Wealth inequality is not nearly as out of control as many left liberal pundits say. This, of course, does not mean everything is fine and dandy.

A Closer Look at Income Inequality

by Andrew Syrios

Cronyism and government largesse have caused serious problems throughout the economy, and should be done away with, not compounded with more redistribution and government control.

Economic inequality is the big thing these days. Barack Obama has called it the “defining challenge of our time” and the number of books being published on the subject could fill a small library. Of particular note is a survey by Michael Norton and Dan Ariely of 5,000 Americans asking what they thought wealth inequality should be compared to what it actually is. Norton and Ariely asked which of two distributions the survey participants preferred, either that of the United States or Sweden (without knowing what those distributions represented). Here’s what they were given:

Needless to say, 92 percent chose Sweden. This survey has become all the buzz on the progressive left and a Youtube video about the study has gone viral with over 14 million views. Not surprisingly, however, there are enormous problems with this analysis. First and foremost, Norton and Ariely used Sweden’s income distribution instead of wealth because “... it provided a clearer contrast.” I’m sure the left’s love affair with Sweden and an attempt to stack the deck had nothing to do with it. The top 20 percent in Sweden actually own 73 percent of the wealth (in the United States it’s 85 percent).

More importantly though, like just about every other discussion on inequality, they neglect to control for age. Age is by far the most important and most ignored variable in both income and wealth inequality. The word “age” doesn’t appear once in Norton and Ariely’s paper, nor does it in theWikipedia page on the subject, and it is not controlled for in Edward N. Wolff’s influential paper on wealth inequality, on which this survey appears to be based.

This feeds the illusion that the top 1 percent or 10 percent, or whatever, is a static group. But as the OECD noted, in 2008 there was an annual 27.2 percent turnover figure in who was in the top 1 percent of income earners.[1] Further, a University of Michigan study showed that only 5 percent of the people in the bottom income quintile in 1975 were still there in 1991 and 29 percent had moved to the top.

Wealth is a bit more stable than income, but it grows with time just the same. According to a Pew study, the net wealth of those over 65 between 1989 and 2009 went from $120,000 to $170,000. For those younger than 35, their wealth actually decreased from $11,500 to $3,500. Indeed, people under the age of 44 possess only 11 percent of the wealth in the United States.

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Read more: mises.org