Advertisements

Wealth Inequality: Signal or Noise?

Ezra Klein has a nice segment on Vox explaining why wealth inequality is dangerous for America. And worse than its oft-mentioned cousin, income inequality. Given my political biases, it is very easy for me to accept this claim, and I’d probably favor most normative conclusions Ezra may reach. That said, the numbers in this argument just don’t work out. I think two diagrams make this point perfectly clear.

Image

Image

What you notice here is that wealth inequality isn’t really a problem of the top 10%. Or 1%. Or even really 0.1%. It’s the tippy-top 0.01% that are driving the trend. Or just over 30,000 individuals. And from what we know about this group, most (61%) are bankers or other high-rung executives, with a few doctors and lawyers mixed in.

This isn’t exclusive to wealth. The pristine echelons of the one percent dominate the income distribution more than Occupiers would have you believe. But there is a startling difference between the two, the income share of affluent Americans – top 10% without the 1% – hasn’t markedly declined either.

So when you consider wealth inequality it’s important to note that you’re really talking about a problem that concerns fewer people. As a motivating example, consider the ratio of wealth between the richest man and median man. Would this figure yield any insight into the nuances of the sociopolitical power structure? Hardly. No one would say Bill Gates is the beneficiary of inequality, that he is so wealthy is an independent phenomenon.

That isn’t the case for the relative salary of an investment banker to a plumber, which (in no negligible part) is a result of changes made the tax and regulatory code in favor of top earners. In that sense, income inequality is actual a tangible phenomenon. We can identify winners and losers of the Gini map over the past thirty years.

Is the mind-blowing wealth of 30,000 Americans absurd? Sure. But it would be difficult to say, as the video suggests, these elite are beneficiaries of any inequality other than owning the right capital at the right time. (Indeed it is capital gains in the stock market that drive the income of this group).

And therein lies the problem of arguing wealth inequality is uniquely more worrisome than income inequality. The bankers and, more likely, executives we’re talking about are so rich because of income inequality. With many corporate boards effectively subservient to managerial executives, C-suite officers have the ability to more or less set their own income, independent of productivity and marginal value added (which, granted, is tough to measure for highly skilled people).

The key forces driving income inequality are driving wealth inequality. And while Piketty’s book is in vogue right now (disclaimer: I’ve read only 100 pages so far), there is nothing especially bad about the current distribution of wealth relative to income.

Now one may argue that, of course, wealth and income inequality are correlated – but the real thing to worry about is wealth. While that may be true in some specific circumstances, political donations for one, in general it is very false. We’re told the richest hundred (or so?) people control as much wealth as the bottom 50% of the planet. Or, as Ezra cites in his video, the Walton family is richer than the bottom 30% of Americans combined.

That sounds scary, but it’s also a rather meaningless statistic. A middle-class homeowner with a mortgage in a bad housing market isn’t as wealthy as an Indian slum dweller without access to credit markets. But has an infinitely higher income. Many poorer and lower-middle class Americans are in debt which, sometimes, exceeds their assets. Hence ratios of wealth make little sense. You may want to argue that indebtedness of our poor is a really big problem – and I would be inclined to agree – but that’s a different conversation.

Nor is it clear that wealth plays an especially central role, vis-a-vis income, in political control. It is important to caveat this point (and, really, this entire post) nothing that wealth engenders income engenders wealth, and therefore distinguishing between the effects of either is difficult. However, as proxy consider these two tables from the Sunlight Foundation. 

Cycle Corporate Lawyer/Lobbist Ideological
1990 56.5% 14% 15.1%
1992 57.8% 14% 15.5%
1994 54.2% 15.7% 18.2%
1996 54.6% 15.6% 17.8%
1998 54.6% 16.4% 17.8%
2000 54.3% 15.8% 18.7%
2002 53.6% 15.8% 18.8%
2004 54.7% 15.8% 18.3%
2006 54.6% 15.5% 19.3%
2008 54.5% 15.8% 18.5%
2010 54.8% 15.7% 18.1%
More than $500K $100,001-$500,000 $50,001-$100,000 $25,001-$50,000 $10,000-$25,000
# of The One Percent of One Percent 17 995 2,468 4,907 18,305
Amount Given $27,761,319 $135,925,304 $172,008,627 $169,265,649 $266,124,661
% of Political 0.0% money 3.6% 17.6% 22.2% 21.9% 34.4%
% who are corporate 47.1% 47.7% 55.2% 54.4% 58.7%
% who are lawyer/lobbyists 0.0% 15.7% 17.2% 18.7% 14.8%
% who are ideological 52.9% 33.4% 22.8% 19.0% 14.6%
% given to independent expenditure groups 92.4% 13.4% 7.4% 7.2% 7.7%
% given to candidates 2.7% 30.4% 34.4% 42.3% 49.6%
% given to parties 4.9% 58.1% 59.5% 49.8% 31.9%

Here’s the important theme. In the second figure, there’s a discrete break between the individuals of the top 0.01% giving more than $500k and those not. Specifically, the amount given the “independent expenditure groups” increases from around 10% of more moderate donors to 90% of all deep donors. The proportion of donors identified as “ideological” also increases very quickly.

You might say that that these ideological donors are a product of wealth independently of income. But corporate donations are usually motivated by more specific (not to say benign) interests geared towards income. Now going back to the first graph, it’s clear that even though the 0.01% more than doubled their share of national income over the time period considered, ideological donations didn’t increase all that much, and corporate donations have remained steady.

There might be a sense in which corporate interests are driven by wealth, but that’s not the argument proposed by the Vox video. Instead we are told to worry about the political influence of heirs bathing in a pool of their parents dough. No – you can always trust corporations to focus on one thing, and that’s profit, not wealth.

Of course, a number of assumptions were made in this highly indirect argument. But regardless, no one (to my knowledge) has actually made the statistical case that wealth inequality, as a phenomenon emerging independently of income inequality, is responsible for the “doom loop of oligarchy”.

Let’s conclude by discussing the dynamic between the two inequalities. Theoretically, there is a strong correlation. Higher income inequality leads to higher incomes at the top leads to higher marginal propensities to save at the top leads to substantially higher savings at the top leads to wealth inequality leads to capital income inequality leads to income inequality. In fact, by first approximation, wealth inequality should increase even if income inequality remains constant by simple virtue of savings differentials between top and bottom. And if income inequality is increasing, wealth inequality should rise that much more rapidly. And yet the time series of percentile shares of total wealth/income do not reflect this argument:

wealth3

 

Sure the bottom 95% are doing a little worse and the top 5% a little better today, but the changes are nothing near the drastic increase in income inequality in the same time period. This suggests policy has changed favoring high income over low income in a much clearer fashion than high wealth over low wealth. This isn’t surprising given that much of the richest 0.01% are executives and bankers, not heirs to mounds of wealth. After all, it is the group of affluent-but-not-rich people for whom we subsidize housing (indeed more than we do food for the poor!) It is for the doctors we protect the medical market. It is for the middling executives and partners at law firms nobody has heard of we decrease taxes on those earning more than $200k. It is for the top 15(- top 2)% of Americans who couldn’t afford frequent flights to Florida without Spirit or Southwest we refuse to tax carbon emissions from airplanes the way they should be!

And that’s clear in the way the wealth inequality argument is presented. The top 0.01% make about 25% of all campaign contributions, control about 12% of total wealth, and earn about 7% of the nation’s output. The top 1%, to that end, control about 40% of total wealth and earn about 25% of all income. But, for the 1% (minus the top), it’s only income that’s been going up!

That wealth inequality in America is as low as it is, given the income distribution, is remarkable. In fact, the role inherited wealth plays at the top seems to be diminishing:

…the percent [of the Forbes 400] that grew up wealthy fell from 60 to 32 percent while the percent that grew up with some money in the family rose by a similar amount.  The percent who grew up with little or no wealth remained about flat. 

Or:

Overall, Figures 5 and 6 show a trend in the Forbes 400 list away from people who grew up wealthy and inherited businesses towards those who grew up with more modest wealth in the family and started their own businesses.  These changes largely occurred between 1982 and 2001.

If you read the whole paper, what you learn is that the a key driver of success for these stalwarts was growing up in a middle-class to mass affluent family with access to good education at an early age. Good education, note, means motivated teachers and up-to-date technology: something you’re as likely to find in a nice suburb as you are in Phillips Exeter.

And that takes us back to the point about income and wealth. Wealth inequality has always been pretty bad. There’s a reason the Vox video shows a time series of income shares but not wealth shares. Wealth, by definition of how it is constructed, will always be more concentrated. The burden is on those arguing that wealth inequality is a key concern to explain why the relative increase (if it even exists) is bad.

In the mean time, I would rather worry about something that actually concerns most of America, like income inequality. I’m talking about meth addicts in “white trash” neighborhoods that are overworked with two jobs. Or the inability for so many parents to furnish their children with good technology and educational enrichment. Or the shitty healthcare they probably have. Or about the total stagnation of incomes for the bottom two-thirds of the income distribution.

These people will never have any real wealth. And, frankly, if we can find a way to get them jobs, higher wages, and a steady retirement, I can’t even begin to see why it matters.

 

Advertisements
22 comments
  1. Pingback: Assorted links

  2. Brett said:

    Having wealth income can make your livelihood more stable, at least if you don’t go and invest it all in speculative-grade investments and junk bonds. In this type of economy relying almost entirely on labor income means you’re very vulnerable to the churn of job and company change unless you happen to be in a few professions where that doesn’t happen much (like being a doctor). Even CEOs aren’t excepted from this – they just negotiate better severance packages and pay-outs to make the transition much easier.

  3. Michael Moran said:

    First, the fact you do a blog at your young age you should be applauded. Income inequality does not make some group poor while another is rich. Income does not come in a set amount from heaven. In general, high income individuals have high income because they earn it. There was recent particle in Economist talking about how in America today high income individuals have less leisure time than do low income taxpayer. The reason is they work harder. If you tax them at a rate where they work less, income inequality will have declined but you will not have really helped the poor. A simple example, over last 35 years the amount of individuals living in extreme poverty (under $1 a day) has declined a large amount. Most of this decline (75% per an Economist article) is the decline in China (I would also argue most of the rest is due to the economic growth in China helping other countries). Yet 35 years ago there was very little income inequality in China, now there is a lot. 35 years ago China’s leaders said “it is ok if some get rich first,” and that freedom to let some get rich first has led to 35 years of economic growth. Is China a better place than 35 years ago? Almost all policies which are intended to reduce income inequality will decrease growth, thereby increasing poverty.

  4. Have you read Bakija, Cole, and Heim on the occupations of those with very high incomes, also cited by Piketty?

    http://www.indiana.edu/~spea/faculty/pdf/heim_JobsIncomeGrowthTopEarners.pdf

    I don’t really get how people can read this as evidence that “supermanager” executives of public companies are capturing boards of directors to “set their own income.” This paper seems to show that executives of non-finance public companies haven’t really increased their share of national income much at all. Instead the big gains came to people in finance and executives “closely held” firms. Lawyers, entertainers, even doctors also increased their share by a lot more. This seems quite at odds with the corporate governance story often told. Krugman seemed to agree somewhat with this criticism in his review of Piketty.

    Overall, I’m more persuaded by Kaplan and Rauh that “it’s the market,” and we see rising inequality everywhere, consistent with superstar effects and scale effects.

    And of course, the really really big wealth comes mostly from capital gains to entrepreneurs and their heirs.

    Maybe I’m missing something, but I’m honestly confused about why there is so much emphasis on executive pay.

  5. In the mean time, I would rather worry about something that actually concerns most of America, like income inequality. I’m talking about meth addicts in “white trash” neighborhoods that are overworked with two jobs. Or the inability for so many parents to furnish their children with good technology and educational enrichment. Or the shitty healthcare they probably have. Or about the total stagnation of incomes for the bottom two-thirds of the income distribution.

    None of these are problems of inequality. These are all problems of low absolute welfare, not low relative welfare. If we took all the income of the top 1% and dropped it into an ocean, thus reducing inequality, it would be absolutely nothing to improve the healthcare or income stagnation of the bottom two-thirds.

    Healthcare is a real problem. Income stagnation is a problem. An inability to grant one’s children a better life is a problem. But none of those have anything to do with income inequality.

    • “If we took all the income of the top 1% and dropped it into an ocean, thus reducing inequality, it would be absolutely nothing to improve the healthcare or income stagnation of the bottom two-thirds.”

      Well that’s why I’m suggesting we redistribute from more than just the one percent. (It was a 1/3 vs. 2/3 type argument).

      You’re right, though, that much of this is a concern of absolute welfare not inequality and that the policies to alleviate one do not necessarily work for the other. But some do. Dean Baker has quite compellingly argued that periods of very low unemployment and high job creation result in lower inequality by improving the bargaining power of labor. This also results in higher wages and welfare.

      That’s the kind of policy I was looking towards.

      • grabowcp said:

        Well that’s why I’m suggesting we redistribute from more than just the one percent. (It was a 1/3 vs. 2/3 type argument).

        Ok, but then make that argument on those grounds. Say that we should distribute because it will improve the absolute welfare of the 2/3, not because it will reduce inequality. I have sympathy for fixing real problems, such as inadequate healthcare, based on absolute welfare. Simply noting that some people have more than others is of little interest to me.

        Dean Baker has quite compellingly argued that periods of very low unemployment and high job creation result in lower inequality by improving the bargaining power of labor. This also results in higher wages and welfare.

        No doubt, and having the best performing economy possible — which increases the demand for labor and raises its bargaining power — should be our #1 public policy goal. I wish we spent a lot more time talking about how to do this rather than endless prattling about inequality — it would be a much more productive discussion!

        However, it seems to me that promoting a dynamic economy would be worthwhile even if inequality continued to increase (as for example seems to be the case in the 1990s per this chart: http://im.ft-static.com/content/images/fc9f31a6-a2f7-11e0-a9a4-00144feabdc0.img). If the real income of the 2/3 increased by, say, 5% per year but that of the 1/3 rose by 10% — thus increasing inequality — I would not consider that to be a problematic development.

  6. metatone said:

    I think you misunderstand the influence of money on politics. Donations are not the only vector for influence.
    The Koch brothers, whether you love them or loathe them, have been pretty effective at the influence game and donations are only a small part of the picture.

  7. W said:

    You’d really make an excellent courtier if you TRULY applied yourself, and have my full support. Who knows, you might even get a job with Vox!

  8. Pingback: Good Sentences

  9. I have read a few good stuff here. Definitely value bookmarking for revisiting.

    I surprise how much attempt you set to create such a fantastic
    informative web site.

  10. Exceptional post however , I was wanting to know if you could write
    a litte more on this topic? I’d be very grateful if you could
    elaborate a little bit further. Kudos!

  11. The manager plays a very important role iin successful employee motivation.
    Don’t play the victim: Lots of people in life have hard times, terrible families,
    addiction problems, terrible tragedies etc.
    For manjy couples, being infertile no longer means having tto go through life without children.

  12. corset said:

    It is combined with a tight lacing around the
    corset that is long enough to grid the whole posture.
    The corset type blanket will enjoy enormous popularity in the 2014summer season. For ladies, the choice of
    different dresses has always ben an advantage for them.

  13. Midriff fat iss an ugly addition that 70% of American now have
    andd for tthe saake of being abgle to live a longer and happisr life iit nneeds
    to be eliminated. Fatty foods will also slow down metabolism and it can cause other
    diseases like heart problems. Individuals wityh hypertension are normallyy discouraged from
    taking fat burners since these have effects that
    maay not work well with their medical condition.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s