Tuesday, January 16, 2018

Wealth inequality and poverty in America - Part 2: Inequality is not as bad as you think ...

… it’s worse!

In this part I am going to explore some of what’s known about the psychology of inequality.

What do we know about wealth inequality?

In a 2015 TED talk, Dan Ariely asks “How equal do we want the world to be?” He says you’d be surprised.

The news of society’s growing inequality makes all of us uneasy. But why? Dan Ariely reveals some new, surprising research on what we think is fair, as far as how wealth is distributed over societies … then shows how it stacks up to the real stats.

In his blog, Ariely features a good graphic illustrating the points he made in his TED talk.

I recently came across this video that some talented person made of a study I conducted on wealth inequality a few years back with Mike Norton. It does a great job covering the main findings regarding the differences between what Americans think the distribution of wealth is (somewhat even), what they would prefer (more even than socialist Sweden), and how wealth is actually distributed (the bottom 40% of Americans possessing less than 0.3% of total wealth, the top 20% possessing 84%). The graphs, and a longer explanation, are also available here.

The only thing I wish he emphasized a little more is how similar the results were for Democrats and Republicans, which I found very hopeful. Even with all the ideological polarization in Washington, the moment we ask the question of ideal wealth distribution in a general and less self-interested way, we seem to be a country that cares a lot about each other.

Scriber adds: even if our political leaders do not.

What are the consequences of feeling poor?

I phrase the question in this way because in The Psychology of Inequality Elizabeth Kolbert reports that Researchers find that much of the damage done by being poor comes from feeling poor.

(Elizabeth Kolbert has been a staff writer at The New Yorker since 1999. She won the 2015 Pulitzer Prize for general nonfiction for “The Sixth Extinction: An Unnatural History.”)

A group of economists tested the “relative income” model.

By this theory, people who learn that their salaries are at the low end will be pissed. Those who discover that they’re at the high end will be gratified.

As the relative-income model predicted, those who’d learned that they were earning less than their peers were ticked off. Compared with the control group, they reported being less satisfied with their jobs and more interested in finding new ones. But the relative-income model broke down when it came to those at the top. Workers who discovered that they were doing better than their colleagues evinced no pleasure. They were merely indifferent. …

Kolbert reasoned from those results that “In a society where economic gains are concentrated at the top—a society, in other words, like our own—there are no real winners and a multitude of losers.”

[Keith] Payne is now a professor at the University of North Carolina, Chapel Hill. He has come to believe that what’s really damaging about being poor, at least in a country like the United States—where, as he notes, even most people living below the poverty line possess TVs, microwaves, and cell phones—is the subjective experience of feeling poor. This feeling is not limited to those in the bottom quintile; in a world where people measure themselves against their neighbors, it’s possible to earn good money and still feel deprived. “Unlike the rigid columns of numbers that make up a bank ledger, status is always a moving target, because it is defined by ongoing comparisons to others,” Payne writes.

Feeling poor, meanwhile, has consequences that go well beyond feeling. People who see themselves as poor make different decisions, and, generally, worse ones. Consider gambling. Spending two bucks on a Powerball ticket, which has roughly a one-in-three-hundred-million chance of paying out, is never a good bet. It’s especially ill-advised for those struggling to make ends meet. Yet low-income Americans buy a disproportionate share of lottery tickets, so much so that the whole enterprise is sometimes referred to as a “tax on the poor.” [AZCentral.com reports: See the biggest winners in Arizona Gov. Doug Ducey’s budget proposal. See sidebar.]

SIDEBAR: AZ Gov. Doug Ducey's budget proposes to increase that "tax on the poor." "Playing a favorite lottery game should be easier once the state installs 450 new vending machines at 363 grocery stores across the state. The Arizona Lottery already has 800 of the machines in the market. Boosting the number of vending machines is part of a plan to add $11.5 million to state general fund revenue in the 2019 fiscal year." (Note that the writers have lottery players as "winners.")

And inequality has other consequences.

People’s attitude toward race, too, [Payne] argues, is linked to the experience of deprivation … “Feeling disadvantaged magnified their perception of racial differences,” Payne writes.

[Paynes’ book] "The Broken Ladder” is full of studies like this … the wealth of evidence that he amasses is compelling. People who are made to feel deprived see themselves as less competent. They are more susceptible to conspiracy theories. And they are more likely to have medical problems. A study of British civil servants showed that where people ranked themselves in terms of status was a better predictor of their health than their education level or their actual income was.

What do the wealthy think about inequality?

Rachel Sherman is a professor of sociology at the New School, and … studies inequality… “Although images of the wealthy proliferate in the media, we know very little about what it is like to be wealthy in the current historical moment,” she writes in the introduction to “Uneasy Street: The Anxieties of Affluence.”

Sherman’s first discovery about the wealthy is that they don’t want to talk to her. … A second finding Sherman makes, which perhaps follows from the first, is that the privileged prefer not to think of themselves that way. One woman, who has an apartment overlooking the Hudson, a second home in the Hamptons, and a household income of at least two million dollars a year, tells Sherman that she considers herself middle class. “I feel like, no matter what you have, somebody has about a hundred times that,” she explains. …

… [Another] woman, with an even higher household income—two and a half million dollars a year—objects to Sherman’s use of the word “affluent.” “ ‘Affluent’ is relative,” the woman observes. Some friends of hers have recently flown off on vacation on a private plane. “That’s affluence,” she says.

This sort of talk dovetails neatly with Payne’s work. If affluence is in the eye of the beholder, then even the super-rich, when they compare their situation with that of the ultra-rich, can feel sorry for themselves. The woman who takes exception to the word “affluent” makes a point of placing herself at the “very, very bottom” of the one per cent. “The disparity between the bottom of the 1 percent and the top of the 1 percent is huge,” she observes.

Whatever its source—envy or ethics—the discomfort that Sherman documents matches the results of [another] University of California study. Inequity is, apparently, asymmetrical. For all the distress it causes those on the bottom, it brings relatively little joy to those at the top.

The psychology of tax cuts

Scriber sees all this through a different lens - a fundamental law of psychophysics, the study of how we detect changes in physical stimuli. The law was deduced by German scientist back in the 1800s and is known as [Weber’s Law.][wiki]

The law states that for a physical stimulus of magnitude X, the amount of change in X, dX, necessary to detect a difference is a constant, c. So, the law is: dX/X = c.

Weber law illustrated
An illustration of the Weber–Fechner law (from Wiki).
On each side, the lower square contains 10 more dots than the upper one.
However the perception is different: On the left side,
the difference between upper and lower square is clearly visible.
On the right side, both squares look almost the same.

Let’s put some numbers on all this to see what the law says. Let’s say that the constant is 0.10. That means that if the stimulus X = 10, you needs a difference dX = 1.0 to notice the difference, 1/10 = 0.10. But if the stimulus is 100, then you need a difference dX=10 to notice the difference (10/100 = 0.10).

Let’s be even more concrete. Suppose person A earns an annual wage of $40,000 and that the Weber constant is c=0.10. It would take an increase of $4,000 for person A to notice the difference. Now suppose person B earns an annual salary of $400,000. It would take an increase of $40,000 to be make a just noticeable difference. Finally, assume person C takes home a benefit package worth $4,000,000. The just noticeable difference for person C is $400,000. Person B’s increment is equal to the entire wage of Person A, and Person C’s increment is ten times the annual wage of Person A.

The respondents in Sherman’s study are following Weber’s Law: “The disparity between the bottom of the 1 percent and the top of the 1 percent is huge.” The implication is that the disparity, say, between the bottom of the lowest 10 percent of wage earners and the top of the lowest 10 percent is small. So it does not take much of a boost at the lowest income level for the recipients to notice a difference.

Try this thought experiment. Consider your annual income (from all sources). Then imagine that your next year’s income is increased by a small, just noticeable, amount - and you define that dollar value of the increase. Then imagine a worker in the fast food industry earning minimum wage. What do you think that worker would think about and feel about receiving a raise the same size as your small amount?

Weber’s Law, I submit to you, was the real driver behind the recent tax bill that so obviously provides huge tax breaks for the rich and very small ones for the lowest wage earners. The GOP just had to make sure that their donor class experienced a just noticeable difference. At the same time they could curry favor with the working class for very little cost. Consider the reported $1,000 bonuses offered to AT&T employees. Those aren’t raises and don’t carry benefits but all the research covered here suggests that the workers receiving those raises will notice them and experience gratification because of them. So don’t be surprised if America’s working class keeps voting for Trump - it’s Weber’s Law.

Making us feel richer: The case for greater equity

The affective reaction to the inequality brought about by Weber’s Law, however, seems to follow a different rule according to Kolbert’s reporting: “Inequity is, apparently, asymmetrical. For all the distress it causes those on the bottom, it brings relatively little joy to those at the top.”

Kolbert concludes:

Preschoolers, brown capuchin monkeys, California state workers, college students recruited for psychological experiments—everyone, it seems, resents inequity. This is true even though what counts as being disadvantaged varies from place to place and from year to year. As Payne points out, Thomas Jefferson, living at Monticello without hot water or overhead lighting, would, by the standards of contemporary America, be considered “poorer than the poor.” No doubt inequity, which, by many accounts, is a precondition for civilization, has been a driving force behind the kinds of innovations that have made indoor plumbing and electricity, not to mention refrigeration, central heating, and Wi-Fi, come, in the intervening centuries, to seem necessities in the U.S.

Still, there are choices to be made. The tax bill recently approved by Congress directs, in ways both big and small, even more gains to the country’s plutocrats. Supporters insist that the measure will generate so much prosperity that the poor and the middle class will also end up benefitting. But even if this proves true—and all evidence suggests that it will not—the measure doesn’t address the real problem. It’s not greater wealth but greater equity that will make us all feel richer.

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