Swedish inequality datapoint of the day

By Felix Salmon
March 25, 2011
NYT, the wealth-inequality survey by Michael Norton and Dan Ariely is back in the news.

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Thanks largely to the NYT, the wealth-inequality survey by Michael Norton and Dan Ariely is back in the news. You might remember it from back in September. Here’s how it was reported in HufPo:

The respondents were presented with unlabeled pie charts representing the wealth distributions of the U.S., where the richest 20 percent controlled about 84 percent of wealth, and Sweden, where the top 20 percent only controlled 36 percent of wealth. Without knowing which country they were picking, 92 percent of respondents said they’d rather live in a country with Sweden’s wealth distribution.

Similarly, Tim Noah, in Slate, said the survey showed respondents favoring “a wealth distribution resembling that in Sweden”. And Chrystia Freeland has the same idea: “Americans actually live in Russia, although they think they live in Sweden”, she writes.

The Norton and Ariely paper is easy to misread in this way. Americans Prefer Sweden is one heading; the text does little to dispel that idea.

As can be seen in Figure 1, the (unlabeled) United States distribution was far less desirable than both the (unlabeled) Sweden distribution and the equal distribution, with some 92% of Americans preferring the Sweden distribution to the United States. In addition, this overwhelming preference for the Sweden distribution over the United States distribution was robust across gender, preferred candidate in the 2004 election and income.

If you look at the referenced Figure 1, it labels three different charts as “Sweden (upper left), an equal distribution (upper right), and the United States (bottom)”. It also comes with a note:

Pie charts depict the percentage of wealth possessed by each quintile; for instance, in the United States, the top wealth quintile owns 84% of the total wealth, the second highest 11%, and so on.

The clear implication is that in Sweden, the top wealth quintile owns 36% of the total wealth, as demonstrated in the “Sweden” pie chart. But that’s not true. Go back to footnote 2 (yes, a footnote), and you find this:

We used Sweden’s income rather than wealth distribution because it provided a clearer contrast to the equal and United States wealth distributions; while more equal than the United States’ wealth distribution, Sweden’s wealth distribution is still extremely top heavy.

This is an important point, which nearly all the discussion of the paper has missed. Mark Gimein has put together the charts showing what the truth of the matter is. The first two charts are reality, while the third is the fictional “Sweden” of the Norton-Ariely paper:

usa_wealth_charts.jpg

sweden_wealth_charts.jpg

sweden1_charts.jpg

The point here is that wealth inequality is ever and always enormous. The US and Sweden are very far apart, when it comes to inequality, but if you look at wealth inequality rather than income inequality — which is the subject of the Norton and Ariely paper — then countries tend to look more alike than different. A huge part of the population of just about every country is going to have zero wealth — if you live paycheck to paycheck, for instance, or if you’re young and haven’t been earning money for long, or if you just spend a lot. That doesn’t mean you’re poor.

In countries like Sweden, indeed, the social safety net is strong enough that you don’t need to build wealth in the same way you do if you’re Chinese, say. Wealth is a form of insurance, and when insurance is nationalized, you need less wealth. As a result, people can enjoy the fruits of their money, instead of saving it up for emergencies or for retirement — and only a small percentage of the population really spends a lot of effort in a successful attempt at accumulating more.

Indeed, Sweden and the US are even closer together, in terms of wealth inequality, than the charts above suggest: as Gimein notes, the Swedish data exclude money held offshore, the value of family owned firms, and the considerable wealth of super-rich Swedes like Ikea founder Ingvar Kamprad, who left the country to avoid taxes.

Ariely told Gimein that “we created a more equal society than the most equal society in the world,” while calling it “Sweden”. Which might be interesting as an academic exercise, but the message was lost on most of the people who read the paper, and who thought that there really was a society where the lowest quintile owns 11% of the wealth.

Wealth inequality is a problem — but it’s one of those things, like homeownership rates, where public policy only makes a very small difference to some very large numbers. Norton told Gimein that he and his colleagues are now exploring “whether educating Americans about the current level of wealth inequality (by showing them charts and pictures) might increase their support for policies that reduce this inequality.” Well, it might. But it’s important not to mislead people about what’s possible.

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