Luck and Inequality
Success and Luck, by Robert Frank, Institute for Policy Studies (IPS), June 27, 2017.
Frank is a professor of economics at Cornell University and the author of Success and Luck: Good Fortune and the Myth of Meritocracy (see below) whose thesis is: Luck is far more important to success in this life than we imagine.
Why the myth of a perfect meritocracy is so pernicious: An interview with Robert Frank, by Sean Illing, Vox.com, July 12, 2018.
“… Most of the people who emerge as big winners today do tend to be talented and hard-working, so there’s at least a semblance of meritocracy. What’s also true is that being hard-working and talented are by no means sufficient to get you into the winner’s circle. Luck matters a great deal. …”
The radical moral implications of luck in human life, by David Roberts, Vox.com, August 21, 2018.
Roberts describes all the ways in which circumstances in our formative years shaped who we are and all the ways that luck continues to shape us and our options as adults, and therefore why we should be compassionate towards those who fail and demanding of those who do well. “… the more you believe our trajectories are shaped by forces outside our control (and sheer chance), the more compassionate you will be toward failure and the more you will expect back from the fortunate. When luck is recognized, softening its harsh effects becomes the basic moral project. …”
On the Money: How Americans’ Economic Views Define – and Defy – Party Lines, by Lee Drutman, Vanessa Williamson, and Felicia Wong, Democracy Fund Voter Study Group, June 2019.
Describes the results of the Democracy Fund Voter Study Group’s 2019 VOTER Survey (Views of the Electorate Research Survey). The results show how American voters explain why some people are rich and others are poor, what effects wealthy people have on society, and how views of wealthy and poor people relate to economic policy preferences.
“... Respondents rated six potential explanations for why people are poor, and six explanations for why people are rich (Table 2). ... In both cases, the least popular explanation was ‘luck.’ ...”
How Norwegians and Americans See Inequality Differently, by Alana Semuels, The Atlantic, January 11, 2017.
“… ‘In Norway, people very much disapprove of inequalities that are due to bad luck,’ Bertil Tungodden, a professor at the Norwegian School of Economics, and one of the paper’s authors, told me. ‘People in the U.S. are more willing to accept inequality, even if it reflects pure good luck for some and pure bad luck for others.’ …”
Success and Luck: Good Fortune and the Myth of Meritocracy, by Robert H. Frank, Princeton University Press, 2016.
Frank reviews recent research that shows that chance plays a much larger role in important life outcomes than most people imagine. In a world increasingly dominated by winner-take-all markets, trivial initial advantages and chance opportunities along the way often translate into gigantic fortunes. He explores the implications of those findings to show why the rich underestimate the importance of luck in their success, and offers two simple solutions: (1) increased government spending on infrastructure used by everyone, universal healthcare, and poverty reduction programs, and (2) a progressive consumption tax to pay for them.
Counterintuitive problem: Everyone in a room keeps giving dollars to random others. You’ll never guess what happens next. Decision Science News, June 19, 2017.
Visualization of the paper below. “Imagine a room full of 100 people with 100 dollars each. With every tick of the clock, every person with money gives a dollar to one randomly chosen other person. After some time progresses, how will the money be distributed?” Most people assume that the distribution would remain about equal. But, in fact, it results in a skewed, roughly exponential shape.
Statistical mechanics of money, by A. Dragulescu and V.M. Yakovenko, The European Physical Journal B, 17, pp. 723–729, June 22, 2000.
If you’re so smart, why aren’t you rich? Turns out it’s just chance., MIT Technology Review, March 1, 2018.
Briefly describes the mathematical academic paper below:
Talent vs. Luck: The Role of Randomness in Success and Failure, by Alessandro Pluchino. Alessio Emanuele Biondo, and Andrea Rapisarda, Advances in Complex Systems 21:03n04 (July 9, 2018).
Describes a simple computer model that simulates 1,000 people who each have the same amount of capital but differing levels of talent. Every 6 months, for 40 years, if one of the people encounters a random lucky dot and has sufficient talent, then her capital doubles. If she encounters a random unlucky dot her capital is always halved. At the end, capital is highly skewed (most people at the bottom, only a few at the top), resembling what we see in society; and those with the most talent are not necessarily at the top.
Talent, luck and success: simulating meritocracy and inequality with stochasticity, by Hongsup Shin, Medium, March 18, 2018.
This analysis begins with the same simple computer model as above, but explores how meritocracy and stochasticity affect economic inequality through a variety of scenarios: letting the level of talent affect how much lucky and unlucky events affect the change in capital, adding a regular paycheck that depends on talent, adding interest returns on capital, adjusting so luck is greater for the rich and less so for the poor, adding an income tax, and adding a social safety net. This is a smart analysis with lots of interesting and provocative results.
Wealth Inequality and Natural Disasters
Damages Done: The Longitudinal Impacts of Natural Hazards on Wealth Inequality in the United States, by Junia Howell and James R. Elliott, Social Problems spy016 (August 14, 2018).
Investigates a largely ignored contributor to wealth inequality in the United States: damages from natural hazards. Results indicate that as local hazard damages increase, so does wealth inequality, especially along lines of race, education, and homeownership.
State of the Dream 2019: The Perfect Storm, United for a Fair Economy, January 2019.
Explores how race and economic injustice are connected to natural disaster resilience and recovery.
Facts: Wealth Inequality in the United States, Institute for Policy Studies (IPS).
Eight graphs with accompanying text that provide basic facts about wealth inequality in the United States.
Nine Charts about Wealth Inequality in America (Updated), Urban Institute, October 5, 2017.
Nine graphs with accompanying text that provide basic facts about wealth inequality in the United States and some suggestions for shrinking wealth inequality and racial wealth gaps.
9 charts that explain the history of global wealth, by Matthew Yglesias, Vox.com, December 16, 2014.
Nine charts from Thomas Piketty’s book Capital in the 21st Century (see below) that illustrate the history of the global economy including three that specifically focus on wealth inequality.
Wealth concentration returning to ‘levels last seen during the Roaring Twenties,’ according to new research, by Christopher Ingraham, Wonkblog, Washington Post, February 8, 2019.
Summarizes a recent paper by economist Gabriel Zucmac: “The 400 richest Americans — the top 0.00025 percent of the population — have tripled their share of the nation’s wealth since the early 1980s … today the top 0.1 percent of the population has captured nearly 20 percent of the nation’s wealth, giving them a greater slice of the American pie than the bottom 80 percent of the population combined. That bottom 80 percent figure includes the 1 in 5 American households that has either zero or negative wealth, meaning that its debts are greater than or equal to its assets. …”
The richest 1 percent now owns more of the country’s wealth than at any time in the past 50 years, by Christopher Ingraham, Wonkblog, Washington Post, December 6, 2017.
A good summary of the work of economist Edward N. Wolff. “… Today, the top 1 percent of households own more wealth than the bottom 90 percent combined. That gap, between the ultrawealthy and everyone else, has only become wider in the past several decades. …”
Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data, by Emmanuel Saez and Gabriel Zucman, The Quarterly Journal of Economics 131:2 (May 1, 2016), pp. 519–578.
This careful academic analysis shows wealth inequality is high and rising fast in the United States: the top 0.1% share has increased from 7% in the late 1970s to 22% in 2012. In contrast, the wealth share of the middle-class has followed an inverted-U evolution over the course of the twentieth century: it is no higher today than in 1940.
‘The Great Gatsby Curve’: Why It's So Hard for the Poor to Get Ahead, by Matthew O’Brien, The Atlantic, June 2013.
“… [R]ich kids without a college degree are 2.5 times more likely to end up rich than poor kids who do graduate from college.” What measures could change this?
State of the Dream 2017: Mourning in America, United for a Fair Economy, January 2017.
Examines how wealth inequality affects people of color, the “racial economic divide.” For example: “In 2013, the most recent year available, the median net worth of households headed by whites was roughly 13 times that of black households.”
Wealth Condensation: Why the Rich Get Richer, by swellsman, DailyKos, September 24, 2011.
This post describes and discusses the implications of the highly-mathematical academic paper below. Bouchard and Mezard determined that if people have random amounts of money at some beginning time and engage with each other for a long time, a few will end up owning a large fraction of the total wealth. The final distribution of wealth is determined not by the participants’ money-making skills (which were all set to be the same), but by the nature of the situation: random interactions and favorable returns paid to existing capital. This distribution reflects Pareto’s principle which is based on the actual skewed distribution of wealth in virtually every country in the world.
Wealth condensation in a simple model of economy, by Jean-Philippe Bouchaud and Marc Mézard, Physica A 282 (March 2000), pp. 536–545.
The 4 biggest reasons why inequality is bad for society, by T. M. Scanlon, Ideas.TED.com, June 3, 2014.
Economic inequality can give wealthier people too much control over the lives of others, can undermine the fairness of political institutions, and can undermine the fairness of the economic system. Plus, workers have a claim to a fair share of what they produce.
Wealth Inequality in America, by politizane, 7 minutes, November 20, 2012.
Infographic on the distribution of wealth in America, highlighting both the inequality and the difference between our perception of inequality and the actual numbers.
Tax the Rich: An animated fairy tale, by Fred Glass, narrated by Ed Asner, 8 minutes, December 5, 2012.
How the United States arrived at this moment of poorly funded public services and widening economic inequality. Written and directed by Fred Glass for the California Federation of Teachers, narrated by Ed Asner, with animation by Mike Konopacki.
Getting Ahead or Losing Ground: Economic Mobility in America, by Julia B. Isaacs, Isabel V. Sawhill, and Ron Haskins, The Brookings Institution, February 2008.
“… Most people are better off than their parents, but slower and less broadly shared economic growth has made the economy more of a zero-sum game than it used to be, with very high stakes for the winners. Some subgroups, such as immigrants, are doing especially well. Others, such as African Americans, are losing ground. … there is no evidence that opportunity has increased in a way that might offset the slower and less broadly shared growth of income and wealth that families have experienced. Nor is there evidence that the United States is in any way exceptional when compared to other advanced countries. Indeed, a number of advanced countries provide more opportunity to their citizens than does the United States. …”
A Century of Wealth in America, by Edward N. Wolff, Belknap Press (Harvard University Press), 2017.
Detailed analysis of the accumulation and distribution of wealth in the United States since 1900.
Capital in the 21st Century, by Thomas Piketty, Belknap Press (Harvard University Press), 2017.
Pulls together historical data on wealth worldwide and in key countries and describes the economic history of the last two centuries.
Americans Want to Live in a Much More Equal Country (They Just Don't Realize It), by Dan Ariely, The Atlantic, August 2, 2012.
“We asked thousands of people to tell us how equal wealth distribution would have to be for them to enter society at a random place. The vast majority — rich, poor, GOP and Democrat — imagined a far more equal nation.” This is a summary of the academic paper below.
Building a better America—One wealth quintile at a time, by Michael I. Norton and Dan Ariely, Perspectives on Psychological Science 6:1 (February 3, 2011), pp. 9–12.
Wealth and Meritocracy
What Do Our Wealthiest Deserve? An Interview with Didier Jacobs, Oxfam America, Sam Pizzigati, Too Much, Institute for Policy Studies, February 3, 2016.
This interview summarizes the long report below. “… We can trace most of our world’s billionaire wealth to cronyism, inheritance, and monopoly. … my last critique of meritocracy: the inequity between the talented and hard-working people who take a bet and win and the equally talented and hard-working people who take a bet and lose. Both winners and losers here rank as equally deserving. Yet the one can be thousands of times wealthier than the other only because of luck. … The meritocracy notion may make sense for the middle of our income distribution: An outstanding nurse is likely to make more money than an average one and would deserve that extra income. But in no way can meritocracy justify extreme inequality. …”
Extreme Wealth is not Merited, by Didier Jacobs, Oxfam America Discussion Paper, November 2015.
Abolish Billionaires, by Farhad Manjoo, New York Times, February 6, 2019.
“… A billion dollars is wildly more than anyone needs, even accounting for life’s most excessive lavishes. It’s far more than anyone might reasonably claim to deserve, however much he believes he has contributed to society.
At some level of extreme wealth, money inevitably corrupts. On the left and the right, it buys political power, it silences dissent, it serves primarily to perpetuate ever-greater wealth, often unrelated to any reciprocal social good. …”
Do people advance based solely on individual merit? Drawing on the scholarly literature, this book examines the effect of traditional meritorious factors — talent, attitude, work ethic, and character — on economic outcomes and shows that they are vastly overestimated. The book also evaluates the effect of non-merit factors such as family background, social connections, market conditions, educational opportunities, discrimination, and luck.
Meritocracy and Economic Inequality, edited by Kenneth Arrow, Samuel Bowles, Steven N. Durlauf, Princeton University Press, 2000.
These dozen scholarly papers confirm mounting evidence that the connection between intelligence and inequality is surprisingly weak, and demonstrate that targeted educational and economic reforms can reduce the income gap.
Wealth and Inheritance
The Inheritance of Inequality, by Samuel Bowles and Herbert Gintis, Journal of Economic Perspectives 16:3 (Summer 2002), pp. 3–30.
Parental income and wealth are strong predictors of the likely economic status of the next generation.
The Correlation of Wealth Across Generations, by Kerwin Kofi Charles and Erik Hurst, Journal of Political Economy 111:6 (December 2003), pp. 1155–1182.
Results from studying the U.S. Panel Study of Income Dynamics show substantial intergenerational persistence in wealth. The age-adjusted elasticity of child’s wealth with respect to parents’ wealth is around 0.37. These intergenerational relationships are large, especially since the study only focuses on households who have not yet received bequests from their parents. Much of the persistence arises from what occurs at the extremes: children of very low wealth or very high wealth parents rarely end with wealth substantially different from that of their parents.
How rigid is the wealth structure and why? Inter-and multigenerational associations in family wealth, by Fabian T. Pfeffer and Alexandra Killewald, Population Studies Center Research Report 15-845, 2015.
Results from studying the U.S. Panel Study of Income Dynamics indicate a considerable degree of intergenerational wealth transmission across not only two but three generations, particularly high rigidity at the top of the wealth distribution, and a stark disadvantage of African-American households through their disproportional and repeated relegation to the bottom of the wealth distribution.
Inherited advantage: The importance of inheritance for private wealth accumulation in Europe, by Philipp Korom, European Sociological Review 34:1 (February 2018), pp. 79–91.
Multivariate econometric analyses of harmonized survey data obtained from 11 European countries reveal that inheriting households own considerably more wealth than non-inheriting households, all other things equal. The wealth gap between households who received lifetime gifts or bequests and those who did not varies hugely along the distribution of net wealth. At the median, the wealth gap reaches about 112,000 euros and increases beyond 517,000 euros at the 90th percentile.
Understanding Intergenerational Mobility: The Role of Nature versus Nurture in Wealth and Other Economic Outcomes and Behaviors, by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi, CEPR Discussion Paper No. DP13559, February 2019. Earlier version: Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth, by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi, NBER Working Paper No. 21409, July 2015, Revised July 2017.
Studying the intergenerational correlation between adopted children and their parents in Sweden: there is no evidence that education or earnings of parents are important drivers of the intergenerational wealth relationship between children and their adoptive parents and a limited role for child earnings, education, savings rates, and asset allocation. Wealth transmission from parents to children is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, direct financial transfers from parents to children is likely the most important factor.
Born with a Silver Spoon? Danish Evidence on Wealth Inequality in Childhood, by Simon Halphen Boserup, Wojciech Kopczuk, and Claus Thustrup Kreiner, The Economic Journal 128:612 (July 1, 2018), pp. F514–F544.
Studying Denmark: asset-holdings of children at age 18 (mostly parental gifts to children) are strongly predictive of wealth holdings many years later when they are in their 40s, especially for families at the top of the wealth distribution.
Wealth and Education
Investing in Children: Changes in Parental Spending on Children, 1972–2007, by Sabino Kornrich and Frank Furstenberg, Demography 50:1 (February 2013).
Data from the U.S. Consumer Expenditure Survey shows that in 1972, Americans at the upper end of the income spectrum were spending five times as much per child as low-income families. By 2007 that gap had grown to nine to one; spending by upper-income families more than doubled, while spending by low-income families grew by 20 percent.
The Widening Academic Achievement Gap Between the Rich and the Poor: New Evidence and Possible Explanations, by Sean F. Reardon in Whither Opportunity? Rising Inequality, Schools, and Children’s Life Chances, Greg J. Duncan and Richard J. Murnane, eds., Russell Sage Foundation, 2011.
A given difference in family incomes now corresponds to a 30 to 60 percent larger difference in scores on standardized tests of math and readhing than it did for children born in the 1970s, whereas the relationship between parental education and children’s achievement has remained stable.
Inequality in Postsecondary Education, by Martha J. Bailey and Susan M. Dynarski, in Whither Opportunity? Rising Inequality, Schools, and Children’s Life Chances, Greg J. Duncan and Richard J. Murnane, eds., Russell Sage Foundation, 2011.
There are growing gaps between children from high- and low-income families in college entry, persistence, and graduation. Rates of college completion increased by only four percentage points for low-income cohorts born around 1980 relative to cohorts born in the early 1960s, but by 18 percentage points for corresponding cohorts who grew up in high-income families. Among men, inequality in educational attainment has increased slightly since the early 1980s. But among women, inequality in educational attainment has risen sharply, driven by increases in the education of the daughters of high-income parents.
Facts: Income Inequality in the United States, Institute for Policy Studies (IPS).
Sixteen graphs with accompanying text that provide basic facts about income inequality in the United States.
Our Broken Economy, in One Simple Chart, by David Leonhardt, New York Times, August 7, 2017.
A dynamic chart that shows total income growth per year in the United States by income percentile for every 34-year period starting with 1946–1980 and ending with 1980–2014. It neatly summarizes the recent soaring of inequality: Before 1980, the take-home pay of the middle class and the poor rose more rapidly, in percentage terms, than the pay of the rich. But now, the very affluent (the 99.999th percentile) are seeing very large income growth and those below the 90th percentile are seeing very little (the 5th percentile is seeing no growth at all).
40 Years Of Income Inequality In America, In Graphs, Planet Money, National Public Radio, October 2, 2014.
More graphs showing the rise of income inequality over the past 40 years.
This cartoon explains how the rich got rich and the poor got poor, by Alvin Chang, Vox.com, May 23, 2016.
An easy-to-understand analysis of income inequality over the last 40 years using cartoon figures.
A Guide to Statistics on Historical Trends in Income Inequality, Updated, by Chad Stone, Danilo Trisi, Arloc Sherman, and Roderick Taylor, Center on Budget and Policy Priorities (CBPP), May 15, 2018.
Comprehensive guide to income inequality, wealth inequality, and poverty — where the data comes from and what it shows (with clear explanatory graphs).
11 Charts That Show Income Inequality Isn’t Getting Better Anytime Soon: It’s no secret: More and more wealth is trickling up, by Dave Gilson and Edwin Rios, Mother Jones, December 22, 2016.
Charts that show why wealth and income inequality continue to grow.
Piketty’s Inequality Story in Six Charts, by John Cassidy, The New Yorker, March 26, 2014.
Good summary of Thomas Piketty’s book Capital in the Twenty-first Century (see above).
The Rich, the Right, and the Facts: Deconstructing the Income Distribution Debate, by Paul Krugman, The American Prospect, June 4, 2014 (originally Fall 1992).
“… an assessment of the three kinds of conservative attacks on the simple facts about growing inequality: (i) efforts to deny the facts, through a mixture of confused statistical arguments; (ii) claims that the growth record of the Reagan years outweighs or negates any apparent increase in inequality; (iii) claims that income mobility makes comparisons of the income distribution at a point in time meaningless. …”
How rising inequality hurts everyone, even the rich, by Christopher Ingraham, Washington Post, February 6, 2018.
Recent studies suggest that inequality depresses economic growth and have found that inequality, particularly the high level seen in the present-day United States, gives rise to criminal behavior.
A huge new Stanford and Harvard study proves that US inequality isn’t just about class, by Eshe Nelson and Dan Kopf, Quartz, March 20, 2018.
Summarizes a recent study by economists at Stanford, Harvard, and the U.S. Census Bureau which assesses data on intergenerational economic mobility for 20 million U.S. children and their parents (the Equality of Opportunity project). The study shows that economic class alone cannot explain the income gap: “When we compare the outcomes of black and white men who grow up in two-parent families with similar levels of income, wealth, and education, we continue to find that the black men still have substantially lower incomes in adulthood.”
Inequality Is…, the Economic Policy Institute (EPI), 2013.
Animation showing how inequality is real, personal, expensive, created, and fixable.