Share your cake and eat it too

Occupy Wall Street got the numbers wrong: It’s not the 1 percent but rather the 0.0001 percent with all that money. Data from 2009 indicated that the net worth of the richest 400 people in the United States is more than the net worth of the bottom 50 percent.

Of course the discussion isn’t just about 400 people. Income inequality forces a debate about the role of redistribution of wealth within United States policy. Many government endeavors are fundamentally redistributive practices. They create opportunities, services, programs and goods for a wide range of needs and are funded by progressive taxation. Whether they’re highways, parks, museums or Medicaid, these policies facilitate social inclusion and allow people who were not born into riches to still enjoy education, arts or health, for example. Redistribution can also be intergenerational—Social Security and Medicare, for example.

We all know how politically divisive these policies are. But how do people perceive inequality? More importantly, are we content with the status quo? Dan Ariely of Duke and Mike Norton of Harvard conducted a study in which they first asked people to estimate the percent of wealth held by the bottom 40 percent and the top 20 percent of Americans. The average response was 9 percent for the bottom 40 percent of people and 59 percent for the top 20 percent of people. People grossly underestimated the disparity; the numbers are actually about 0.3 percent and 84 percent for the bottom 40 percent and top 20 percent, respectively. The second part of their study found that people generally prefer a society with far less inequality than we have in the United States. This preference for a more equitable wealth distribution was generally true for both Republicans and Democrats, men and women, and among various levels of income earners. In an article published in The Atlantic, Ariely wrote, “Americans want to live in a much more equal country (they just don’t realize it).” Their research is an empirical representation of a concept that is often employed in the economics of policymaking: Our utilities are interdependent. This means that we derive some amount of happiness or benefit from the wellbeing of others. In other words, “self-interest” is not the only human driving force.

So if we as a society care about each other’s welfare, what are our options for realizing this more egalitarian desire? In terms of funding, one possible route is private donation for any causes one deems worthy, whether it’s a favorite museum or a nearby food bank. Another option is a government role in redistribution through income transfers, specialized programs like Medicaid and Medicare or public goods, such as schools, highways and parks.

Clearly both of these options occur already, with the private donation option perceived as much more palatable than forced government redistribution, especially in cases of healthcare or direct income transfer. But private donation alone won’t achieve the “socially” optimal level of redistribution.

To explain this, consider an environmental example: pollution levels. Pollution is usually an individual or company-level decision, but it has effects for all of society. We make the decision based on our personal costs, but there is also a social cost of pollution that doesn’t get fully factored into the decision, leading to higher levels of pollution than if the social cost were internalized. There is also the free rider problem—some people won’t reduce their emissions because they think their individual contribution won’t be dramatic. It’s easy to see that if most people are free riders, pollution levels will be much higher than what is socially optimal, where “socially optimal” refers to taking into account the social costs in addition to the private costs.

The same analysis can be applied to redistribution levels when using the channel of private donation, except instead of an extra social cost, as in the case of pollution, there is a social benefit that doesn’t get fully factored into the decision. As a result, the level of redistribution is less than the optimal level, rather than too high as in the pollution example. In terms of free riding, the idea is that if the end goal is more equality, why donate my own money if all my neighbors are going to donate theirs? Again, if most people become free riders, a method of private donations alone won’t really work.

These types of analyses are based on economic models that are rife with assumptions, so of course they’re not fully representative of reality. A lot of people donate and volunteer and maybe that can sustain the level of equality that we desire. But there’s a strong case for continuing the levels of government redistribution that we’ve seen recently because it’s a way of being bound up in each other’s well-beings. It’s a way for us to collectively commit to a long-term vision of a fluid society where you don’t have to be born into the 0.0001 percent to have a strong influence.