence owners placed themselves in their country's bottom half.

I could actually put myself in that category. When I was a kid, my parents owned a second home at a summer resort. Now, this was mostly an income property that got rented out … but we spent 2 weeks there every summer too, plus innumerable warm weekends in the spring and fall when my parents worked hard on upkeep and repairs (albeit, in a pretty nice environment where they could relax quite a bit too). I never thought of myself as rich; heck, I still think of my upbringing as middle, or maybe even second quintile from the bottom. I must be some kind of idiot: I make far more money than my dad ever did, plus my wife works, and we’re nowhere near affording a second house.

But it gets even still worse. Check out this chart:


Actual objective improvements in inequality are towards the right, while subjective perceived improvements in inequality are going up. They’re not even positively correlated: when things actually get better people think they’re getting worse. This is like a Patriots fan being upset that they’ve just intercepted the Seahawks on the goal line at the end of Super Bowl XLVIII.


And we base policy on this!

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