The Great Divergence
Oct 07, 2010
ariely, divergence, evasion, krugman
Over the last few years, the widening income gap between the rich and poor in Canada has received a considerable amount of focus from groups like the Canadian Centre for Policy Alternatives. Likewise, this blog has addressed the topic on a number of occasions. But now, many in the United States are realizing that the gap between rich and poor is a problem in their country as well.
In what American economist Paul Krugman refers to as “the Great Divergence,” the growing income gap in the US has been steadily growing since the 1970s. Some suggest that the richest may now be richer than they have ever been. And this debate is getting attention in the media as well. Even CNN recently devoted a few minutes of prime time to look at this disturbing phenomenon.
For example, the wealthiest one percent of Americans now pocket almost 25 percent of the country’s income. They also control as much as half of total wealth, including things like property, bank accounts, and investments. Their share of the pie has almost doubled in the last four decades. And to compound the inequality, the poverty rate in the US has increased more steeply since the recession than it has since 1994.
Although income is more evenly shared in Canada, it isn’t by much. Indeed, the trend toward greater concentration at the top of the income scale is identical between the two countries.
The emerging inequality debate in the United States prompted a study involving economist Dan Ariely of Freakonomics fame. In the study, “Building a Better America, One Wealth Quintile at a Time,” Ariely and Michael Norton look at Americans’ perceptions of income utopia. And they come up with some surprising findings.
Participants in the study were presented with three different pie charts, each depicting wealth as distributed between chunks of 20 percent of the population. One showed complete equality in distribution, one showed the current US reality, and a third matched Sweden’s income dispersion, where about a third of the country’s wealth is owned by the richest 20 percent of the country.
An amazing 92 percent of American respondents picked the Swedish model as the ideal. This included more than 9 out of 10 Republicans who voted for former US president George W. Bush. Even the rich agreed that wealth should be more evenly shared. So it appears that the vast majority of Americans would prefer to live in a country that more resembles Sweden than their own.
The problem, however, is that although most Americans and Canadians obviously prefer a more egalitarian society, at least in theory, very few of them actually support the Robin Hood-like approach (ie. greater taxes) that would be required to address this inequality. And that’s unfortunate. Many of us see the problem and don’t like it. But the solutions are not at all appealing either. Those with wealth obviously do not want to even consider giving some of it up.
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