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Everything You Need to Know to Talk About Inequality

Why Thomas Piketty's capital gulf gets a bit complicated when you look at the numbers.

Inequality in the United States, Europe, and elsewhere has become a hot topic since the global economic downturn highlighted the stark differences between rich and poor. Thomas Piketty's widely-reviewed (and, to hear him tell it, widely misunderstood) best-selling book has illustrated just how wide the disparities are in income and wealth. His data show that the gaps are at their widest since the waning days of the Gilded Age, which was not capitalism's finest hour. But how much these gaps really matter in practice is a bit more complicated.  

Which inequality are we talking about?

The term inequality is often used without specifying what is being measured or how. For example, income inequality and wealth inequality are distinct; one measures an annual flow, and the other a quantity at some point in time. Which one you care about may depend on the costs and benefits of each kind. I happen to think wealth inequality is more important because it's more likely to determine your access to economic opportunities, but intelligent people can differ on this point.

Measures of income inequality can also give different results. One might compare the incomes of the top 10 percent to the bottom 10 percent, while another might use a calculation like a Gini coefficient that looks at the entire distribution. Here, the choice of metric is more philosophical; you might care more about the difference between the richest and poorest people in your country than you do about what happens in between, or vice versa.

What are the benefits and costs of inequality?

Inequality is a fundamental part of the capitalist system, at least as viewed by economists. The possibility of earning different incomes and accumulating different levels of wealth gives people incentives to work hard and realize their productive potential. In theory, this makes the pie bigger for everyone, even if it's not shared completely evenly.

But inequality also has costs, as recent research has begun to suggest. If money plays a role in the allocation of opportunity, then inequality may make it more likely that a rich, stupid kid gets a chance -- say, a place at an elite university -- that would have been better exploited by a poor, smart kid. Moreover, there are probably social costs to huge disparities in wealth. Even if the people at the bottom enjoy a decent standard of living in absolute terms, the contrasts with the lifestyles of rich may lead to resentment, unrest, or worse. And that's a big "if." Here, in the supposedly wealthy United States, there are still millions of kids who experience hunger sometime during the year.

The overall relationship between inequality and average living standards probably looks something like the curve proposed by Arthur Laffer for tax rates and tax revenue. If you have complete equality, then living standards may fall short of their maximum, since people will have less incentive to work. If you have complete inequality -- that is, all wealth in the hands of one person -- then everyone else is stuck once more with the same wealth: nothing. As essentially slaves, their incentives to be productive will be just as bad, unless there's some chance they could be that one person at the top in the future. In fact, both extremes look a lot like North Korea, which isn't exactly an economic heavyweight.

Is there any scientific evidence for these relationships between inequality and living standards?

Anecdotally, the rapid growth in post-socialist economies suggests that too little inequality may indeed have been a problem. But, according to the International Monetary Fund, extreme inequality can also detract from economic growth. It may also be the case that changes in inequality are associated with lower growth rates, perhaps because of the disruptions that can cause or accompany the changes themselves. Every economy almost certainly has a peak in its inequality Laffer curve, that is, the level of inequality where living standards are at their highest, all other things equal. We just don't know where it is yet.

If inequality is bad, what can we do about it?

There are quite a few options, but for me they all fall into two categories. First are policies that make inequality irrelevant to opportunity in society. These include efforts to improve early childhood education, nutrition for poor children, and access to the admissions process at top colleges; the idea in each case is to make sure every kid has a chance to be evaluated on his or her merits. This category also includes initiatives to reduce the influence of money in politics, so that even poor candidates would have a shot. Doing so might make the electoral process more meritocratic and economically efficient, compared to the current situation where wealth can seem like a prerequisite for mounting a campaign. Some of these policies can take effect quickly, but others -- especially those aimed mainly at kids -- could take a generation or more to make a dent in inequality.

Options in the second category attack inequality directly. Among these are progressive taxes on income and wealth. They're always controversial, since their objective may appear to be bringing people at the top of the economic totem pole down, rather than lifting the bottom up. On the other hand, they can change the distributions of income and wealth much more quickly.

All of these policies seek to reduce the economic distortions that come with inequality. But it's worth thinking about how these policies might create new distortions along the way. Programs for children cost money, and tax rates would have to rise to pay for them. Progressive income and wealth taxes may distort decisions about working and saving, though it's not clear which are worse in this respect. My own proposal tries to reduce these distortions with a hybrid tax on both income and wealth that uses a sliding scale for rates.

What's the bottom line?

The recent surge of interest in inequality is healthy for the global economy, as well as for Piketty's book sales. Even as inequality diminishes between countries, it's rising within many around the world. It will be useful to know how much inequality may hurt our living standards in the long term, and whether the possible remedies might be just as costly. Stay tuned.

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COLUMN

The Problem With Confidence Men

How Katty Kay and Claire Shipman get it wrong on women and overconfidence.

If you happen to be a world leader, and you happen to attend one of those world leader powwows to which the rest of us usually aren't invited (the opening festivities of the U.N. General Assembly session, for instance), and you happen to look around at your fellow world leaders, you might also happen to notice that most of your fellow world leaders are fellows.

According to U.N. figures, women made up only about 10 percent of all heads of state in 2013, and, according to the Inter-Parliamentary Union, women constituted only about 17 percent of all government ministers in 2012 and 22 percent of all parliamentarians worldwide as of February 2014. In the United States, only 20 percent of current cabinet secretaries are female, along with only 18.5 percent of all current members of Congress. A few rungs down the ladder, men continue to outnumber women: Women hold only one-third of federal senior executive service positions, for instance, and in the national security and foreign-policy agencies, the figure is even more skewed toward men.

Since women make up 51 percent of the world's population, all this raises an obvious question: Why don't women run the world -- or at least 51 percent of it?

Good question! In answer, you might be tempted to start muttering about the lingering effects of centuries of sex-based discrimination or the lingering existence, in some quarters at least, of good old-fashioned sexism. You might also add a scowling commentary on the scarcity of affordable, high-quality child care, the absurd demands of the 24/7 workplace, the "second shift" of housework and child care most women still do when they get home from their paid jobs, and the cultural expectations that steer women away from traditionally male roles such as leader of the free world (or even chief of staff to the leader of the free world).

But you'd be wrong. Or at least, according to veteran television reporters Claire Shipman and Katty Kay, you'd be missing the deeper underlying reason for women's "continued failure to break the glass ceiling," which is "something more basic: women's acute lack of confidence."

In the cover story in this month's issue of the Atlantic, Kay and Shipman offer a lengthy excerpt from their just-published book, The Confidence Code: The Science and Art of Self-Assurance -- What Women Should Know. Few women make it to the top, they argue, because women generally underestimate and undervalue their own skills and expertise. They're less likely than men to ask for raises or negotiate about salaries when they get job offers, and even when the objective evidence suggests that they know as much as or more than their male peers, women still express less confidence about their knowledge. As a result, they're less likely than their male peers to apply for promotions: Women won't apply for promotions unless they believe they meet 100 percent of the qualifications for the job, while men will if they think they meet even half the qualifications. The problem isn't that women are locked out of top jobs, say Kay and Shipman -- it's that too often, they simply take themselves out of the running.

Up to a point, Kay and Shipman have a point. What they refer to as "the confidence gap" has been amply documented, and most women will relate to Kay and Shipman's anecdotes about meetings in which men yak away blithely about even the most half-baked ideas, while smart women with terrific notions seem bent upon undermining themselves the minute they open their mouths. ("Um, so, this is probably kind of a bad idea, so probably I just shouldn't even waste everyone's time with it, but I was sort of thinking, you know, um, maybe.…")

Needless to say, there are already plenty of self-help books urging women to stop undermining themselves, own their own expertise, and generally "lean in." And, yes: Women with smart ideas should speak up; women who do high-quality work should ask for raises; women who know their stuff shouldn't wallow in self-doubt.

But Kay and Shipman go way beyond that.

Women, they note, tend to be underconfident: They underestimate their own knowledge and skills. Men, on the other hand, tend to be overconfident: Compared with women, men are more likely to have an inflated sense of their knowledge and skills. (For instance, Kay and Shipman cite a 2011 study that found, they write, "men consistently rated their performance on a set of math problems to be about 30 percent better than it was.")

Yet this inflated sense of self-worth, Kay and Shipman inform us, has its rewards: Overconfident men are showered with success. People like them! In fact, the bigger blowhards they are -- that is, the greater the gulf between their actual knowledge and skills and their inflated sense of their knowledge and skills -- the higher their social status. Overconfident men are perceived as self-assured leaders, and raises and promotions flow their way.

One might conclude from this that the challenge for gender equality lies partly in getting women to be less underconfident, partly in getting men to be less overconfident, and partly in getting everyone to understand that the appearance of confidence can mask underlying incompetence, and vice versa. But Kay and Shipman go in a different direction. For them, the lesson for women is clear: "overconfidence can get you far in life." Women, in other words, need to work on becoming more like men.

Please, God, no.

I don't doubt Kay and Shipman's conclusion that career success often goes to the overconfident at the expense of the truly competent. (This has the ring of painful truth about it.) But though Kay and Shipman cite several recent studies documenting the career and social status benefits of overconfidence, they give short shrift to the even more numerous studies documenting the costs of overconfidence -- which, unfortunately, are often borne not by those with inflated egos, but by all the rest of us.

For instance: Overconfident physicians make more medical errors. Overconfident drivers cause more car crashes. Overconfident investors make too many trades and lose more money. Overconfident corporate CFOs are "more aggressive in their investing and borrowing," as one researcher put it, with negative effects for the corporate bottom line.

What's more, classic studies of overconfidence suggest that experts are no better than nonexperts at avoiding overconfidence. In fact, some studies suggest that expertise can increase overconfidence without a corresponding increase in competence. Weirdly, the overconfident become even more overconfident when faced with highly difficult tasks. Put the overconfident into leadership positions, and the stakes simply go up: A 2011 review of the literature on power and overconfidence found that "the experience of power exacerbates overconfidence."

In the realm of political and foreign-policy leadership, overconfidence can be deadly. Indeed, there's a substantial scholarly literature on overconfidence as a cause of war. U.S. military officials were convinced that Pearl Harbor was invulnerable to Japanese attack; American officials were equally convinced that military success in Vietnam would be a simple matter.

More recent examples come readily to mind. In 2002 and 2003, U.S. officials were overconfident about the validity of intelligence information on the existence of weapons of mass destruction in Iraq: "We know that Saddam Hussein has chemical and biological weapons," Defense Secretary Donald Rumsfeld blithely proclaimed in November 2002. "And we know he has an active program for the development of nuclear weapons."

Officials were still more overconfident about the odds of military success: the war would be a cakewalk, U.S. troops would be hailed as liberators, and it would all be wrapped up quickly. "I can't tell you if the use of force in Iraq today would last five days or five weeks or five months," declared Rumsfeld, "but it certainly isn't going to last any longer than that."

I'm all in favor of increasing the percentage of women in leadership roles in the United States and around the globe, and insofar as underconfidence is part of what holds back smart and capable women, I'll be the first to offer pep talks. But Kay and Shipman draw all the wrong lessons from the correlation that male overconfidence has with social status and career success.

If we find a disproportionate number of men in leadership positions because employers -- or colleagues, or voters -- wrongly equate male overconfidence with competence, the solution isn't simply to urge women to become more confident. (That's particularly true given the persistence of double standards. As Kay and Shipman acknowledge, what looks like assertiveness in men is often characterized negatively as aggressiveness in women.)

Instead, let's work on getting employers and selection bodies -- from party nominating committees to talent scouts -- to understand that the appearance of confidence may be inversely correlated with actual competence. And let's urge them to go the extra mile to find the talented women who may not thrust themselves into the limelight. Let's work on all those overconfident men too. Studies suggest that overconfidence and its costs can be reduced or mitigated, in part through frequent reminders of how dangerous overconfidence can be.

But the last thing we should do is urge women to emulate male overconfidence. If the price of getting more women into leadership positions is that we end up with Donald Rumsfeld in a skirt, will we really be better off?

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