More Equal Than Others

Kevin Lewis

October 28, 2009

A glimpse through the veil of ignorance: Equality of opportunity and support for redistribution

Michal Krawczyk
Journal of Public Economics, forthcoming

This study is an experimental investigation into preference for redistribution of income. It had been hypothesized that (belief in) equality of opportunity in a society diminishes support for the welfare state. This could potentially explain the low taxes and social benefits in the United States vis-a-vis Europe. To verify this hypothesis, participants in an experiment were assigned different "Probabilities of Winning" and matched in groups of four. Next, before finding out who would actually win, they selected preferred transfers to be paid by the winners to the group as a whole. It was found that the average transfers were about 20% lower in the sessions in which winning was determined by performance in a task rather than by sheer luck. This difference cannot be explained by overconfidence in predicting own score. It corroborates the conjecture that perceived determinants of success (i.e. whether poverty results from laziness or bad luck) affect the support for redistribution. On the other hand, greater inequality of opportunity measured simply by dispersion of Probabilities of Winning within a group did not lead to higher transfers.


Income Transfers Alone Won't Eradicate Poverty

Douglas Besharov & Douglas Call
Policy Studies Journal, November 2009, Pages 599-631

Even in the current economic situation, in developed countries, rhetoric about cutting "poverty" is misleadingly outmoded-because it implicitly suggests that government income transfers can be the vehicle for achieving substantial reductions in poverty. Almost all Americans already live far above subsistence poverty: most because of their earnings, and the rest because of government transfer programs. This decline in material poverty is obscured by weaknesses in how the official U.S. poverty measure counts income. What is now called poverty is really "income inequality." Reducing income inequality is also a vitally important social goal, but it cannot be accomplished through income transfers alone. The authors argue that, although income transfers have a role to play in lessening the impact of material deprivation, real progress in raising incomes will require building the human capital of the economically disadvantaged. This means both increasing the earnings capacity of lower-income workers and reducing the number of female-headed families.


Linguistic Diversity and Redistribution

Klaus Desmet, Ignacio Ortuño-Ortín & Shlomo Weber
Journal of the European Economic Association, forthcoming

This paper investigates the e¤ect of linguistic diversity on redistribution in a broad cross-section of countries. We use the notion of linguistic distances"and show that the commonly used fractionalization index, which ignores linguistic distances, yields insignificant results. However, once distances between languages are accounted for, linguistic diversity has both a statistically and economically significant e¤ect on redistribution. With an average level of redistribution of 9.5 percent of GDP in our data set, an increase by one standard deviation in the degree of diversity lowers redistribution by approximately one percentage point. We also demonstrate that other measures, such as polarization and peripheral heterogeneity, provide similar results when linguistic distances are incorporated.


Top Incomes in the Long Run of History

Anthony Atkinson, Thomas Piketty & Emmanuel Saez
NBER Working Paper, October 2009

This paper summarizes the main findings of a recent literature that has constructed top income shares time series over the long-run for more than 20 countries using income tax statistics. Top incomes represent a small share of the population but a very significant share of total income and total taxes paid. Hence, aggregate economic growth per capita and Gini inequality indexes are very sensitive to excluding or including top incomes. We discuss the estimation methods and issues that arise when constructing top income share series, including income definition and comparability over time and across countries, tax avoidance and tax evasion. We provide a summary of the key empirical findings. Most countries experience a dramatic drop in top income shares in the first part of the 20th century in general due to shocks to top capital incomes during the wars and depression shocks. Top income shares do not recover in the immediate post war decades. However, over the last 30 years, top income shares have increased substantially in English speaking countries and in India and China but not in continental Europe countries or Japan. This increase is due in part to an unprecedented surge in top wage incomes. As a result, wage income comprises a larger fraction of top incomes than in the past. Finally, we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open.


Inequality and Redistribution: Evidence from U.S. Counties and States, 1890-1930

Rodney Ramcharan
Review of Economics and Statistics, forthcoming

Does economic inequality affect redistributive policy? This paper turns to U.S. county data on land inequality over the period 1890-1930 to help address this fundamental question in political economy. Redistributive policy was primarily decided at the local level during this period, making county level data particularly informative. Examining within state variation also reduces the potential impact of latent institutional and political variables. The paper also uses a variety of identification strategies, including historic variables as well as county weather and crop characteristics as instruments for land inequality. The evidence consistently suggests that greater inequality is significantly associated with less redistribution. This negative relationship is especially large in heavily rural counties, where concentrated land ownership implied that landed elites also controlled the majority of economic production.


Who Cares about Relative Deprivation?

Martin Ravallion & Michael Lokshin
Journal of Economic Behavior & Organization, forthcoming

If relative deprivation matters to welfare in poor countries as much as it apparently does in rich ones then one would have to question the priority given to economic growth over redistribution in current development policies. We look for evidence in one of the world's poorest countries, Malawi. Using new survey questions that help address likely biases in past tests, we find that relative deprivation is not the dominant concern for most of our sample, although it is for the comparatively well off, including in urban areas. Our results strengthen the welfarist case for a policy focus on absolute levels of living in poor countries. The pattern of externalities suggests that there will be too much poverty and inequality from the point of view of aggregate efficiency.


Financial sophistication and the distribution of the welfare cost of inflation

Paola Boel & Gabriele Camera
Journal of Monetary Economics, forthcoming

The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. economy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefit from inflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money.


Recent Trends in Top Income Shares in the USA: Reconciling Estimates from March CPS and IRS Tax Return Data

Richard Burkhauser, Shuaizhang Feng, Stephen Jenkins & Jeff Larrimore
NBER Working Paper, September 2009

Although the vast majority of US research on trends in the inequality of family income is based on public-use March Current Population Survey (CPS) data, a new wave of research based on Internal Revenue Service (IRS) tax return data reports substantially higher levels of inequality and faster growing trends. We show that these apparently inconsistent estimates can largely be reconciled once one uses internal CPS data (which better captures the top of the income distribution than public-use CPS data) and defines the income distribution in the same way. Using internal CPS data for 1967-2006, we closely match the IRS data-based estimates of top income shares reported by Piketty and Saez (2003), with the exception of the share of the top 1 percent of the distribution during 1993-2000. Our results imply that, if inequality has increased substantially since 1993, the increase is confined to income changes for those in the top 1 percent of the distribution.


Redistribution and Inequality in a Heterogeneous Society

Roland Hodler
Economica, October 2009, Pages 704-718

This paper analyses how income redistribution affects inequality in a society in which individuals differ in their earning abilities and their preferences for consumption and leisure. After discussing the shortcomings of various standard approaches, I measure inequality in such a heterogeneous society by the inequality in individuals' so-called equivalent wages. This approach suggests that redistribution tends to reduce inequality by transferring income from high-ability to low-ability individuals, but to increase inequality by transferring income from consumption-loving to leisure-loving individuals. These countervailing effects lead in all my simulations to a U-shaped relationship between redistribution and inequality.


Trends in U.S. Family Income Mobility, 1967-2004

Katharine Bradbury & Jane Katz
Federal Reserve Bank Working Paper, August 2009

Much of America's promise is predicated on the existence of economic mobility - the idea that people are not limited or defined by where they start, but can move up the economic ladder based on their efforts and accomplishments. Family income mobility - changes in individual families' real incomes over time - is one indicator of the degree to which the eventual economic wellbeing of any family is tethered to its starting point. In the United States, family income inequality has risen from year to year since the mid-1970s, raising questions about whether long-term income is also increasingly unequally distributed; changes over time in mobility, which can offset or amplify the cross-sectional increase in inequality, determine the degree to which the inequality of longer-term income has risen in parallel. Using data from the Panel Study of Income Dynamics and a number of mobility concepts and measures drawn from the literature, we examine mobility levels and trends for U.S. working-age families, overall and by race, during the time span 1967-2004. By most measures, we find that mobility is lower in more recent periods (the 1990s into the early 2000s) than in earlier periods (the 1970s). Most notably, mobility of families starting near the bottom has worsened over time. However, in recent years, the down-trend in mobility is more or less pronounced (or even non-existent) depending on the measure, although a decrease in the frequency with which panel data on family incomes are gathered makes it difficult to draw firm conclusions. Measured relative to the overall distribution or in absolute terms, black families exhibit substantially less mobility than whites in all periods; their mobility decreased between the 1970s and the 1990s, but no more than that of white families, although they lost ground in terms of relative income. Taken together, this evidence suggests that over the 1967-to-2004 time span, a low-income family's probability of moving up decreased, families' later year incomes increasingly depended on their starting place, and the distribution of families' lifetime incomes became less equal.


Redistribution, Polarization, and Medians: Bringing Data to Downsian Puzzles

Henry Brady, Sidney Verba & Kay Schlozman
University of California Working Paper, August 2009

In An Economic Theory of Democracy, Anthony Downs made two widely discussed predictions about political outcomes in a democracy: first, that where the principle of one person, one vote obtains, redistributive economic policies are likely to ensue; and second, that rational, vote-maximizing parties -- and, presumably, their candidates -- in two-party systems have incentives to converge at the preferences of the median voter. Without modification, however, these predictions have not fared well empirically as explanations of political outcomes in America, where policies are not especially redistributive, and parties seem to be increasingly polarized at both the elite and mass level. In this paper we use survey data to investigate the consequences for the Downsian model of the distribution of electoral participation by voting, working in campaigns, or making campaign contributions. We consider two characteristics of citizens that affect both their issue attitudes and their level of participation - their incomes and their level of religious attendance. We show that the medians of the distribution of income and of religious attendance for those who participate are always higher than for those who do not participate in politics. We do this by using a strong property of distributions, first-order stochastic dominance, which implies the median result and which turns out to offer some technical advantages for empirical work. Because the medians for income and religious attendance are substantially higher for participators than those for the general population and because there are reasons to believe that participators have a greater impact on policy outcomes than non-participators, it is not surprising that there is not much income redistribution in America. Those citizens who work in or donate to campaigns -- whose economic position, economic needs, and policy preferences do not reflect those of the median voter -- are in a position both to have additional influence on the outcome of an election and to send direct messages to candidates about their preferences. Moreover, whether Republican or Democratic, the contributors of the median partisan dollar are, in spite of their policy differences, much more affluent than the identifiers, voters, or workers in either party. Vote-seeking candidates will, therefore, not converge on the median voter. Rather, the requirements of running and funding a campaign force parties and candidates to be responsive to political activists, whose circumstances and perspectives have been communicated to them and who do not typically favor redistribution. We also show that the parties differ in their internal medians on both dimensions, and they have become more polarized over time, especially along the dimension of religious attendance and especially with respect to campaign workers. Whereas campaign workers within the Republican Party have high levels of church attendance, those within the Democratic Party have very low levels. Yet despite the emergence of the religious attendance dimension in the past forty years and the increasing polarization along it, the parties remain somewhat more polarized along the income dimension. But it seems likely that the focus on social, cultural, and moral issues fostered by the sorting of party identifiers along the dimension of religious attendance has distracted policy-makers from the economic dimension just as civil rights did in an earlier period. This suggests another way that redistribution has been thwarted in America.


Inequality and the Measurement of Residential Segregation by Income in American Neighborhoods

Tara Watson
Review of Income and Wealth, September 2009, Pages 820-844

American metropolitan areas have experienced rising residential segregation by income since 1970. One potential explanation for this change is growing income inequality. However, measures of residential sorting are typically mechanically related to the income distribution, making it difficult to identify the impact of inequality on residential choice. This paper presents a measure of residential segregation by income, the Centile Gap Index (CGI), which is based on income percentiles. Using the CGI, I find that a one standard deviation increase in income inequality raises residential income segregation by 0.4-0.9 standard deviations. Inequality at the top of the distribution is associated with more segregation of the rich, while inequality at the bottom and declines in labor demand for less-skilled men are associated with residential isolation of the poor. Inequality can fully explain the rise in income segregation between 1970 and 2000.


The Decline of the White Working Class and the Rise of a Mass Upper-Middle Class

Alan Abramowitz & Ruy Teixeira
Political Science Quarterly, Fall 2009, Pages 391-422

ALAN ABRAMOWITZ and RUY TEIXEIRA document the dramatic decline in the white working class and discuss the complicated ways this decline has transformed American politics. They also discuss the emergence of a mass upper-middle class whose effects on American politics may be similarly complicated.

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