The Tolerance of American Inequality

The killing of George Floyd in the custody of the Minneapolis police triggered widespread and persistent protests across the United States. A key flash point among protesters has been economic inequality and racism. History supports their cause—for the last thirty years, we have witnessed a steady increase in income inequality with wealth being unevenly distributed by race. Today, the U.S. performs worse than most other OECD countries on measures of inequality. Research from the Institute for Policy Studies suggests that the median white family has 41 times more wealth than the median Black family. Among households with no wealth or negative wealth, 37% are likely to be Black while only 15% are likely to be white.

When it comes to measuring inequality, one of the most commonly used metrics among academics is the Gini coefficient of inequality. A Gini coefficient of zero represents perfect equality: every individual in the society has equal wealth. One represents complete inequality: a single individual holds all of the wealth. In the United States, the Gini coefficient of inequality has grown steadily since the mid-1970’s, signifying an increase in inequality both overall and when broken down by race.

The fact that these trends have worsened over time underscores the severity of inequality in the United States. At the same time, Scandinavian countries’ progress on reducing wealth inequality shows that the problem is, in fact, solvable. Why, then, has U.S. policy aimed at closing wealth inequality been an abject failure?

Research by Stockholm University professor Ingvild Almås and Norwegian School of Economics professors Alexander W. Cappelen and Bertil Tungodden suggests that the difference in wealth inequality may lie in both countries’ differing approaches to social preference. Conventional political economic theory dictates that social preferences encompass both the conjectured cause of inequality—lower personal productivity as opposed to bad luck, for example—or ideas of fairness. Either could explain why Americans are more willing to accept inequality and less willing to accept redistribution.

Almås et al. conducted a quasi-experiment to evaluate the extent to which Americans and Norwegians tolerate luck, merit, and efficiency as sources of wealth inequality. The “luck” treatment assigned tasks to a pair of workers and determined their income by a coin flip, after which a third party spectator redistributed income between the pair. The “merit” treatment gave all the money to the more productive person. The “efficiency” treatment added costs to redistribution, so that redistributing the income led to a decrease in the total amount.

The researchers found that for all three scenarios, American spectators were far more likely to implement inequality than Norwegian spectators. Averaging across the three treatments, Americans implemented a redistribution corresponding to a Gini coefficient of 0.43, while the Norwegian redistribution corresponded to a Gini coefficient of 0.24. These numbers were almost identical to the Gini coefficients of the two nations themselves, which underscores the importance of redistributive tendencies as a metric.

The experimental data also suggested that Americans are far more likely to redistribute according to a libertarian view of fairness (based on the belief that differences in wealth due to luck and productivity are fair), whereas Norwegians are more likely to redistribute according to an egalitarian view (based on the belief that differences due to luck and productivity are unfair). However, the study also finds that the majority of Americans prefer to equalize completely when inequality is due solely to luck, while most Norwegians are willing to accept inequality when it is due to solely to differences in personal productivity.

Luck-driven inequality and productivity-driven inequality do not happen in isolation. Negative environmental influences—driven by the luck that determines the situation into which a person is born—may further hamper personal productivity, again worsening the environment and contributing further to a toxic cycle of inequality. Policies that address inequality will have to guide American public understanding towards viewing redistribution as a correction of luck-sourced inequalities rather than productivity-sourced inequalities. With such a shift in the public perception, redistributive policies could have more success in bridging economic gaps between income and racial groups.

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Almås, Ingvild, Alexander W. Cappelen, and Bertil Tungodden. 2020. “Cutthroat Capitalism versus Cuddly Socialism: Are Americans More Meritocratic and Efficiency-Seeking than Scandinavians?” Journal of Political Economy 128, no. 5: 1753-1788. https://doi.org/10.1086/705551.