History suggests that a widening gap between rich and poor can lead to political upheaval. In democracies, for example, voters may push for tax changes, while dictatorships often fall to revolution.
Yet a country's actual level of economic inequality may not be the main dynamic driving those changes, according to a new working paper by Moscow's Higher School of Economics economist Vladimir Gimpelson and UCLA political scientist Daniel Treisman. The problem, they argue, is that people generally misperceive levels of inequality. The upshot: What people believe about the level of equality in a given society is more important than hard facts about the distribution of wealth and income.
Take the U.S., where a widening gulf between the top 1 percent of earners and the rest of Americans has become a talking point among policy makers and economists, with reams of data illustrating that the wealth of the country's richest is pulling far ahead, as income for the middle class stagnates or falls.
Yet while there's been much talk about potential remedies, such as changes to the tax system, little has been done to tackle inequality head on. As a result, the country's wealthiest households still often pay a far smaller percentage of their income to Uncle Sam than do rank-and-file taxpayers, while in 2012 the top 400 U.S. earners witnessed a 53 percent jump in income.
Why isn't more happening to change those policies? One factor Gimpelson and Treisman point to is a cultural blind spot, with Americans and citizens of other countries largely underestimating how wealthy the rich really are and the actual size of the inequality gap. American respondents underestimated what CEOs make by 85 percent, the study notes.
The U.S. isn't alone in this, with the authors noting that respondents in all countries were off by more than a third when they tried to guess what top CEOs earn.
On top of that, people generally aren't sure of where their income places them on the economic ladder, which undermines the theory that voters will push for redistribution of income if his own earnings are below the average. A sign of poverty is the inability to put food on the table, but one survey found that people who reported having too little food often put themselves in middle-income and, occasionally, high-income groups.
"The rich tend to think that they are poorer than they are, and the poor tend to think that they are richer than they are," the paper notes. "Both believe they are closer to the national median than is, in fact, the case."
That type of "self-enhancement" bias is another reason behind the gap between perception and reality, with the researchers noting that such misperceptions can affect how people respond to economic issues such as inflation and unemployment.
Then there's also the issue of how citizens of countries believe an economy should work. Interestingly, almost every Ukrainian overestimated inequality in their country, even though it has one of the most equal distributions of income in the world. Why? It could be linked to its history as part of the Soviet Union's socialist economic system.
"Citizens in post-socialist countries appear to be particularly sensitive to inequality, perhaps reflecting the ideological legacy of communism," the authors noted. "Socialists in all countries may exaggerate the income gaps around them, while conservatives may underestimate them."
Free-market proponents "may suppose that wealth is trickling down to all," they added.
That may help explain why poor and middle-class Americans sometimes vote against their own economic interests (aside from the fact that many are voting in favor of social issues that may be more important to them.) A lower-income American may vote in favor of political candidates who want to keep taxes low on the rich because he sees himself as richer than he is, and the rich as more like him, while also believing that some of that wealth, eventually, will land in his lap.
"Ordinary people are often wrong about how the gap between rich and poor has been changing," the paper noted. "If the public does not know how high inequality is, we should not expect the actual inequality level to predict policy preferences and political behavior. But perceived inequality could still be politically important."