Economics

Rich Get Richer, Poor Get Richer. Is Everybody Happy?

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In today's Wall Street Journal, Arthur C. Brooks looks again at the scholarship on inequality and unhappiness[$].

He opens with these stats: "According to Census figures, the average inflation-adjusted income in the top quintile increased 22% between 1993 and 2003. Incomes in the middle quintile rose 17% on average, while the incomes in the bottom quintile increased 13%." In short, the rich are getting richer, but it's not zero sum. The poor are getting richer, too, albeit a little more slowly. But does getting richer slower take all the pleasure out of it? After all, as one famous experiment found:

56 percent of participants chose a hypothetical job paying $50,000 per year while everyone else earned $25,000, rather than a job paying $100,000 per year while others made $200,000. Thus, the thinking goes, the very fact that some people have less than others leads to unhappiness, even without deprivation.

But egalitarians, says Brooks, read the experimental evidence incorrectly. They see in these results a desire for a more equitable distribution of income. But:

The stud[y] above doesn't necessarily tell us that people would be happier in a world of total equality. Rather, they indicate that if there is no apparent prospect for getting ahead themselves (as there indeed was not in the experiment), people will focus instead on having more than others–even to the point of neglecting their financial interests.

What matters in real life, says Brooks, is opportunity. He backs this up with happiness stats over the last 30 years, which show that about 30 percent of people have consistently described themselves as "very happy," even as income disparities have grown significantly. What hasn't changed is mobility: In any given period, about half of people in the bottom quintile will rise out of it within a decade, a fifth within a year.

reason ran an interview with Brooks in our March print issue, and I wrote about him here as well.

NEXT: The Myth of the Unpopular Democrats

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  1. 56 percent of participants chose a hypothetical job paying $50,000 per year while everyone else earned $25,000, rather than a job paying $100,000 per year while others made $200,000. Thus, the thinking goes, the very fact that some people have less than others leads to unhappiness, even without deprivation.

    But isn’t money defined only in relative terms? The amount you have is not important, it’s the amount you have compared to others.

    So of course I’d rather earn twice as much as everybody else instead of half as much as everybody else.

    To illustrate the principle further, would you rather earn $100,000 while everybody else earns $10,000 or $100,001 against everybody else’s $50,000,000?

  2. 56 percent of participants chose a hypothetical job paying $50,000 per year

    How is 56% statistically meaningful? Anyhow, the Democrats tell me I’m poor and unhappy and I believe them. They won Congress after all. The People spoke.

  3. 56 percent of participants chose a hypothetical job paying $50,000 per year

    How is 56% statistically meaningful?

    Right it’s more telling that 44% of the people would rather take the obviously worse deal.

  4. Status matters to people’s happiness. This is a rather simple fact, that sociologists have long understood and documented.

    If greater inequality was making us unhappier as a whole, the change wouldn’t manifest itself in terms of people switching from “very happy” to “unhappy” or “somewhat happy.” It would show up at the bottom of the scale, not the top.

    That richest segment of the population remaining happy as inequality grows is not really very good evidence that the poorer segments are also remaining happy.

  5. God these studies are retarded. As said elsewhere, all that this study proves is that 44% of people don’t understand inflation. Actually, make it more like 45% – that way we can include the researchers who created this study and the journalists touting it.

  6. Dan T. has an excellent point – the absolute numbers of dollars are meaningless without knowing the value of those dollars.

    If everyone made $200,000 (except me), prices would rise accordingly, and I’d likely be far worse off than I would be in a world where I make $50000 while everyone else makes $25000.

  7. I don’t understand. I have been hearing incessantly for at least five years that everyone else’s wages except for the top quintile have been stagnant or down “for decades”.

    Can someone help me understand why those two sets of data seem to conflict?

  8. I was part of a similar survey a couple of years ago while in business school, and the two questions I asked were:

    1. Are the two jobs comparible in all other respects except for salary?

    2. Do prices adjust to incomes, leaving me with less purchasing power in the higher income scenario?

    The answer was that the two jobs are otherwise identical, and the price level would remain unchanged regardless of your (and everyone else’s) income.

    With that, I opted to take the $100,000 over the $50,000, regardless of what anyone else was earning, since my own buying power would be doubled.

  9. You think too much, Jake.

  10. Yeah, I mean if everyone else is making $200k the value of your $100k just went down a lot.

  11. JasonL,

    Look at the time frame: 1993-2003.

    Wages for the non-rich were stagnant or declining through the 70s, 80s, and the recession of the early 90s, then rose between the early 90s and 2001, making up for the declines in earlier decades.

  12. The experiment above doesn’t really capture the current income distribution very well. In the $100k scenario, you’re the ONLY poor guy. In the $50k scenario, you’re the ONLY rich guy.

    If you do the same experiment, but with different income distributions, you might see a different result. Consider the following choices.

    1 – you can take a job earning $100k, where three other guys also earn $100k, four guys earn $200k, and 4 guys earn $400k

    OR

    2 – you can take a job earning $50k, along with three other guys, while 4 guys get $25k, and 4 guys get $12.5k.

    The original $100k gig had you singled out as being the lone whipping boy at a company of high rollers, and the $50k option had you as the big fish in a small pond.

    If you moderate that somewhat, by making the $100k offer have several other low-men on the totem pole to share your status, that might make it more attractive. Alternately, it might diminish the appeal of the $50k option to have others sharing the spotlight of being the high wage-earner.

    You might see some people still taking the $50k job, but I expect you’d see a lot more people taking the $100k job.

  13. “Rich Get Richer, Poor Get Richer. Is Everybody Happy?”

    No, because the poor aren’t getting richer enough to afford health care.

  14. Without knowing prices, those salary figures are meaningless.

    I’d think that if everyone was making $200,000 except me, prices would soon inflate to the point where my purchasing power was much less than the raw numbers might make you think.

    At the same time, if I’m making $50,000 and everyone else is making $25,000 then prices will likely stay low giving me much more purchasing power (as well as those making 25k).

    So I’d pick the $50,000 scenario over the $100,000 because my purchasing power is probably going to be higher.

  15. But isn’t money defined only in relative terms? The amount you have is not important, it’s the amount you have compared to others.

    That’s not really what it’s relative to; money is a proxy for what it can buy. Would you rather be relatively poor in 2007, and have cable TV, Internet access, a car, etc. … or relatively rich in 1900, and have none of those things?

  16. That’s not really what it’s relative to; money is a proxy for what it can buy. Would you rather be relatively poor in 2007, and have cable TV, Internet access, a car, etc. … or relatively rich in 1900, and have none of those things?

    Would I have a top hat and monocle?

  17. crimethink,

    Relatively poor people today have much more neato stuff than did relatively rich people in 1900.

    And yet, they are almost certainly less happy than those relatively rich people from a past era.

  18. And yet, [the poor] are almost certainly less happy than those relatively rich people from a past era.

    I wonder how much of the alleged “less happy” comes from people constantly pointing out how miserable their lives simply must be.

  19. Three problems I have with Income-Status as Happiness, or whatever:

    1) People move through “classes” or “brackets” through out their life (sometimes that’s in the wrong direction). In general the “middle” today is not composed of exactly the same people as yesterday.

    2) People participate in “status races” with people relatively close to themselves. The guy making 100g’s does not compare himself to Bill Gates, and so on. In other words, there is not a universal scale. The top-hipster’s status is not affected by the growth in status of the top-jock, and so on.

    3) Some people care more about status then others. Some people care more about money-status then others. Some people care more about money (fuck the status part) then others. There are a lot of people who forgo more lucrative jobs for ones they find more interesting, or forgo more money-status for more social-status.

  20. Yes, Jake, it’s the outside agitators. There’s never real unhappiness among the people at the bottom. Just troublemakers stirring things up.

  21. My happiness is not defined by other people.

  22. Rich Get Richer, Poor Get Richer

    That’s the Reality of capitalism.

  23. What concerns me is the idea that people will make a mathematically irrational choice to screw everyone and improve their relative position.

    It is part of my concern about healthcare. Marginal Revolution linked to a study finding that people in places like Sierra Leone were happier with their healthcare system than people in the US are with ours despite objectively much worse results. Envy over care that some can afford but you can’t might completely blind you to your level of health.

    http://www.marginalrevolution.com/marginalrevolution/2007/07/the-best-mid-si.html

  24. Everybody’s Got Nice Stuff But Me!

  25. Poverty, is a personal choice.

  26. I’m bored with these stories. It’s pretty well established that people get upset about relative deprivation. Sure, we’re all richer, very few people are subsistence farmers or outright beggars. People below the poverty line might have a telephone or a television set. They should be so damn thankful that everybody is richer so that they can watch Mind of Mencia. Relative deprivation?, it starts revolutions….

  27. Yes, Jake, it’s the outside agitators. There’s never real unhappiness among the people at the bottom. Just troublemakers stirring things up.

    Okay, joe, you can pretend that’s what I said if it makes you feel good.

    Seriously, I’m curious if anyone’s ever done a study looking into the effect of public opinion on happiness as self-fulfilling prophecy. We know that people grossly overestimate the dangers of fireworks, terrorist attacks, and sharks, while underestimating the likelihood of drowning or dying of an asthma attack.

    We also know that people think their children are far more likely to get abducted by a stranger than they really are.

    I’m not denying that the poor are worse off than the rich – in this country or anywhere else. But is it really unthinkable to wonder whether all of the grandstanding people do over marginal cases tends to magnify people’s unhappiness?

  28. Interesting research & commentary on the link between money and happiness:

    http://blog.penelopetrunk.com/2007/07/11/new-research-reveals-some-new-ways-to-buy-happiness-sort-of/

  29. To quote Andy “No, because the poor aren’t getting richer enough to afford health care.”

    Yeah, because their employers are taking their money to buy them insurance thanks to our tax code.

  30. It seems like it is worth discussing Lamar, because there are various approaches we might make to address the unrest caused by relative deprivation.

    To me, if you act to address the relative situation in such a way as to distort incentives and harm overall innovation and wealth creation, you’ve done something pretty terrible.

    This idea of relative deprivation is not forward looking at all. It is unappreciative of the value of risk that pays off. You can probably engineer a reasonably static society that makes people feel better along these lines, but how many people are dying that otherwise wouldn’t?

    I’d rather spend my time trying to short circuit the impluse that appease it, thanks.

  31. “What concerns me is the idea that people will make a mathematically irrational choice to screw everyone and improve their relative position.”

    Well that’s envy and jealousy for you.

    Some people would derive more satisfaction in knowing they had done somehting to hold somebody else down on a relative basis than in doing something that would build themselves up on an absolute basis.

  32. And yet, they are almost certainly less happy than those relatively rich people from a past era.

    they are also more happy then relatively poor people from a past era.

    So relatively poor people are happier today then they were in the past and they live longer and they can do more stuff and have more free time….all of which is possible because we reward innovative hard working smart people….and all of which would be impossible if uncreative lazy idiots got rewarded.

  33. Exactly what Constitutionally ennumerated power delegated to the federal government makes any of this the business of government in the first place?

    Answer: none whatsoever.

  34. I’d think that if everyone was making $200,000 except me, prices would soon inflate to the point where my purchasing power was much less than the raw numbers might make you think.

    See: Manhattan rents.

  35. I wonder if anyone has ever done this survey on a smaller level using REAL money but at a level that wont effect inflation.

    For example, bring 300 people in for testing (like the college psych tests I could take for extra credit in psych class). Divide into 100 random and anonymous groups of 3 people (none know who else is in their group). 2 of the people in each group get some other psych experiment to fill out – but they get paid via the 3rd person. The 3rd person has a choice:

    a. receive $20, the other two members of your group get $40 each
    b. receive $10, the other two members of your group get $5 each

    It would be interesting to see what people choose in that case.

    Also, it would be interesting to hand the money out in a room while explaining how the payments were determined. While they wouldnt no which ones choose for them the $40 recipients could thank the $20 recipients. The $5 recipients could beat the $10 recipients senseless. Heck, maybe hand the $5 people baseball bats along with their Lincoln.

  36. “wouldnt know which ones chose” not “wouldnt no which ones choose”

    ugh.

  37. JasonL:

    I’m not arguing. I’m just saying enough with the studies that try to convince us and poor people that they should be happy because they are richer than their forehobos. They shouldn’t be happy, they should be motivated.

  38. Lamar,

    “forehobos” = awesome

    Urban Dictionary that sucker right now.

  39. Most people are about as happy as they make up their minds to be. Maybe Dale Carnegie said that maybe it was Will Rogers. In my experience it’s pretty much right on, too.

  40. …and you’re supposed to dance like nobody’s watching, but dammit, they are.

  41. Sounds as if we lives in the best of all possible worlds. That’s comforting.

  42. Poverty, is a personal choice.

    And so, is punctuation.

  43. LaMar, I think Sugar is right. You may have just coined a term. Besides, it kind of made me chuckle.

    [shrugs]

  44. Yeah, that study doesn’t much account for the value of each quantity. Should’ve included stagnated amounts of money (say, in bogus stats you’re in the 40% making 200,000 a year while the top 5% is making 1,000,000 and the bottom is making about 3,000) and increase rates (the top has a chance of increasing 18% a year while at your present income you can increase about 9%). That study doesn’t take into account previous incomes, motivation levels, or anything that could possibly amount to how a real capitalist economy *actually* works. It simply throws you into a static theoretical situation and expects you to assess. In conclusion I’d rather make 200,000 in a country where the people making millions are producing computers, than starving “equally” on 200 where the people at the “top” are the ones most loyal to the Party.

    Besides, if you’re making 100K while everyone else is making 200K, you’re either the victim of a conspiracy or just really sucking.

  45. happy because they are richer than their forehobos.

    Hey my grandpa was a hobo!

    Then he was rich.

  46. robc,

    Yeah, there are a few experiments of that sort involving real money. Conclusions vary; I think some find significant degrees of irrationality, while others show the participants reaching outcomes far more optimal for everyone concerned than various game theories would predict.

    These aren’t exactly what you were talking about, but they might be a start (and interesting nonetheless):

    Experimental economics
    Ultimatum game
    Inequality aversion
    Homo economicus

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