The Unassuming Economist

While it has been widely claimed by economists and social scientists that inequality and political polarization are on the rise today, an understanding of people’s perception of ideas of inequality, fairness, and equity has largely evaded critical study. Of late, we have come to realize that perhaps such an understanding could form the missing piece of the puzzle required for effective policymaking. Especially in the USA, researchers have begun to seek answers to questions like why so many voters vote against redistributive policies that would benefit them, such as more progressive income taxes, taxes on capital income or estates, or more generous transfer programs, and why voters have tolerated policies that have contributed to a stark rise in inequality over the past few decades.

A recent column in the The MIT Press Reader (2021) sparks discussion on the same by taking cues from the book ‘Combating Inequality: Rethinking Government’s Role’ by noted economists Oliver Blanchard and Dani Rodrik. The author of the column discusses the role of “intangibles” that cannot be observed even in high-quality administrative datasets but very closely affect the development of policies to combat the problem of high quality. These intangibles- perceptions, views on fairness, and people’s ideas about their own economic standing- are discussed at greater length.

Click here to read the full article.

On similar lines, the OECD’s recent report titled, ‘Does Inequality Matter?‘ (2021), goes a step beyond country-level averages to ultimately find out that people’s perceptions of and levels of concerns about inequality have become very widely dispersed.

“Such dispersion can only be partially explained by standard socio-economic divides across income, education, employment status, gender, age, and household size. In some instances, the dispersion of perceptions and concern becomes polarization between groups with starkly different views. Both dispersion and polarization of perceived disparities and concern have grown steeply over time. Higher levels of observed inequality are associated not only with greater perceived disparities and concerns, but with a more divided public opinion.”

The report also brings out some very intricate insights such as the fact that quite contrary to intuition, most of this increased dispersion in the perception of inequalities and concern for income disparities comes from people who are not less similar but very similar to each in socio-economic characteristics.

Click here to read Section 4 (Has the public opinion become more divided?) of the 2021 OECD Report: Does Inequality Matter?

Policymaking and research on perhaps some of the most pressing social issues in the contemporary world today, like poverty, inequality, access to resources, and related matters, is both blessed and plagued with the idea that additional evidence on people’s identities and information sets can radically transform the rate of success or failure of policies. 

Among other things, one such question has also been the irony of demand for redistributive and poverty alleviation programs not rising commensurately or even remotely as much with the ever-rising level of inequalities in the world. Many studies have attempted to explain this phenomenon by presenting the idea that poor people often have only limited knowledge about their relative deprivation viz other people in the economy. They also believe their income levels to approximately coincide with the average income level of the country, thus convincing themselves of the non-usefulness of any redistribution programs. 

This study, by Hoy and Mager, empirically tests some of these theories using randomized surveys and churns out some insightful observations. It redefines the idea of ‘benchmarking’ incomes for designing redistribution programs and explains the importance of information sets in shaping poor people’s preferences for accepting aid. 

Click here to read more.