Why Money Flows Uphill

Many scholars view global wealth disparities and income inequality as the defining moral, economic, and political issue of our time. Income inequality has been rising in the US for several decades, and the majority of Americans tell pollsters they think the level is too high.

Why, then, has the response from policymakers been so tepid—even under two popular two-term Democratic presidents? That is the question Boston University economist Ray Fisman and a lot of other economists have been asking. One possible contributing factor, Fisman and his colleagues found in a recent study, is that that the elites who make and influence policy care a lot less about economic equality—and more about economic efficiency—than do average Americans.

“Ours is an argument that pushes back, at least in part, against the claim that politics has been captured by economic elites,” says Fisman, who is the first Slater Family Professor in Behavioral Economics, in BU’s College of Arts & Sciences. “We provide a less insidious—but still problematic—explanation for limited redistribution. Politicians are acting on their principles, but these principles—which emphasize efficiency at the expense of equality—diverge from those of everyday Americans.”

Fisman’s study, which was published in Science in September 2015, notes that economic redistribution policies that benefit the middle class and poor almost always involve a cost in terms of lost, or wasted, resources—known as the “leaky bucket,” the term coined by economist Arthur M. Okun in his famous 1975 book, Equality and Efficiency: The Big Tradeoff. Fisman’s co-authors are Pamela Jakiela, an assistant economics professor at the University of Maryland at College Park; Shachar Kariv, an economics professor at the University of California at Berkeley, and Daniel Markovits, a political philosopher and professor of law at Yale Law School.

The study, “The distributional preferences of an elite,” examines people’s attitudes toward two tradeoffs that shape social and economic policy: efficiency vs. equality and selfishness vs. fair-mindedness. “The tradeoff between selfishness and fair-mindedness informs the willingness of the haves to make sacrifices in order to aid the have-nots,” Fisman says. “And the tradeoff between efficiency and equality goes to the familiar conundrum of whether economic policy should concentrate on growing the economic pie or on promoting the pie’s even distribution.”

Elites in the study were more likely to be classified as selfish (and hence less likely to be classified as fair-minded) than average Americans. More importantly, Fisman says, the study found that elites were much less willing to sacrifice efficiency for equality than were average Americans. (That is, elites care more about growing the size of the economic pie than ensuring everyone gets the same-sized slice.) The more elite they were—in terms of education and income—the more the study subjects favored efficiency over equality. The “extreme” elite—a group made up of 208 Yale Law School (YLS) students—held these attitudes, despite the fact that the overwhelming majority of YLS students self-identify as progressive Democrats. The Democratic Party has been traditionally thought of as the party of economic equality.

For the study, the researchers asked YLS students and hundreds of other Americans to play a variation of what economists call a dictator game, in which subjects were asked to distribute a pot of real money between themselves and an anonymous other person. Subjects could keep or give away as much of the money as they liked. The twist was that the price of giving—or redistribution—varied. In some cases, giving was expensive: For every dollar a subject paid out, the other person might only get a dime. In other cases, giving was cheap: For every dollar given, the other person might get as much as ten dollars. Most choices fell somewhere between these two extremes.

Three different classes of subjects played the game:

1. Average Americans, who came from the American Life Panel (ALP), an Internet-based pool of Americans from across the economic and social spectrum that is assembled by the RAND Corporation.
2. Intermediate elites, made up of undergraduates at the University of California at Berkeley, which is one of the most selective schools in the country, and ALP subjects who hold graduate degrees and have annual household incomes of over $100,000.
3. Extreme elites, composed of three cohorts of students from Yale Law School, the country’s most selective law school. As the study points out, graduates of elite law schools typically receive salary offers of $160,000 (often augmented by signing bonuses) on graduation. Two of the past three US presidents and all nine sitting Supreme Court justices graduated from either Yale or Harvard Law schools.

Yale Law students favored efficiency over equality by a factor of four to one. ALP subjects split about evenly between focusing on efficiency and equality. Intermediate elites favored efficiency over equality by a factor of roughly three to two.

The study also found that Yale law students’ attitudes toward efficiency vs. equality tradeoffs predicted their career choices. Equality-minded subjects were more likely to work for nonprofit organizations, with a focus on the equality-related rights and interests of the disenfranchised. Efficiency-minded subjects chose the corporate sector.

BU Research sat down with Fisman recently to discuss what his research tells us about the disconnect between Washington and average Americans when it comes to economic inequality.

BU Research: What is the significance of this study?

Fisman: There are two aspects of it that I think are important. Our study focuses on the attitudes of elite Americans toward redistribution. Studying an elite population is a novelty in itself, since it’s so hard to access elites as survey subjects, yet so very important because of their outsized effect on policy. Second, I think our findings that elites are more concerned with economic efficiency than equality has implications for how we think about confronting the problem of growing inequality in America.

Can you explain how you define efficiency in this study? Are you using it as a proxy for the trickle-down concepts made popular by Ronald Reagan—that if the rich get richer then wealth will trickle down to everyone else?

We are most certainly not invoking supply-side economics, which is essentially a “have-your-cake-and-eat-it-too” theory of income taxation. The trickle-down theory holds that if you cut taxes on the able and productive, they work even harder and get even richer, and by virtue of their efforts, the entire country becomes so much wealthier that the crumbs that trickle down to the rest of the population are so big that even the poor are better off than if we’d taxed them at a higher rate. That is, under supply-side economics, everyone is better off.

We measure efficiency by the extent to which the size of the pie—money available in the experiment, in our case—is maximized. It says nothing about how this pie is distributed amongst individuals. You can think of lots of economic policies that increase or decrease GDP growth. Very, very often, they have implications for equality of income distribution. Taxation is indeed the most obvious example. If we raise taxes, able and productive individuals may choose to work less—why bother if the government taxes 99 cents on the dollar, the reasoning goes—and the country’s economic pie grows more slowly or, some say, may shrink. But we can use those tax proceeds to distribute income or improve educational opportunities or otherwise help the poor in ways that lead to a more equitable income distribution. In this case, we need to decide how much efficiency we’re willing to trade off for greater equality.

How do subjects trade off efficiency vs. equality when they play the game, and what has that got to do with inequality?

Participants in the experiment confront this tradeoff when they face different “prices” of giving. You can think about this price as capturing how much societal wealth is lost when a more productive member of society redistributes to a less able—and hence, initially poorer—individual.

For example, in some decisions, subjects may be able to give $10 for each dollar of their own income they give up. Giving in this case is cheap. At the other extreme, subjects may only be able to pass on 10 cents for each dollar they give up, so giving is expensive. An efficiency-minded individual will always keep everything when giving is expensive—rather than “waste” a dollar only to produce 10 cents in giving—while giving up everything when it is cheap to do so. Why keep the dollar when you can make someone else $10 richer? But this creates extreme inequality—one person ends up with everything and the other with nothing. An equality-minded person will always ensure that both parties end up with the same amount. And many subjects will do so even when it leads to a much, much smaller pie.

It seems like you’re making a distinction between political and economic elites. But aren’t some so-called political elites also part of the economic elite and couldn’t it be that they may express progressive ideas generally, but still be influenced by their inherent class bias?

I’m actually not sure we draw such a sharp distinction. In fact, one can very reasonably argue that they’re drawn from similar pools—like graduates of Yale Law School. YLS graduates are likely to join the ranks of the economic elite—as when they run white shoe law partnerships or Fortune 500 companies—or the political elite, serving as lawmakers and judges.

You found that elite subjects were twice as likely to be selfish as their compatriots in general—what are some numbers from your study that show that?

One example is Figure 2 of the online Science article, which shows that more than 30 percent of YLS students kept “nearly” the entire pie in every pie-splitting decision they made. Only around 15+ percent of our subjects drawn from a pool of diverse Americans did so. We get similar rates of selfishness to the YLS sample in our pool of Berkeley undergraduates.

You say that Yale Law students’ commitment to efficiency over equality is astonishing, given that they self-identified as Democrats rather than Republicans—and thus sided with the party of economic equality—by a factor of over nine to one. What about the difference between the rhetorical ideals of a political party and what it does in practice? Some people believe there isn’t much of a difference between Democrats and Republicans; people look at the Clinton administration, which cut welfare, among other regressive acts, as a deeply unprogressive administration. Is it possible these Yale students are a perfect example of modern, elite Democrats?

Here’s why we find it more astonishing: In other work, Shachar, Pam, and I find that political affiliation is, for Americans overall, a strong predictor of efficiency orientation. So self-identified Democrats—who lean toward equality orientation—do, in fact, act in a manner that is in keeping with the rhetorical ideals of their party, relative to Republicans, who tend to emphasize efficiency.

Given this result for the population overall, we find it to be very striking that Yale Law School students—more than 90 percent of whom say they’re Democrats—nonetheless are more efficiency-focused than the Republicans in our broader sample of Americans.

And yes, we’re arguing precisely your point—that this could contribute to the apparent divergence between the preferences of Americans for greater equality and the efficiency-focused technocratic choices of America’s leaders.

Are you suggesting that Yale Law School students acquire their attitudes about economic justice at Yale?

Definitely not. We’re not saying anything about where their attitudes come from. It’s not so much that they’re selfish as that they have this view of society that puts more weight on efficiency than equality and that would lead them to redistribute less than many Americans might prefer.

Is it possible for some of us non-economists to read your study as an excuse for elites—and that what you really found is that elites just don’t care about equality for the middle class and poor?

That’s a totally reasonable and relevant point. Given the current framing of our results, we do run the risk of being seen as apologists for inaction by elites. But I don’t see things that way. What I take away from our study is that policymakers on both sides of the aisle might be more reluctant to implement redistributive tax policies that aim to narrow the gap between the rich and the poor, even if that’s something their constituents want or need. The study’s findings signal this disconnect between the preferences of the electorate and the elected. It is, in some sense, a corruption of democracy, if you want to be a bit histrionic about it.

That is, we’re arguing that a mismatch between voter preferences and policies, owing to personal preferences of elites or otherwise, is a subversion of democracy. I think that’s a balanced assessment, and one that doesn’t let anyone off the hook.

We live in a so-called representative democracy. We can vote out people who don’t represent our interests. Why do you think this isn’t happening? Why do people who care about income inequality vote for people who don’t enact policies to remedy it?

This is so far above my pay grade. Why does Congress pass the Farm Bill every five years? Why can’t we pass gun control legislation? There are many mysteries to American politics, and probably more explanations for why things are the way they are. Our study doesn’t speak to this, and if I’ve got any sense at all, I won’t try to either.