Non-audioPolitics

Americans grossly underestimate income inequality

I was under the impression that the rising inequality of wealth and income had become a prominent, if not omnipresent issue in America over the

I was under the impression that the rising inequality of wealth and income had become a prominent, if not omnipresent issue in America over the past six to eight years.

In the mid-2000s, highly publicized research showed that the gap between the wealthiest 1 percent and the other 99 percent was wider than it had been since the Roaring Twenties. That concept of the “1%” became the logo and mantra of the Occupy Wall St. protests during the bottoms of the financial crash. “Capital in the 21st Century,” a 696 tome on inequality by an economist – a French economist no less! – was a best-seller for months this year.

So how is that Americans actually grossly underestimate the actual difference between the 1% and the rest of us?

A truly fascinating piece in the Harvard Business Review summarizes recent research into how Americans and others perceive the difference between what CEOs make and what average earners make. (Ironic, right? Has any institution contributed more to economic inequality in America more than the Harvard Business School?)

Using data from a massive global survey called the International Social Survey Programme, researchers looked at what people in about 40 countries estimated the difference between CEO and average income was, the actual difference and what respondents thought it should be. 

The following chart looks a little weird but look closely:


Graphic: Harvard Business Review

The grey represents the actual, real world ratio of CEO/average income for each country. The red is what people in those countries estimate the real ratio is. And the blue — that tiny speck in the middle – is what people think the ratio ought to be, ideally.

There are two huge headlines for America:

  • Actual CEO pay is many times greater in America than any other country.
  • Americans grossly underestimate how much CEOs are really paid.

Let’s look at the raw numbers:


Graphic: Harvard Business Review

The average American worker earned $34,645, the average CEO earned 354 times that or $12,259,894. The runner-up is Switzerland, but it really isn’t in the inequality race.

Of course, by the standards of modern global finance, American CEOs are basically middle class. According to Forbes, the poorest hedge fund manager its Top 25 in 2013 list earned $280 million; George Soros was #1, earning $4 billion.

“This new research makes clear that, one, it’s mindbogglingly difficult for ordinary people to even guess at the actual differences between the top and the bottom; and, two, most are in agreement on what that difference should be,” writes the Review’s Gretchen Gavett.

According to one the researchers, Michael Norton of the Harvard Business School,  “The lack of awareness of the gap in CEO to unskilled worker pay — which in the U.S. people estimate to be 30 to 1 but is in fact 350 to 1 — likely reduces citizens’ desire to take action to decrease that gap.”

Possibly. Or action seems futile. Or action is in fact futile given the unprecedented imbalance of wealth.

As the Occupy Wall St. gang was trying to draw attention to the 1%, the 1 % was laughing all the way to the bank.  This chart based on research by an economist at Bard College, Pavlina Tcherneva, via the news site mic.com documents what has happened to income growth/loss during economic recoveries: 


Source: Pavlina Tcherneva

Look at the 2009-2012 period; now that is a portrait of inequality. The 1950s looks a whole lot better than the 21st century.

One more chart, just in case you’re worried these are only from leftie sources. Here’s one from a study of economic inequality put out last week by the investment bank Morgan Stanley (yes, even more ironic than HBS).

Source: Morgan Stanley

This is a broad look at income inequality using a statistical device called the Gini Coefficient. It’s interesting how steady the climb has been since 1968.

I enjoyed the conclusion of the Morgan Stanley report: “Income inequality explains divergent consumer spending as lower-income households remain liquidity constrained and higher-income households continue to respond to growing wealth from financial assets.”

“Liquidity constrained.” It’s a wonderful 21st century euphemism for an old word: poor. No wonder Americans are a bit confused about how poor they really are compared to the rich.

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