Never mind the 1 percent Let's talk about the 0.01 percent (2017)
review.chicagobooth.edu
review.chicagobooth.edu
>“The demand for top skill has outpaced its supply, with the returns to top skill increasingly taking the form of business income.”
This really doesn't come off as a problem that needs solving and instead sounds like a purely political war cry. These aren't lords abusing powerless peasants, they're contributing members of society being disproportionately rewarded for their disproportionate contributions. Wealth inequality needs to be considered in the context of overall prosperity and despite the fearmongering you see online, most Americans are doing well. Even our poor have modern conveniences, access to emergency healthcare, generally safe food and infrastructure - eating the evil rich and redistributing their wealth is unlikely to solve any of the major issues in the country, as we're already throwing tons of money at schooling and healthcare and the like.
It'd be far nicer if even the poor had access to non-emergency medicine, too, though.
Ironically, the poor tend to contribute a disproportionate amount of their income to things like taxes and infrastructure, being without the ability to shield their "wealth".
Do you really argue that the people in the top 0.01% are contributing to society at a rate hundreds or thousands of times higher than the rest of the people?
And in the case of heirs, such as the Walton family, are they contributing so vastly more than the guy who mows people's lawns during the day and cooks their dinners in a restaurant at night?
Or how about the Renaissance folks. They (whether fully legally or secretly illegally) reap huge rewards yearly, certainly using some advantages and situations most people do not have access to. Are they likewise contributing to society so much more than the average person?
Oh wait, let's talk nurses and schoolteachers. They pretty clearly contribute very heavily to society, and they get paid pretty poorly. Are they really contributing less, by factors of tens or hundreds, than Larry Ellison?
On an individual basis, leveraged through his organization - I think that it is objectively clear that the answer is: yes.
Yes. That is because of of the impact of their actions.
Let's take the example of a CEO of a major company. The difference between a good CEO, and a great CEO might only change the value of a company by 1%. But 1% of a 100 billion dollar company, is 1 billion dollars.
So if you are effecting a large enough company or area, then only being a little bit better than everyone else, turns out to be massively valuable, and therefore this value needs to be incentivized.
If you consider a measurement of their financial compensation to be proportional to their contribution to society. In reality, the actual impact of their actions is unknown - such things are beyond our ability to measure, we can only speculate.
> therefore this value needs to be incentivized
Technically, it doesn't need to be incentivized. Life would carry on if it wasn't, perhaps even with a better outcome. It is not possible to know what the outcome would be.
Ok then. But that doesn't support the argument that compensation is too high. Maybe it isn't high enough, and should be even higher!
I can use your unknown argument to support even higher compensation, just as much.
That is true, but I made no argument. You on the other hand, seemed to be explaining that such arguments are wrong, at least as I understood you.
> I can use your unknown argument to support even higher compensation, just as much.
Just as much, which is precisely zero.
You seem to be claiming that they are producing value, that needs to be compensated. You have no evidence, yet you speak as if you do.
And the only claims that I make, are in response to other claims. I don't need to make any claims, if you aren't going to make any, because I can just stick with the status quo, merely because it is the status quo.
The burden of proof is on the people who claim that the current status quo, of CEO compensation is for some reason, out of line.
Because unless there is some good reason, it probably isn't, for the sole reason that it is the status quo.
Other people are the ones making the claim here, that the current state of the world is for some reason wrong.
It is perfectly fine, and normal, to assume that the status quo, for an arbitrary issue, is ok, in the absence of evidence that it is bad.
The burden of proof is on the people who are claiming that the status quo is wrong, and needs to be changed.
Why? Because in the vast majority of situations, the status quo is the status quo for a reason. Because if the status quo was wrong, then people would probably find a reason to change it, regarding any arbitrary issue.
So I maintain that the burden of proof is on the people who want to change the status quo, not on the people who want to maintain it.
There are a million different ways that we could change the world, and you have to make an argument for why we should make the change.
And I cannot prove a negative here, as for why there are zero bad things about the status quo.
> No, everyone else in the thread was making a bunch of arguements about how CEOs are overpaid. That is the argument that requires justification.
I'm confused.
https://news.ycombinator.com/item?id=21671403
>> Do you really argue that the people in the top 0.01% are contributing to society at a rate hundreds or thousands of times higher than the rest of the people?
> (you) Yes. That is because of of the impact of their actions.
Any chance you could clear up my confusion?
You answered "yes" to the question "Do you really argue that the people in the top 0.01% are contributing to society at a rate hundreds or thousands of times higher than the rest of the people?", and yet now you seem to be claiming that you have not asserted that they are producing disproportionate value.
> And the only claims that I make, are in response to other claims.
They are still claims.
> I don't need to make any claims
But you did.
> ... because I can just stick with the status quo, merely because it is the status quo.
Then you should have done that, rather than falsely claiming you did it after the fact.
> The burden of proof is on the people who claim that the current status quo, of CEO compensation is for some reason, out of line.
True. It is also true that you have a burden of claim, because you also made an assertion.
And so on and so forth.
"> The burden of proof is on the people who claim that the current status quo, of CEO compensation is for some reason, out of line.
True."
Awesome! So you agree with me that the people who were claiming that CEO compensation too high have not shown this to be true, and therefore they have not proven that we should be worrying about this. (And that apparently you are an ultimate skeptic, who does not believe that we can show any evidence, on anything, or something?)
That is the main point that I am trying to make and is the only claim that I really care about. The people who said this, have not proven their statements, and you seem to agree that they have not established their claims, great!
And I am glad that we were able to come to an agreement on the main thing I was trying to explain which is that the people saying this have not proven their statements to be true. :)
Well, not really.
As I said before: "If you consider a measurement of their financial compensation to be proportional to their contribution to society. In reality, the actual impact of their actions is unknown - such things are beyond our ability to measure, we can only speculate."
There is no proof either way that we should or should not be "worrying about this". Whether we should be worrying about this is for voters to decide. Well, assuming Democracy wasn't a complete facade that is. In lieu of Democracy, about all individuals can do is bitch and moan, and hope the conversation makes it into mainstream discourse, and perhaps something might be done out of shame or fear.
> And that apparently you are an ultimate skeptic, who does not believe that we can show any evidence, on anything, or something?
It can rarely be demonstrated with any sort of accuracy what any one individual contributes to society.
> That is the main point that I am trying to make and is the only claim that I really care about.
This is dishonest revisionism - you made several specific points. If you'd like, you can admit that outright, or you can continue to write in a disingenuous manner. Up to you.
Cool. So you agree that it has not been established, with any substantiated facts, that CEOs are overpaid. So we agree on this point. Awesome!
I am glad that we were able to come to an agreement on this point! Thank you for the good conversation, and have a nice day!
There are lots of examples of consistently bad or self-serving behavior of banks - banks which get special benefits from the people, including quantitative easing (essentially the ability to print money). I find it incredibly difficult to believe that they are contributing to society in line with their compensation. In fact, I believe in some cases it's the opposite.
For example, it is possible that a worse executive would have had a higher chance of causing an even worse outcome than what happened.
The point is that executive compensation is a drop in the bucket, compared to the value of a company as a whole. A CEO only has to have a slighter higher chance of getting a slightly better outcome, for the math to work out and the compensation to be worth it.
I've been thinking about this lately. A schoolteacher generates huge value for dozens of people per year. A CEO of a big firm may generate tiny value for millions or billions of people per year. If the schoolteacher is generating a thousand times more value for each of their students than the CEO does for each of their customers, then the CEO still generated a ton more value to humanity.
My napkin math is that teachers make about $200B/year in the U.S. (3.2M teachers * $60k/year). The top 0.01% seems to make about $100B/year (16k families * $7M/year). So we're in a situation where yes teachers make more value than the 0.01%, but they also earn almost twice as much. (To be fair, it seem reasonable that teachers should earn more than 2x more, but that's a separate conversation).
The scale factor is a weird one for fairness. If someone's value to others is the value per person (X) times the number of people (Y), it seems like our society or technology or something is set up so that it's much easier to maximize X*Y by making Y huge and lowering X than it is to make X huge and lower Y. You can make your firm serve a million times more people, but you can't teach a million times better. Framed this way, no wonder a "value" maximizing world is getting less personal and more corporate as people lower X wherever they can to explode Y.
Not to mention, many companies are a net negative to society.
As a thought experiment, imagine a CEO of company making $5B/year of nebulous undefined "value" with 250M customers (roughly Spotify-ish?). That company's "value" per customer is about $20/year. Compared to a teacher, I think this company's impact per "customer" rounds basically to zero. Suppose the CEO is able to raise that "value" by 0.14%. Compared to the workers, it's still basically zero. Being less than three cents per customer per year, it's truly absurd compared to any teacher's impact per student per year. But it increases the company's $5B/yr by about $7M/yr.
This is a CEO who creates (relatively speaking) practically none of the value of the firm, which in turn creates (relatively speaking) practically no value per customer, and yet because they just have so many customers the CEO has created $7M/year of value in this thought experiment. That's the average 0.01% household income.
Small value over many people just seems to have more range than large value over few people.
So does it count as generating tiny value for millions or billions if you're actually forcing a customer to stay with your overpriced product when there are actually plenty of equal or better cheaper solutions?
I get what you're saying, but I think it would be a struggle to find many corporations whose actions are enough net-positive to society to justify their CEOs' compensations.
But is that a problem, really? Is it a problem if 0.1% of society have absolutely no lack of money whatsoever?
It sounds rather small to me, particularly since most of the money is a valuation of someone's job (or some other productive resource). Taking away the money is also taking away that someone's job.
The value that you add depends on what you do.
First example: someone who manufactures useful widgets is useful to society roughly in proportion to the number of widgets they make — this is probably non-linear diminishing return of usefulness with more production, but I think in practice we can ignore that most of the time for simple manufacturing jobs.
The range here is small, perhaps only a factor of 2-10.
Second example: an inventor who makes a machine that makes it easier to make those widgets. Their value to society could be as much as “difference in number of widgets produced by everyone combined, totalled over a period which is hard to even estimate”, unless that number is so large that diminishing returns is relevant. Unlike the people who actually make the widget, it’s reasonably likely for the person who invents a widget-making-machine to reqch this point. You might even get some extra problems from technological unemployment - short term or long term, it’s still a problem - or the waste of overproduction.
It isn’t as simple as saying “Tim Berners-Lee is as valuable as the entire internet”, because of all the work of other people that built on his, but even a single invention can benefit society to the tune of billions.
Third example: an entrepreneur who recognises a problem in the world and creates a solution. A new type of widget, or whatever. In an optimistic case, they might hire people that would otherwise be unemployed.
I’m not saying this always happens - and “wealth creator” as a term seems to be used to describe people that get rich by moving money around rather than just those who get rich by doing what I describe here - but that it could happen means it’s worth keeping track of.
I would argue that creating a thousand new jobs is at least as valuable to society as the cost of a thousand unemployed people, though almost certainly not as valuable as the wages those thousand earn in the new jobs, because that would be double-counting.
This could still easily be worth millions per year.
Fourth example: Management. Most work is done by teams, and a manager who can make their team 10% more productive is worth as much to society as that productivity boost, summed over the entire team.
I will acknowledge that management can be bad as well as good, so the sort of manager which makes everyone in the team resign (a friend mine recently left such a team because of such a manager) is worth negative their combined productivity.
I can easily believe that Bezos has been an enormous force multiplier because of all the other retailers that have not grown like Amazon. I can believe that Musk is great for SpaceX and entirely average for Tesla, because of how well SpaceX is doing and how averagely Tesla is doing.
How much is SpaceX worth? How much is reducing launch costs by a factor of three worth? I’m not sure, but it’s a lot, and SpaceX succeeded where all the other launch providers — and their, I assume, equally smart engineers — failed.
—
As a separate point, I totally agree with your implicit claim that productivity != income.
The current form of global capitalism doesn't really have a direct corollary to the LTV pricing mechanism.
> they're contributing members of society being disproportionately rewarded for their disproportionate contributions
Are they contributing for their level of wealth being rewarded? Are they contributing 5,400+ times the average American is?
Our schools need funding (teachers are buying their own supplies), infrastructure needs funding (bridges are collapsing), and our healthcare is extremely expensive for the average person.
In a nation with as much wealth as we enjoy, it is shameful how we relegate our neighbors to defecating on sidewalks, living in tents with no heat or plumbing, and raving in the streets due to lack of mental health care.
Over 100 years ago sure. Over 40 or 60 has it really? People usually consider more stuff (access to cheaper and more gadgets, the internet, etc) as an improved standard of living or quality of life. In other words they conflate technology making some products cheaper for a better standard of living.
But even more important factors, for a large part of society is access to healthcare, education, house, etc -- all of which have gotten more expensive. There was a time when a single earner could buy a house at 25 or 35 and get their kids to college. Now two earner families often struggle.
Middle class jobs have also become more stressful and pressing, while many middle and working class wages, inflation adjusted, have stagnated for decades, despite the increased stress, working hours, and productivity gains.
This line is extremely condescending. Why don’t we tell the top 0.1% who seem to always need more to do their valuable service to society that they have it much better than any king had it a hundred years ago? So why they need more every year? why is this line only used against the little guy? Fact is that more and more wealth goes to a small group of people. In my view this is extremely damaging to a society in the long run. some level of inequality is probably helpful to motivate people but it shouldn’t be growing constantly.
What makes inequality increase is actually the mindset of poor people that their poverty is "someone else's fault" like this kind of comment ( and also that "the state should do something" like it is their mother ).
The hard truth is that inequality increases because poor people dont fight against and do nothing about it except complaining. Its always the fighting that has brought any of the social improvements, not the goodwill of politicians or anykind of "fair invisible hand".
Our poor do have modern conveniences, because that’s what the world does; it evolves with current technology. They have access to emergency healthcare, which will almost inevitably bankrupt them when they need treatment. “Generally safe food” is not good enough in what is supposed to be one of the top first world countries. Infrastructure? Sure. Depending on how poor you are you’ll have varying access to infrastructure.
This hasn’t happened out of concern for our poor. The poor are getting society’s leftovers.
I don’t particularly care if we’ve “thrown tons of money at schooling and healthcare and the like” when we spend exponentially more money on the US military. Teachers across our country are still underpaid, and our education system is still not taken seriously enough. The US is not in the top 10 most educated countries (K-12), despite being a top first world country. Admittedly, money wouldn’t fix all the problems with our education system, but it would make a big difference.
It sounds like this was written by someone with a limited frame of reference.
It doesn't "come off as" a problem, because that is how you have personally interpreted the situation.
> that needs solving
It doesn't in fact "need" solving - life will go on, one way or another, regardless of whether policies are changed or not.
> and instead sounds like a purely political war cry.
In may in fact be "a political war cry", but is it purely that, or might there actually be something here that deserves attention?
> These aren't lords abusing powerless peasants
This is true, but colorful, rhetorical characterizations like this are an excellent way to persuade people without sticking to cold hard facts.
> they're contributing members of society being disproportionately rewarded for their disproportionate contributions
This rhetorical device is effective in that it persuades readers to logically think of the issue as a binary rather than a continuum.
The proper question is: is their disproportionate reward proportional to their disproportionate contribution? And even this improved statement of the situation is flawed in that is kind of implicitly assumes that the relationship between contribution and reward should be linear, which is inconsistent with the general societal decision that taxes should be progressive (the tax rate(!) increases as the taxable amount increases).
And to be clear, I'm making no absolute claim that progressive taxes are "right", I am only stating that this is what society generally deems "proper". This aspect of the situation seems absent from your analysis, so it seems appropriate to point it out.
> despite the fearmongering you see online
This style of rhetoric is persuasive, and it may even have some truth to it, but it is orthogonal to a proper logical analysis of the actual issue and should therefore be avoided.
> ...most Americans are doing well. Even our poor have modern conveniences, access to emergency healthcare, generally safe food and infrastructure
This style of rhetoric is persuasive in that it frames the issue according to one specific perspective (a subset of dimensions) on the overall (the entire subset of dimensions) issue.
A loose (and uncharitable) restatement of this might go something like: "Because most people are "doing well", then therefore there is nothing to see here." I will note that this isn't actually what you are saying, I'm just pointing out the beauty of rhetoric - when done well, it invokes a style of thinking, which results in real-time generation of certain "facts", without actually having to explicitly say certain things (ex: dog whistling). It can cause the reader to change the way they conceptualize the situation, and therefore change their conclusion from that which it would be if they were to engage in a purely factual analysis of the situation in its entirety.
This isn't to say that you are doing any of the above consciously and with intent to deceive, I'm simply pointing out some of the flaws that are ever-present in the way modern society, politicians, advocates, etc engage in communication. It's no wonder we've made such a mess of things.
People believe they think logically, based on facts, because this is how it seems to each of us. Bu in such matters what people actually do is think in narratives, that are very loosely (and often incorrectly) based on "facts" (most of which are also narratives), and then only a subset of the entirety. This is by necessity, because outside of the hard sciences, systems are far too complex and interconnected to think about using pure logic and facts. However, it's not a necessity to think we think in facts - this we are capable of realizing, and many philosophers and psychologists have amply demonstrated this, but the realization of the importance of this has not made it's way into widespread knowledge, and certainly not into behavior in discourse, even that between highly intelligent people.
I wonder if awareness of such complexities in communication was widespread throughout society, if we could improve the outcomes of our political process. I suspect we'll never know.
In some cases, these people are lords abusing powerless peasants. Most of America isn’t Seattle, Austin, NYC, or the Silicon Valley. People can work for WalMart in the town I grew up in or go unemployed because WalMart swallowed competition. They’re literally at the mercy of whatever WalMart wants to pay them.
Our poor have emergency healthcare but will get bankrupted in the process.
They have safe food insofar as they won’t die of typhoid or hepatitis like in the developing world, but they don’t have healthy food. They have access to various forms of packaged, refined sugars. A diet based on cheap access to these goods will only lead to longer term health problems - there’s scientific data backing that claim.
Interesting how you frame your argument - that the poor aren’t as horribly off as perhaps in another century or in the developing world, and so it’s good enough. The same argument can and should be used to call out the endless greed, especially of the 0.1%. Don’t have they have enough? Are they they some of the richest folks in human history?
2. Outsized contributions shouldn't result in outsized rewards. The marginal utility of additional wealth is much higher if you're poor. Inequality is inefficient. Also, if you are rewarded as much as you contribute, your net contributions are zero.
> Even our poor have modern conveniences, access to emergency healthcare, generally safe food and infrastructure.
Dude. Emergency healthcare and generally safe food isn't something to be proud of unless you're a developing country.
My family has been in the 1% for a few years and we’re just bottom-rung individual contributors at FAANGs. 50% of our net worth is in our house. We don’t run or have stakes in any private businesses. No investment properties. The only thing that sets us apart is while an upper middle class family might do a European vacation one year, buy a car the next, and redo their bathroom the next, we do in the same year. Otherwise, I imagine our lives and aspirations are similar.
1 - https://www.cnbc.com/2018/07/27/how-much-you-have-to-earn-to...
There's a huge difference between that type of 1% for a year and age 30-40 dual (or very high single) annual income earners.
The former may retire with a $1-5M net worth, the latter is either spending heavily or retiring with a $10M+ (and likely $20M+ with reasonableiinvestment returns) nest egg.
Gets worse as you go down in income. Try two wage earners at $60k/year.
Roughly the point is that while "the working elite" is much harder to be repelled by; it is still a problem that many tasks in society that could before be done by a medium educated middle class, is now done by a few highly educated people plus a swath of people with no education.
This causes the second group to have less part and prestige in their work, while the first group gets alienated from their own work, by being forced into the few fields that allow one to reach the 1%.
>Mankiw noted that the 1 percent’s share of total income, excluding capital gains,...
I'm not completely sure how the discussion turned into top 1% of income earners and specially exuding capital gains. I think it's possible that there is intentional attempt to change the discussion.
If you are in the top 1% of wealth, your net wealth is roughly $7 million. If you get just 3 percent real return for you can get $210,000 a year income without working.
And so forth and so on. This is far more about resentments and insecurities than policy.
The fact of the matter is if you want to re-adjust the economic landscape towards the poor in a meaningful way it is going to realistically require harming the economic interest of all the current winners -- from the $90k/year tradesman all the way up to Jeff Bezos. In all likelihood it will probably also mean higher prices for goods and services as well as higher unemployment. Maybe those trade-offs are totally worth it, but we should be adults about these things and not pretend there's some magic policy that's going to make everything great for everyone except some tiny cabal of not-us that's probably evil anyway.
It’s the handful of people who control 90% of all wealth. “1%” was a catchy soundbite but it was always the 0.0001%
The wealthiest make a lot of money, but it's nothing compared to the aggregate of millions of Americans making upper middle class wages.
Taxing the super rich is a great idea, but at the end of the day the govt just needs to spend less money on programs that don’t work or aren’t needed.
Translation:
>You could recover some of the wealth that is systemically siphoned (by inflation)/withheld (via wage suppression) from everyone, but you really should look at that whole wealth redistribution mechanism working against centralization of capital in private hands. That's the problem.
Not really buying it. The fact you're pushing these systems off as not working leads me to conclude you've not met the level of understanding to safely do away with Chesterton's fence. There is tons of room for improvement in the execution of these safety nets; but the Market doesn't want people feeling safe. Risk aversion from guaranteed stability makes exploitative employment/compensation schemes more difficult to sustain.
That's pretty much already solved with 401ks and IRAs which are retirement investment accounts with tax advantages.
There's a sizeable group of people that just cannot stand someone working hard and reaping the fruits. Again I'm not talking about Lambo-driving, yacht owners but an average doctor, small business owner or an engineer for that matter.
Per the old meme, success breeds jealousy, but unfortunately recently it breeds hate and violence.
Critiques of the merely well-off can sometimes be more indicative of the major problems facing America, since there are so many more in this category. For example, by critiquing this 1% class you also get into very interesting questions about land use in California.
At some point very early on, your money starts making money and you cease to do "work" to make that number grow. It seems inappropriate to equivocate capital gains with gainful employment.
Of course once you are so wealthy that the majority of your income is passive income from e.g. stock market gains, the capital gains tax is at 25%.
The situation is so bad that in relation to what your employer pays for you (Arbeitgeberbrutto), you get much less than 50%.
What's the value of the delivery guy's network? The CEO's presumably lets him achieve results that others can't. He can broker better deals, hire better talent, push for more favorable laws. That's value to the firm, to shareholders, hence better pay.
The reason why CEOs get paid so much is not because of how hard they work, it is because the effect of their actions is massive, and eaking out that extra 1% is worth it.
It’s the handful of people who control 90% of all wealth.
From a material perspective, it makes sense that they behave this way (the ultrawealthy are more likely to sign their paychecks and they’re less exposed to many of the harms present further down the income chain), but does allow for a politics of resentment to develop around the position they occupy in society. Most working class people are unlikely to encounter a billionaire in their lifetimes, but will come across many upper income individuals who will tell them (either directly or indirectly) that they deserve their low station or that nothing can really be done to improve their material standing.
[0] https://www.dissentmagazine.org/online_articles/on-the-origi...
“Never mind the 0.01 percent. Let’s talk about the 0.0001%!” would be even more crazy, considering the exponential distribution of wealth.
_That_ is the point
But I suppose, adding no additional logic you could have one half of a normal distribution, normalized by multiplying everything by 2 to account for that.
However, that doesn't strike me as a very natural distribution for a self-organized system with some randomness, and exponential growth. Power and wealth always seems to find its way to some type of power law distribution. You could only enforce such a distribution by concentrating power to the most extreme limit of a power distribution to exert control over the rest. And it's likely that for any definition of wealth you could come up with, people would just find a proxy for wealth that isn't counted by which they could start to exert more control.
Power law is reasonably easy to get. Even with identical starting wealth just having chance + compound interest is enough to produce it. No need for anything more complex than that.
You can add various corrective terms to make get "equality of outcome", but to get to a gaussian distribution around the average you need really drastic/totalitarian measures.
The best system from a pure math POV would be a flat tax combined with universal basic income. But unfortunately it is naive to assume that this is politically viable.
Politics largely is selling a particular group an advantage over the general population in exchange for votes. And a flat tax / basic income system is just too simple for that.
The only way of getting a 0.5 Gini ("absolute equality") is if everyone is earning the same, which is ridiculous. As soon as you throw any randomness in there, well, all of a sudden you get inequality.
Next, there are the (totally reasonable) winner-take-all mechanics of skilled labor. Are you a better CEO (where "better" here could just mean better at pitching/selling/hiring/picking a market)? Then you can end up capturing all of the market share vs your competitors. That ends up paying nicely.
You still could have rent-seekers and people who cheat, but from the article itself, the top driver is differentiation based on skills.
Don't like winner-take-all mechanics? Introduce income pooling. But I wouldn't expect that to be the revolutionary change people are looking for, just a way to guarantee people on the same skill ladder end up in roughly the same outcome bracket. I don't think "guarantee top ivy leaguers make >$400k/yr" is what you're looking for.
This produces not just 'inequality', but the power-law distribution. The only thing you can't know is which element will be the '0.01%' master of the universe, because nothing distinguishes it from the 'poor' elements as it's only a simulation.
The point this establishes experimentally is that through simple value exchange you get the same distribution people associate with meritocracy and market dynamics, without any elements of choice or distinctions of merit being applied.
Skill and value have nothing to do with it: the problem is purely mechanical, the system will substantially punish and reward elements in the system quite outside of any consideration of merit. Once you introduce merit, skill etc. you're only exacerbating the problem.
Wealth tax, even in very tiny amounts, is quite good at turning the power-law distribution into a more random-looking distribution as one might expect it should be. And usually people aren't talking about Gini 0.5, nor does anyone aspire to that unless it's as a form of rebellion against the extreme opposite. People will tolerate an enormous amount of inequality if their own lives aren't too acutely threatened.
1. A computer simulation where wealth is exchanged by chance has power-law behavior
2. Wealth IRL has power-law behavior
3. Therefore, wealth IRL was exchanged by chance (as opposed to skill)
Is this what you were saying? If not, mind breaking down what you are saying?
Needless to say, the above is affirming the consequent. The exchange mechanism random simulation is modelling need not be the actual mechanism in real life (though it may very well be a good model, viewing skill as randomly assigned to members of the population).
1. The computer simulation demonstrates that simple exchange produces power-law wealth in the absence of value or meaning.
2. Wealth IRL is considerably in excess of this power-law behavior, to the point where it's a real impediment, because…
3. Wealth IRL owes more to capital protecting itself and rewriting the market's or government's rules to cheat. Skill has next to nothing to do with it: wealth derives from crime, manipulation and abuse, and there isn't a fortune anywhere that doesn't have blood on it. So, far from being a simple claim that 'wealth IRL does not correlate with merit/skill', I am rather claiming that wealth IRL correlates with evil, abuse, and criminality. Admittedly worse than your 'how dare you say wealth isn't correlated with merit', but there it is. Sorries :)
The fact that random chance also helps some of these criminals get their start is just a sort of bonus for the criminals, and a handicap to any free market system that might otherwise be a mechanism serving to assert a sort of crude meritocracy. Skill means absolutely nothing. It's about the ability to act criminally and to exploit existing resources and personal relationships, and always has been, all the way on back into dim prehistory.
When it gets too extreme, the guillotines come out or there's some sort of typically very destructive revolution that serves as a great setback to civilization in general. This, too, has happened over and over. It happens not when evil grows too great in its abuse of the peasantry (because nobody ever cares about them), but when the 10 percent or the 1 percent start to get beat up too much by that 0.01 percent, just as the original article highlights. When the 'upper middle class' starts to suffer, that's when things get dicey, because those are the people who can afford to fight their rulers and who have the time, attention and resources to do so.
How's that, does that help? :)
The simulation doesn't seem to add to your point. Instead, you're making an empirical, falsifiable claim about the nature of wealth acquisition.
At this point, you're disagreeing less with me and more with the economists in the original article, Piketty and Saez, who found skill to be the top driver, not "next to nothing."
The wealth inequality in America is higher than it has ever been. This did not come about naturally.
This does not mean it’s good. The source even presents some methods of avoiding it.
But the key point is that it doesn’t need some sort of conspiracy of the rich to happen. It will happen inevitably without being anyones fault if steps are not taken to address it.
The current financial system didn't happen by accident. It was intentionally built in the 1980s by the Reagan administration, at the behest of rich Republican donors. It was not inevitable, it was engineered.
One has to rather specifically design a progressive taxation system to avoid a power law.
Read the paper. The conditions for power law are very simple.
I live in Finland. A place one hardly can say is friendly to the rich. Yet we too have a power law, just with different constants than what US has.
Generational wealth has always struck me as fundamentally unjust, for the basic reason that you don't get to pick your parents. I see the argument that a man is entitled to the sweat of his brow; we can debate just how to define what is his sweat vs. infrastructural sweat, but the underlying point seems fair enough. I do not see the argument that a man is entitled to the sweat of his father's brow.
The principle that you are entitled to what your parents or grandparents earned is behind all sorts of injustice in the world, from hereditary monarchies and wars of succession to wealth gaps between majority and minority ethnic groups long after formal discrimination has been outlawed. Even when the inheritance doesn't happen, you still have evils like abusive rich parents having leverage over their closeted college-age children because the financial aid system (in the US, at least) assumes that children have access to their parents' money.
There's a lot of possible ways to implement the system, but it is not inevitable that wealth, once concentrated, does not dissolve, and even leaving wealth inequality aside, there are good reasons to get rid of it.
I hadn't even read the abstract of the article you posted when I clicked "reply," but in fact, that article advocates for the same thing:
> We show that a tax on large inherited fortunes, applied to a small portion of the most fortunate in the population, can efficiently arrest the concentration of wealth at intermediate levels.
I expect most people would agree.
However, views change drastically when you turn it around.
A great many people feel entitled to use the sweat of their own brow to provide for their own children. This includes providing an inheritance, especially a house.
Few people are happy to provide from their own work equally for everyone's children without any special benefit to their own.
That said, if you just care about wealth inequality, it's totally fine to buy your child a modest house, or even buy them an expensive house at a large marginal tax rate. As the paper points out, you don't need to stop all intergenerational wealth transfers, you only need to stop a portion of the wealth transfers of the richest people at the far end of the RNG.
The trick about "a house," in particular, is it means two things - a place to live and an investment vehicle. I agree that many people will be sympathetic to the argument that you should be able to provide your kids with a place to live. (I am myself somewhat sympathetic to it.) But as long as there are people on the streets with not even a bed, it's immoral to twist this sympathy into a right to transfer millions of dollars in wealth to your kids in the form of an expensive house on expensive land. So, put a cap on the inheritable amount that makes it quite sufficient for reasonable living quarters, and heavily tax transfers beyond that.
Often taxation gets to its highest point at the basically high average household level though. In Germany for example top income tax is ~41% and already starts at about 4500EUR / month.
But actually rich people pay a maximum of 25% on interest/shares etc because they don't actually have a salary.
Basically politicians and common people are being played. The 'richer' middle level incomes are played against the lowest income levels while the really top levels in Enterprises and the Ultra-rich are never mentioned. On the contrary, companies especially play the 'jobs' card to get to pay even less taxes.
Also, “you can never change how it is!” is a nirvana fallacy; you certainly can make things better. It’s been done before.
In fact vast disparities in wealth can only be created and sustained through significant social effort.
It takes an incredible degree of social co-ordination for multi billionaires to exist. Outside of a strong rule of law you have be to a strongman or warlord to keep your hands on all that stuff.
As a society we could choose to cap wealth. For example we could say "it's illegal for an individual to own more than a billion dollars worth of assets". The excess would effectively be tax.
I can immediately think of a huge number of problems with this (oh no, all the multi billionaires leave!, offshoring, transfers between family members, "schemes" in general) but it's obviously possible to pass this kind of law, were there the social will to do it.
It is not possible to amass huge assets without deep support from society at large. Police, judges, guards and the goodwill of the public are ensuring the safety of the billionaire's property.
People who write don't earn a great deal of money. Nor (typically) do they have the potential to do so. Other professions can at least dream that they will hit it big or earn a good steady income if that is not the case. People at the bottom can't even dream but 'they know their place'. News articles with head lines like that draw readers sure but I think it's more than that ('people who write...'). This is human nature. Very generally the middle class that are employed and not taking on credit card debt and spending over their means (which they do) don't care that there are super wealthy people.
What is to stop people in some dirt poor foreign country from talking about how it's not fair that people in the US, even our poorest, very likely have it better than they do? (Well nobody other than the writers in our country will say anything and quite frankly nobody in our country would care enough to give them anything that we have so it doesn't matter). When was the last time you heard of a tax specifically to help people in dirt poor countries? (Not talking about aid but actual 'we will take your income', well never).
You know what has changed more than anything? What we know about what others are earning and what they have that is what material goods.
As many older HN readers will probably agree when I was growing up their were the Rockefellers, Howard Hughes and maybe a few other people. There were movie stars and the Beverly Hillbillies. You didn't really care that they were wealthy it was just the way it was. There was no revolt of the masses. Sure there are more people will money today but what there is grossly more of is attention and that it's in everyone's face (and of course the people who write and broadcast about it).
The respondents weren't opposed to an exponential distribution as such; but the images of the disparities between what they thought was ideal, what they thought the reality is, and what the surveyors say the distribution is is still striking.
For example, charging lower tax rates on capital gains than ordinary income promotes a concentration of wealth to people with wealth. Suggesting this is purposeful policy for society to encourage investment is comical -- what else would wealthy people do with the wealth? Store it under the mattress? Or spend it (in which case that would accelerate the velocity of money, also good for society). Capital gains taxes are only on the gains -- income that had not yet been taxed. Actual double taxation is a wealth tax.
Similar tax policy that results in concentration of wealth are: 1) 1031 transfers (where income on sale of real property isn't taxed so long as the proceeds are used to purchase real property), 2) Qualified Small Business Stock (where federal tax isn't paid on gains of sale of small business stock) 3) Economic Opportunity Zones (where tax is deferred on gains so long as the gains are invested in an Opportunity Zone, and all additional gains aren't taxed).
I don't have a problem with the idea. It recognizes that income derived from investments is riskier than income from a paycheck, and applies a discount.
The problem is with the execution. Why is the top rate for cap gains only 20% - even if you earn $10b, but 37% for a mere $510k in ordinary income? Surely there should be some amount of cap gains that can be taxed at 37%. Maybe it's $5m instead of $510k (to recognize the riskiness of the income stream) but it shouldn't cap out at 20%. Simply put, why aren't there more tax brackets for cap gains and other investment income?
It's unclear why as a matter of tax policy we want to discount taxes because risk is taken. If an investment results in a loss, that loss is permitted to offset gains elsewhere.
Because the people who make large capital gains are the ones funding political campaigns and helping to write the laws.
The argument that one is riskier than the other and therefore entitled to lower tax rates doesn’t make sense to me.
Sure, investing in an asset might be riskier if you’re randomly throwing darts, but I thought these folks were all about personal responsibility.
To be clear, I work at a FAANG. My total comp was is near half a million, a significant chunk of which is equity. The only risk I take is not cashing out immediately and waiting a year for the long term capital gains tax. I don’t necessarily provide more output or value than someone like a teacher. The equity I sold this year was in the hundreds of thousands and I paid less taxes on it than what most teachers probably pay. It doesn’t make any sense, and this system in my opinion isn’t sustainable. The inequality is going to lead to conflict.
You already pay income tax on the RSUs when they vest. If you sell them immediately, you’ll have a de minimis capital gain or loss.
Unless you actually would have turned around and bought your company’s stock with a bonus, you should really just sell immediately and ignore the trivial capital gain (or loss).
For ESPP it can make sense to hold, but even then, only if there was a huge increase in value since the beginning of the holding period, so perhaps that’s what you meant (but ESPP is capped at a very low amount, so that would be a tiny portion of your hundreds of thousands in RSUs).
Create a system that can be applied evenly, and fairly, from the top to the bottom and then I think you’ve got a great and novel idea.
And a fair tax is just too simple. Politicians wouldn't have anything to sell anymore...
You’re right! Without the ability to carve out exceptions, why would a powerful lobby need to come with a proverbial suitcase a cash?
Want scandinavian style socialism: set the basic income very high and have a high flat tax rate of maybe 50%. Want a more individualist approach: set basic income to the bare necessities and set the flat tax rate to 25%.
Want to borrow to fight against a recession, keynesian style: increase basic income without raising flat tax rate. Want to save for bad times: increase flat tax rate without raising basic income...
I guess this kind of system can only emerge due to some drastic change or historical accident. E.g. the eastern european countries have a flat tax system because after the collapse of the soviet union there was no complex incumbent system in place.
I would love to know if there is a way to get to such a system using the normal democratic process. But if it exists, I don't see it.
If you take 10% from someone making $1000/month, they can't pay their electric bills.
If you take 10% from someone making 1,000,000/month, they have to wait a little longer to buy their third superyacht.
That's why the idea that taxes could be made easier by getting rid of brackets never made any sense. That argument is just a cover for undoing the progressive nature of the tax system (as in, the more you make, the larger the percentage you pay in taxes).
2. the wealth of the 0.01% are numbers stored in computers. They are claims on future production, yes, but the whole system only works because 99.99% of these claims never gets cashed out, because there are physical limits to what a handful of billionaires can consume, no matter how opulent their lifestyles. If you try to distribute this virtual wealth, people will try to turn it into physical consumables, only to find there really isn't enough for everybody, and the whole system will go to shit.
3. at some point, a guy I know made the observation that revolutions don't really redistribute much, mostly they just take the wealth from the wealthy and burn it. Well maybe how it works is the most important and expensive physical good - land - gets redistributed, most other physical goods are destroyed, and the virtual wealth is zeroed in a very expensive accounting exercise.
No. The upper .01 percent have tax lawyers and accountants and many other staff members (not to mention lobbyists) working full-time to reduce their taxes. In theory, anyone could do the same. In practice, the tax code is so enormously complex that only people who can afford to hire multiple college grads full time can pull it off.
I think we evolved the emotion of envy in a time when being rich meant hoarding. Markets break that evolutionary intuition.
What are your thoughts on the counter-arguments that basic income will lead to a dystopian future where an underclass just sullenly gets by as dependents of the state. Plenty of scifi speculative descriptions of this future are a bit scary, but are they just scare-mongering?
An old man is relaxing on the couch in his apartment in 1917 Saint Petersburg. His grandson runs excitedly into the room and proclaims: "Grandfather, the revolution has begun, we're killing the rich, and nobody will be rich anymore." To which the old man wearily replies: "My generation fought so that nobody would be poor."
Simple arithmetic shows that if you were to completely strip the 0.01% of their wealth (which just isn't going to happen, since they own the Congress) and "give it all to the poor", the poor would still be pretty poor: 6T between 350M people is $17K per person, or about 3 years worth of Obamacare. And that's pre-tax.
The way you prop up the poor is by creating opportunity and competition for lower skilled labor and trades, by rejecting some parts of globalism, which forces "the rich" to pay more for their labor supply. That propping up seems to be happening as we speak: unemployment is at a 50 year low (https://www.wsj.com/articles/u-s-september-nonfarm-payrolls-...)
Historical reference: https://en.wikipedia.org/wiki/Decembrist_revolt
My guess is the people who make the list this year, drop off the next and never end up on it again.
The top people (again income) are the folks that sell their company or equity stake. It’s a huge windfall, but they never make that much again.
The article addresses inherited wealth:
> On the 2016 rich list, two-thirds were self-made and one-third had inherited at least part of their fortune. More than 10 percent were immigrants to the US.
I wonder what portion of that 10% fits into the inherited wealth bracket also. Anecdotally I've met a lot of rich Indian and Chinese immigrants in tech, however they came over with family money, with strong family power networks, attended top schools and then parlayed their wealth + connections into something even greater.
It feels as though we throw "immigrants" out there to be synonymous with "broke" and "powerless".
And if you own a large company, you have no income (beyond a salary) unless you sell equity.
There are probably people worth $1B+ who aren’t in the top 0.01% because they’re money stays invested and they don’t pull income from selling.
The richest 10% own 70-80% of the wealth in the U.S.
My point is that the entire wealth distribution curve should be looked at, and any serious discussion needs to go back to first principles and determine what the curve would look like in a fair society.
Of course there are wide philosophical-moral chasms between different notions of fairness, with HN readers, by nature of the hand that feeds them, skewed heavily toward the belief that market forces are the best arbiters of worth and fairness.
the ultra-wealthy are literally an unelected shadow ruling class.
By constantly painting things as hopeless and unfair, all you do is stimulate rage.
You think that the ultra-rich don't have an "us-vs-them" mentality? You think that they aren't lobbying and fighting and advertising and campaigning to keep their unearned wealth and power for themselves?
The rich have an us vs them mentality because the media demonizes them for working hard. I dislike rich people as much as anyone but the productive response isn’t rage. Rage gives the rich even more power and reason to look for more reasons to hide their wealth and exploit.
If you’re so convinced the rich have “harmed” you why not try to move somewhere where you believe your ideals are more aligned?
He has literally sat around doing nothing, occasionally traveling to Africa to boost his PR, and got more money than the median American could make in a million years. How did he "earn" that?
People who take your view that billionaires deserve their money because they "work hard" -- and I'm sure some of them do work hard -- usually don't realize how much money a billion dollars really is. An individual could never work hard enough or long enough or smart enough to deserve that amount of money.
- A million seconds ago was 12 days ago. A billion seconds ago was the 80s.
- With a 5% return on their wealth -- most billionaires actually make closer to 10% returns -- you make $137,000 a day if you have a billion dollars. So the poorest billionaires make more money in a day than 99% of Americans make in an entire year.
- https://medium.com/datadriveninvestor/you-have-no-idea-how-m...
Nobody should have that much money. Nobody.
Also, if it's not just painting, but actually unfair, then it's up to the reader to have an emotional reaction or not.
The distributions we currently see have no excuse or purpose. It's fine talking about the value of exceptional individuals, but if a Jeff Bezos is even ten thousand times better than your average schmoe, never mind 'millions of times better', then he would be able to have his influence without the aggregated power given him through accumulation of capital.
Never mind whether his dumb kid deserves to have the accumulated power of entire countries abstracted into the form of capital: HE himself has no business possessing that kind of power on top of his functional exceptionalness. He can damned well fend for himself, and will likely still be a big winner and have all he could wish. He has no right to the accumulated power our system awards him, on top of what he can do with his own intelligence and efforts. It's a magnifying effect, fully exploited by just the sort of person Bezos is.
Concerns of inheritance only highlight the problem. The parent is not that much superior to the dumb kid, and humans do not merit so much importance (as 'exceptional individuals') as our system claims they do. The BEST you can hope for is a crazy person like Elon Musk, aiming for some quixotic goal while they blunder around causing damage… and that's a best case scenario.
So... what's your plan?
That is, your approach, writ large, harms the economy as a whole. Don't think of that just as money. Think of it as stuff being produced. If there's less stuff produced, that's not good for the workers either.
You seem to have completely ignored the point of the comment you replied to, which is: If the investor doesn't get part of the profits of the company, then nobody will invest in a company. Any company that needs outside investment to buy tools to increase efficiency therefore will not be able to do so. That loss of efficiency impacts the economy as a whole, not just the "bankers and barons".
Is there any step of that logic which you can actually refute?
The reason companies need investors today is that all of the wealth is hoarded by a select few that need to be entreated like feudal lords to get any land, machinery, IP, tools, etc. If the wealth were fairly distributed, a group of regular people would be enough to pool the necessary resources.
They don't always need it. Microsoft, for instance, didn't need much in the way of investment to start and grow.
But some companies take more investment. Say it's the 1800s, and you want to build a railroad. You have to acquire a bunch of land, buy and lay rails, and buy engines and railroad cars - all before your first dollar of revenue. Where are you going to get that kind of money? You sell stock, so that anybody who has a few dollars can buy a small piece of the railroad. And why should they do so? Because they're going to get paid back, out of the profits the railroad earns (if it actually makes money).
If those people don't have the chance of getting paid back from the profits, most of them won't buy stock. If they don't buy stock, then we wind up not having any railroads. That wouldn't have been good for the economy in the 1800s.
Now, you could argue that investors could get paid back some of the profits for a limited amount, and then no further, and they would still invest. That's true, and it's the bond market rather than the stock market. But big new capital-intensive businesses typically financed themselves by stocks rather than bonds. There may be cultural reasons for that, but I think there are also solid financial reasons. Many new businesses fail. If I'm going to invest money, and there's a realistic chance that I'm going to lose all of my investment, then I need a reward that's enough to motivate me to take the risk. Bonds typically don't yield enough to compensate for that kind of risk - not even junk bonds.
There is nothing wrong with selling away the future value of your contributions, or for other people buying the future value of your contributions.
Why does he deserve it virtually tax free?
Why does he deserve more than the average MS worker can make in a million years while doing no work himself, just because he owns some pieces of paper?
Seriously, you could have worked at Microsoft as a full time engineer from the time before the genus Homo evolved to the present, through 100 ice ages, and still not have been paid as much as Bill Gates has in his retirement. How can you possibly justify this?
Because as a part of someone's compensation, you can be paid for with future value.
> How can you possibly justify this?
If I want to sell off my future value of my future work, in exchange for someone else's past work, that is my right to do so, that's why.
Nonetheless, he has increased his hoard of wealth by 60 billion dollars, 120% of what he retired with.
That money was made by the hard work of Microsoft's current engineers, devs, testers, managers, salespeople, call center workers, the whole bunch. THEY are the ones benefitting society, and they would be doing the same job whether Bill Gates existed or not. THEY should be the ones reaping the rewards.
What is not mentioned but certainly plays a key role in one's ability to perform so well financially is the special opportunities the top 0.01% have and circumstances they operate within compared to the lessers. If we were to review each person in the top 0.01%, I expect most of them would be making their huge gains not by exercise of special skills but rather by exercise of special circumstances.
RISK - As we have seen with the 2007/8 financial crisis, there is a small group of very wealthy, very powerful finance people who can take enormous risks with other people's money, profiting whether they win or lose. The 07/08 crisis cost the general public (in bailout using public funds (debt)) hundreds of billions of dollars. But the stratospheric executive bonuses paid to fund managers and bank executives during the lead up years was not retracted. So the people that took unreasonable risks profited greatly, and the public paid for their profit and then some. Even during the following years, the executives and fund managers received significant bonuses. And thanks to golden parachutes, the exit/firing of some of them resulted in even bigger profits for that group.
OPPORTUNITY - The wealthier one is, the easier it is for them to get credit. Even in cases such as Trump where he has a long history of running businesses into the ground and leaving debtors unpaid, he was famously able to secure very large loans to take even bigger actions (which similarly often resulted in underperforming businesses which would later seek forgiveness or reductions of debts). The point is, once you're rich enough, you need never risk your own money. You can borrow huge sums to seize opportunities. When you win, you win big. When you lose, you can probably get away with no personal loss.
LAWS - With wealth and power comes influence. You can afford to lobby (sometimes a polite term for bribe) to get special laws or loopholes that have direct financial benefits for you. Perhaps it relates to a defense contract, and you hold a lot of Boeing stock. Or perhaps it relates to an FAA regulation and you hold a lot of Boeing stock. Or it's a special rule that lets you write off the purchase of a piece of luxury property as a business expense.
TAXES - This is a huge space for gaining an advantage over the normal people. Not only do you have the means to play the offshore/shell-company game (reducing your tax burden, perhaps to zero), but you also can do strange things like deferring your taxes indefinitely if you're a hedge manager.
I could go on with plenty more examples of special advantages that the top 0.01% have compared to everyone else. These advantages, even if modest, represent an exponential benefit in terms of financial growth over time.
I belong to the Top 10% and I'm fine with that.
Why do Americans focus so much on the "ultra-rich" and the billionaires when you can build a successful welfare state by just taxing the Top 10% a little more?
I know a few folks in the top percentiles that feel like they pay the same number of dollars or more than everyone else - they see this as fair. They seem to miss the fact that they get to keep a larger percentage of their money every year. If you get to keep more of your money every year than everyone else then its easier to build your wealth at the expense of everyone else.
So, some bitterness there. :D
Or, more simply, your country doesn't have anywhere near the same systemic and cultural issues the US does currently.
Because in America, the top 0.01% makes their wealth through investment income, which is taxed at a lower rate. So, the top 0.1% pay a considerably lower rate than the balance of the top 1%.