EEC: Econ 101

Econ 101: Why learn about economic inequality?

David Brancaccio, Erika Soderstrom, and Jarrett Dang Feb 2, 2023
Heard on:
Barnard professor Homa Zarghamee says learning about economic inequality is a fundamental part of understanding the modern economy. Scott Olson/Getty Images
EEC: Econ 101

Econ 101: Why learn about economic inequality?

David Brancaccio, Erika Soderstrom, and Jarrett Dang Feb 2, 2023
Heard on:
Barnard professor Homa Zarghamee says learning about economic inequality is a fundamental part of understanding the modern economy. Scott Olson/Getty Images

This story contains details about suicide that may be disturbing to some readers.

Our team here at Marketplace is taking an introduction to economics class as part of what we’re calling the Marketplace Crash Course. This Econ 101 lesson plan is an opportunity to brush up on everything that underpins our economy, thanks to a free, open-source textbook from CoreEcon. You can sign up to follow along here.

This textbook covers a key topic that’s crucial to understanding today’s economy: inequality. This is also an issue that’s not often taught to students taking introductory-level economics, said Homa Zarghamee, a professor of economics at Barnard College in New York City. Zarghamee, who has taught using the Core Econ textbook, spoke with Marketplace’s David Brancaccio about why intro-to-econ students should be versed in economic inequality.

“Students just care about inequality — and not just students, Americans at large care about inequality,” Zarghamee said. “So when they’re asked about pressing problems that economists should address, by far the most prevalent answer is inequality — it exceeds even climate change or the environment.”

The following is an edited transcript of their conversation.

David Brancaccio: I don’t remember exploring inequality when I took intro econ. I mean, I have gray hair, so it’s been a while. Is it just because I’m ancient?

Homa Zarghamee: No. I have less gray hair than you, and I had the same issue. I did not study inequality in my intro econ classes. I didn’t teach it that much in the econ classes that I’ve been teaching for the past 20 years. So it really wasn’t until I started using this textbook that I was able to give it, I think, the prioritization it deserves.

Brancaccio: I mean, it’s good, grim fun talking about this. There’s something compelling and wild about the subject. But it’s crucial, really, don’t you think, that the students get a sense of this?

Zarghamee: Absolutely. I think for one, these intro textbooks in economics, they were treating inequality as an afterthought. So they were usually forefronting efficiency concerns. And I started being worried about what people even understood “efficiency” to mean. So in economics, we have a pretty specific notion of efficiency that I don’t think would match up with what most people think of it. So this concept of Pareto efficiency, this is when there’s no surplus left on the table. You can’t change the current allocation without making somebody else worse off.

Brancaccio: Pareto, a famous Italian thinker on these subjects. But the thing is, economists don’t like it when you leave resources on the table, and they have this very specific way of calculating when you’re being wasteful.

Zarghamee: Right. So that notion of Pareto efficiencies, again, you can’t make somebody better off without making someone else worse off. So if I took $1 from a billionaire and gave it to a poor person, that would not necessarily be an improvement, that would be a trade-off. So then intro textbooks tend to go from presenting efficiency to never really mentioning equality until these double-digit chapters at the end of the book that most professors probably don’t have an opportunity to get to, except to mention upfront with very little evidence that there’s a trade-off between efficiency and equality.

Brancaccio: Because people need to understand that you can have an efficient system or an efficient society that you just wouldn’t want to live in.

Zarghamee: Yeah, absolutely, absolutely. So you will basically say things like, “Efficiency is maximizing the size of the economic pie. And then equality refers to how the pie is divided,” and that you can’t really pursue these two goals together. If you do a good job with one, you’re doing a poor job with the other one. And there’s really not that much evidence to back that up.

Brancaccio: But, I mean, why is it important?

Zarghamee: Well, I think just pedagogically, it’s really important because if anyone’s taking an economics course, it’s intro economics they’re taking. So something like 40% of U.S. undergraduates take one — and only one — economics course. And it’s introductory. And if we kind of learn more nuances, we go later into the major. Great, but we should be beholden to the people who are only taking one of these courses and introduce some of that nuance now. So from research from within economics, you would get that there is an importance of equality for better economic outcomes and for growth. And it’s just, frankly, important to people. If we all prioritize these Pareto efficiency feelings, then it would be fine that middle-class wages have stagnated for half a century while the gains and economic growth have gone to the top. We could say something like, “Yeah, we made the pie bigger, we made some people better off without making others worse off.” But that’s just not how it’s been experienced, I think, by most of the United States. And we’ve seen the political consequences of that. Another issue is that students just care about inequality. And not just students, Americans at large care about inequality. So when they’re asked about pressing problems that economists should address, by far the most prevalent answer is inequality — it exceeds even climate change or the environment. And this, again, isn’t just students, this is bankers. When you ask bankers, they give the same response. So I think what we’re tapping into are these issues of fairness and just desserts, like what is the fair distribution of economic resources? How much money or what economic resources do people deserve? And we’re walking around with this sense that economic inequality is high and in the U.S. that it’s higher than it has been since the Gilded Age. But I have yet to see students not be floored by just how high it is and just how much it’s risen. And again, this isn’t just students who react this way. But behavioral economist and social psychologist Dan Ariely and Mike Norton, they surveyed a nationally representative sample of about 5,000 Americans about the wealth distribution. So their finding is very consistent with what I see in the classroom. So regardless of political orientation, economic position, et cetera, people’s ideal wealth distribution is much more egalitarian than they think the distribution is. And what they think the distribution is, is much more egalitarian than it actually is.

Brancaccio: So some people may say, “I think a proper distribution is sort of half the people are above the line, half the people are below,” but what do they actually say?

Zarghamee: Yeah, so people think the wealthiest 20%, on average, should ideally have about 30% of the wealth. They think that they actually have 60% of the wealth, but it turns out that they actually have 85% of the wealth. And this is just way higher than, again, what people think is out there and what they think their ideals are. And again, there are differences. People who are better off are OK with the distribution being more unequal, but nowhere near where they think it is and nowhere near where it actually is. Republicans are more tolerant of an unequal distribution than Democrats. But again, they’re all idealizing a distribution that’s way more equal than what we actually have.

Brancaccio: An enduring moment for me reading that Core Econ textbook is when they’re talking about inequality, they talk about this study by, not an economist, but a psychologist at the University of California, Irvine. And he creates this rigged Monopoly game, right? There are two players, and one, because of a flip of a coin, gets terrible rules. The other person gets a lot more money, a lot of other advantages, and they play each other. And you remember the study?

Zarghamee: Oh, absolutely. Yeah.

Brancaccio: And they play and their behavior changes, right?

Zarghamee: Yeah, so the interesting thing is not just that the coin toss determines the rules of the game for these two different players, but that they watch the coin toss determine the rules of the game for them. They see — it’s transparent — one of them is getting privileged, one has been put in a difficult position. And they see this game play out. So they see the random process, they play the game, they watch the person who starts with this incredible advantage do better. But at the end, they end up, the people who are doing better, thinking they did better because of their own skill and cleverness and effort.

Brancaccio: Well, let’s actually hear the researcher himself, Paul Piff, tell it in an interview I had done with him some time ago.

Paul Piff: At the end of the study, we ask rich players why they inevitably won. And they don’t talk about the flip of the coin. They talk about the things that they did. They talk about their acumen, they talk about their competencies, they talk about this decision or that decision or that thing that they did. And I think that this is a basic human bias. That’s true of all of us. And that is that when something good happens to you, we, I think because of the cognitive machinery that we’re kind of equipped with, think about the things that we did that contributed to that success.

Brancaccio: I suppose that’s not your problem as an economist, professor. It’s more of a problem for public policy, right? Because it makes inequality really hard to deal with because people think, “Well, I’m getting way more than my fair share because I’m awesome.”

Zarghamee: Well, yeah, the issue is people aren’t often walking around thinking that, right? So the thing that he’s showing is that even when you show people that randomness, they still don’t pick up on it. So the fact that they don’t pick up on it in day-to-day life already has this name called the “headwind tailwind asymmetry.” It’s much easier to see the obstacles that you’re up against than to feel this tailwind that’s pushing you ahead. But I think what he’s doing is this amazing job of illustrating that even when it’s transparent, you still tend towards thinking that you’re responsible for your own successes. And this has a lot of implications for support for redistribution. So a study by economist Christina Fong back in the early 2000s shows how using, like, Gallup daily polls, those who think that getting ahead is due to these self-determined factors like risk taking and hard work are much more likely to oppose redistribution, while people who think getting ahead is due to these exogenously determined factors like gender or race or who your parents are, your connections, luck, inheritance — they’re much more supportive of redistribution. And this, again, turns out to be the case regardless of your own characteristics. So both white and Black people who think race matters for getting ahead are supportive of redistribution, both men and women who think that gender is important for getting ahead are supportive of redistribution. So again, like, all of this plays into how policy is designed and how economics translates into policies that affect people’s lives.

Brancaccio: And there you are teaching this course on inequality, and for those of your students who are like, “Well, if I just keep focused and get a good education, that’ll increase my share of the pie.”

Zarghamee: Well, they’re right. So that will, that will increase their share of the pie. The issue is more what it takes to get that education. So taking a step back, there’s an interesting and, I think to some people, maybe counterintuitive empirical relationship called the Great Gatsby curve that shows that countries with less economic inequality, in other words, countries that are more equal, are also ones that are more upwardly mobile. So a kid can expect to do better than their parents. And I think this goes for the people for whom it’s counterintuitive, it might be counterintuitive because you think, “Oh, if there’s a wider income distribution, then that might mean that you can transcend that distribution to rise up and more, there’s more room for upward mobility,” but it actually turns out that it’s the opposite. So countries like Australia and New Zealand, they offer significantly less inequality than the United States and significantly greater opportunity for each generation to do better than their parents. So now enter this other really striking empirical relationship. So there’s a Harvard economist, Raj Chetty, who’s the director of a project called Opportunity Insights, which uses Big Data to study the science of economic opportunity. And he compiled this graph that shows the relationship between parents’ income rank and their children’s college attendance. And what’s crazy about this, it’s a scatterplot. But you have to zoom in to see that it’s a scatterplot and not just a straight line, meaning that little else other than parents’ income may determine a child’s college attendance. So while it’s definitely the case that going to college helps one economically, going to college is almost like a 1-to-1 correlation to your parents having enough money to put you into college. So it’s another kind of nail in the coffin of the idea of the American dream, which is that, you know, if we just work hard enough, we can make it. There’s a lot to suggest, right now, that the extent to which we can “make it” is determined by accidents of birth having to do with, with our parents’ income.

Brancaccio: And professor, before we go, let’s talk just for a moment here about a chart that you have labeled “Deaths of Despair.” This is people taking their own life, this is people dying of alcoholism and substance abuse.

Zarghamee: Yeah, so this was discovered — it kind of unfolded in 2014, life expectancy in the U.S. actually dropped on average. And a closer look showed that while the mortality rate was steadily declining, at least since 1990, for middle-aged people in comparably rich countries, and for other groups within the United States, like Hispanic Americans, for example, non-Hispanic white Americans have actually had an increasing mortality rate since the late 1990s and early 2000s. Then an even closer look shows that this is primarily being driven by white Americans who don’t have an undergraduate college degree and by what the economists Anne Case and Angus Deaton, who found it, called deaths of despair. So these are drug overdoses, suicides, alcoholic liver disease and the like. And yeah, it’s a very disturbing trend, and I think has a lot to do not just with the actual economic opportunities, but to the extent that the life that they saw for themselves does not end up playing out, and that there are these winners and losers to a lot of the neoliberal policies that we have and that we pushed for a long time, globalization, that supposedly are going to make everybody better off. But it takes a lot of work to make sure that everybody’s made better off and that the people who are losing jobs, that their whole industries are being done away with, [aren’t] falling behind.

Brancaccio: All right now, just really before we go, if you want to sound smart about inequality at the next barroom discussion or dinner party, what should they whip out? The Gini coefficient— is that a good one? What would you tell us?

Zarghamee: The Gini coefficient isn’t a bad one. Economists aren’t crazy about it.

Brancaccio: It’s a measure of inequality.

Zarghamee: Yeah, it’s a little bit hard to describe. It’s easy in that it’s a number that falls between zero and 1. The higher it is, the more unequal, the closer to zero it is, the more equal.

Brancaccio: I’m all for easy. OK, so that’s good, and you can look it up. But here’s what you need to know about the Gini coefficient. The higher the number is worse?

Zarghamee: The higher the number is more unequal.

Brancaccio: Is more unequal. All right, so when that comes up, at least you can say that much.

Zarghamee: Yeah, but another easy one to look at are income shares. So if you look at income shares of the top 1%, that’s basically saying, “What percentage of all income went to the top 1% of earners?” And that might be an even easier number to understand. But again, it’s an interesting distinction between that look at inequality in something like the income share of the bottom 20% because when you look at the top 1%, you kind of miss what’s happening in the middle and bottom of the distribution. When you look at the bottom of the distribution, you miss what’s happening at the top, so the Gini coefficient tries to even those out a bit.

In addition to the Core Econ textbook, we have a newsletter series for the Marketplace Crash Course that will offer cheat notes and guides for getting through all of the lessons. It’s free to sign up and you can follow along at your own pace.

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