Rising Wealth Inequality: Should We Care?
nytimes.com
nytimes.com
http://www.pewtrusts.org/our_work_report_detail.aspx?id=5896...
(Previous HN discussion here: http://news.ycombinator.com/item?id=2355141 )
This says that incomes have risen by at least 60% (relative to parental income at same age, inflation and family size adjusted) for all categories of Americans. The bottom 10% gained 61%, the top 10% gained 92%. Our increase in inequality is the result of a rising tide lifting all boats.
Another interesting implication of this: the alleged CPI-adjusted decline/stagnation in median wages must be primarily caused by immigration. If Americans are richer than their (American) parents, but incomes are down, then the decline/stagnation must be concentrated among people who don't have American parents.
[edit: added italics to parenthetical in 4'th line in response to locopati's comment. Also added link to essay citing this report.]
If I call home to the suburbs, I can find a whole bunch of 35-55 year old white people named "murph" and "sully" who exceeded their parents' incomes at 25 on a generation-over-generation basis but have been personally stagnant/declining in income for the last 10 years. Furthermore, I can find another group of 25 year olds who are very much not making what people used to make in non-knowledge-worker jobs a few decades ago. The average might say otherwise but the average includes me. I didn't stay home.
That's the story of the last 30 years for many Americans who aren't high end knowledge workers, and there's a lot more of them than there are recent immigrants.
And this a weighted average of incomes roughly 27 years ago (the weight is the distribution of ages at which children are born).
The sample of people today includes only those people who's parents were in the united states 27 or so years ago. Call this group A. Call the complement (either immigrants or children of immigrants) B. Call the historical reference group C. Wages of A U B are roughly equal to those of C. Wages(A) > C. This implies wages(B) < C. If wages of A U B have not increased, but the wages of A have, this implies the wages of B must be lower than the historical average. Simple arithmetic.
So basically, the story is that Murph Jr. makes 60% more (Chained CPI adjusted) than Murph Sr. did at the same age. But the average of Murph Jr. and Jose (a recent immigrant) is lower than Murph Sr.'s (Chained CPI adjusted) wage.
Also, while Sully Jr. might make less than Sully Sr. did, the study asserts that the average of Sully Jr. and Sally Jr. (not to mention Tyrone Jr. and Poonam Jr. - remember how non-white males are also allowed to have good jobs these days) is up 60%.
The early 80's were the tail end of the era where a single income could purchase an average home. So while my income is about 50% higher than my father's at the same point in his career, I'm able to live in a similar type of home and have a similar lifestyle, although I'm in a small city where costs are far lower.
If I lived in the same neighborhood where I grew up in NYC, we would only own a home if we were renting the downstairs.
Unfortunately, there is nuance, and I don't think there is really any possibility that the public will fully grasp it. Not because they're dumb, but because it takes a huge amount of time to figure it out. Even that new yorker article, which takes a severely dim view of wall street, absolutely acknowledges that banking fulfills a critical role in the creation of wealth. How do you make sure you keep the baby when you throw out the bath water? And we're all too familiar with "innovative technology development" companies that really just exist to patent stuff, in order to extract a toll from those who do create (often completely independently of the original "innovation").
As for what to do? I don't even have a good answer in theory. I browse the randian/libertarian literature at top dog in berkeley every now and then, and there is a compelling case that many rent-collecting segments of the economy are propped up by government regulation, though even then, what do you do, eliminate the patent system? go back on the gold standard? abolish the AMA? Some people would say yes, I'm not so sure. I wonder if just a more vigilant attempt on the part of government to identify and eliminate rent-collection would help... I know, I know, a lot of people would hear this and say "in your dreams", and as usual, I'm really unsure about this myself.
More seriously, I think there is a strong case for seriously limiting if not completely eliminating government intervention in the economy as those interventions often lead to very unintended consequences, notably favoring special interest groups at the expense of others.
As Milton Friedman said: "One of the great mistakes is to judge policies and programs by their intentions rather than their results."
Regarding income inequality, I do think it is a worrying phenomenon but a very small price to pay for a healthy economy and most of all, individual liberty.
I am totally baffled by the ever growing inequality between the rich and poor (pay, taxation, power differences, and etc). I was always wondering when we could ever see a significant change in such absolute unfair situation. Can we possibly use technology to make a change?
Hoping to see a better outcome by the time my children grow up, or before I die!
Summary - while the upper 10% of Americans have a greater share of the national income than in many other countries, they also pay a significantly larger share of the income and payroll taxes. (Yes, that includes SS.)
Method - find share of income. Find share of taxes. Divide latter by former. In all but a few countries, that ratio is >1. The US ratio is 1.35, the highest. Next comes Australia, at 1.29, the Netherlands at 1.28, and Ireland at 1.26. No other country's ratio is over 1.2.
Sweden's ratio is 1 while Norway's ratio is 0.95. Yes, you read that correctly - their income/payroll taxes are NOT progressive wrt the top 10%.
Me - I don't care what someone else has, aka envy. I care what I have, aka greed.
I also don't care if there is a large income disparity. All the remedies I've seen proposed to fix this "problem" essentially just raise taxes on top earners. I can't think of a worse place for that money than in the hands of a politician.
Sales taxes and VAT makes the US even more progressive in comparison because the rich spend a smaller fraction of their income on VAT-taxed things.
For example, Bill Gates spends maybe 5x as much as me on dinner yet we both pay the same tax rate on said dinner. His "dinner budget" is in the noise in his budget. Mine isn't.
Luxury item taxes are in the noise for him so the fact that I don't pay them doesn't make a significant difference wrt progressiveness.
There are two other problems with too much progressivity.
(1) govt revenue becomes extremely volatile. Rich people tend to have more volatile incomes, so when they take a hit, anyone dependent on them takes a hit.
(2) Rich people have more choices in how and when they recognize income.
WRT (2), CA has a fair number of people who get rich on paper, move out of the state, and then turn their wealth into cash. Since the latter is the taxable event, CA loses.
A higher ratio doesn't indicate that a country's tax structure is more progressive; it indicates that a country has greater income inequality.
Why? Because the wealthiest 10% paying a larger share of the total taxes is compatible with each of those wealthy individuals paying a relatively small individual percentage of their income in taxes (compared to their peers in other countries). This happens precisely when a country has a high level of income inequality and a relatively less progressive tax structure. In such countries, the richest own more of the wealth, giving a higher numerator; they pay a larger share of total taxes due to the fact that (in comparison to more equal countries) their incomes are much higher compared to the incomes of the other 90%; yet the richest 10% pay a lower percentage of their income relative to their peers in other countries because the tax system is less progressive than in other countries.
So it's not correct to say that Sweden and Norway do not have progressive tax structures with respect to the richest 10%, while the U.S. does. Norway's top tax rate is 47%; Sweden's is 59%; the U.S.'s is 35%, plus up to 10% in state income tax, for a max of 45%. [1]
> Me - I don't care what someone else has, aka envy. I care what I have, aka greed.
This attitude strikes me as naive. Much of "what you have" is only valuable relative to what others have. This is especially true of cash, but also true of illiquid goods that you value at least partly for their social function or status. Would driving a Porsche (say) be exactly as valuable to you whether or not everyone else had one? And if so, can you say that about everything you have and value?
Did you read the linked article? It measures the ratio (% of taxes paid) / (% of income earned). In this US, this ratio is 1.35%. In Norway, it's 0.95. Inequality would increase the denominator, not the numerator. With a flat tax (at 35%, 47% or 59%), this ratio would always be 1.
Perhaps you are confusing overall tax burden (taxation levels) with progressivity (the derivative of tax rate w.r.t. income)?
As for positional/signalling goods/status (e.g., a Porsche that no one else owns), they are always a zero sum game. There is no avoiding this. The most you can do is equalize incomes and allow status to be unequally distributed via other mechanisms (good looks, athletic ability).
Right, sorry, I should have been more clear. Yes, inequality increases the denominator. But what I meant was that I would expect the numerator to grow faster than the denominator, at least some of the time, as both inequality and regressivity increase. So I would expect the ratio to be higher for some countries with higher inequality and relatively less progressive taxes (it seems likely that the U.S. is one example). Thus, one should not necessarily understand a higher ratio as indicating a more progressive tax system, which is what the original commenter was claiming.
Not possible. Define P = progressivity index = tax rate for top 10% / tax rate for bottom 90%. Define R = income of the top 10%, B = income of the bottom 90%, and inequality I = R/B. Tax paid by the rich = RP x tax rate for bottom 90%.
% of taxes paid by rich = RP / (RP+B) = IP/(IP+1). (Tax rate for bottom 90% factors out)
(% tax paid by rich) / (% income earned by rich) = [IP/(IP+1)] [(R+B)/R] = P(I+1)/(IP+1)
Simple calculus shows this quantity always increases with increasing P and decreases with increasing I. So a higher ratio implies either a) a more progressive tax system or b) less inequality.
Not at all. The pleasure that I get from a trip to Mexico is not affected by whether someone else can go Fiji. The benefit that I get from owning a house in San Jose has nothing to do with the cost of Bill Gates' mansion. The fun that I have driving my car isn't affected by the amount of money that Larry Ellison spends on boats.
> This is especially true of cash
Actually, it's the least true of cash.
> but also true of illiquid goods that you value at least partly for their social function or status.
There's your problem - you're assuming that I care about what other people have after I explicitly said that I don't.
As Feynman said, why do you care what other people think?
Or rather, if you do, isn't that your problem? Why should that problem justify doing anything to other people?
> Would driving a Porsche (say) be exactly as valuable to you whether or not everyone else had one?
Absolutely, Except that I want a Jaguar, not a Porsche.
Well said. As far as sins go, greed is much better than envy. Greed encourages you to earn more for yourself, which generally has positive externalities. Envy is satisfied just as well by destroying the wealth of others.
Top: 1%: In 2004, the top 1% controlled 50.3% of the financial assets while the bottom 90% only held 14.4% of the total US financial assets.
([6] at http://en.wikipedia.org/wiki/Wealth_in_the_United_States)
The Forbes 400 would be the top 0.00013%. They own 1.54 trillion in assets. The US M2 Money Supply is only 8.36 Trillion dollars.
It's also been suggested that the general population are optimists about this situation.
http://www.theatlantic.com/national/archive/2010/09/more-on-...
http://rutledgecapital.com/2009/05/24/total-assets-of-the-us...
Doesn't take much of a consistent percentage increase in income from one person to the next, spread across a large population, to result in that top 20% indeed dominating most wealth.
ETA (after playing with Excel for a few minutes): If each person in the USA makes just 0.000003% more than the next, the resulting "20%s" wealth distribution graph looks exactly like the "Actual" part of the Percent Wealth Owned graph.
I'd say a wealth inequality of three millionths of one percent between one person and the next is about as fair a wealth distribution as you could ask for. The author needs to educate himself about statistics before self-righteously educating others about the virtues of communism.
ETA2: reduce the differential to 0.000002% and the graph approximates the "Estimated" part of the graph in question. To achieve the alleged "Ideal" distribution, further reduce the differential to 0.000001%. Innumeracy indeed.
Not sure what you're saying here. Do you mean that, in an imaginary country where everyone but the top earner makes exactly 0.000003% less than the person above him, income will be distributed in that way?
I see how this would tell against the author's particular choice of representation, but I'm not sure that it tells us much about how income is actually distributed in the U.S., much less how it should be distributed. Just because the same distribution can be realized in a country where income seems to slide much more "fairly" (i.e., gradually) from the richest to the poorest doesn't mean that distribution can't be realized in a much less fair way here. (Moreover, I suspect that if you put it in absolute dollars, rather than percentage points, the incomes in your imaginary country would strike most people as decidedly less fair.)
The "innumeracy" comment comes from the fact that those decrying "unfair!" do not realize that a miniscule (two millionths of one percent is nigh unto zero) linear adjustment of percentages translates to exponential variations when applied across hundreds of millions of people. They're performing an equal linear division of the population (20% increments) and somehow expecting the wealth numbers to come out with a similar "fair" equal division of holdings; realizing that the rich should indeed have more than the poor (hence the semantic difference in terms), they resolve this cognitive dissonance by "allowing" the rich to hold some 3x the wealth of the poor - oblivious to the statistical fact that variations in wealth are a matter of exponential-accumulation percentages, not linear accumulations multipliers.
I don't see how income can slide much more "fairly" (i.e., gradually) from the richest to the poorest than a differential of a vanishingly small three millionths of one percent. To say that somehow it "should" (obvious moral arguments of "it's not yours to distribute" aside) be _one_ millionth of one percent instead is to wage class warfare, a very real and bloody process as history shows, because the dividing lines for the 20% groupings mean the guy at the bottom of the highest bracket is making $0.10 more than the guy at the top of the second-highest bracket, and the guy at the bottom of the second-lowest bracket is making $0.0003 more than the top person in the lowest bracket. Comparing between adjacent individuals, and even across entire brackets, with real numbers should strike most as decidedly fair. Is the 80% division hundreds of times wealthier than the 20% division? and the very top unto billions more than the very bottom? sure - and that's reality, folks: the wealth distribution curve is a natural consequence of miniscule percentages aggregated over hundreds of millions of people, and no amount of "should" and social-reengineering (to wit: "comply or die") can render viable change to a natural, social, statistical phenomenon.
But since many people cannot cope with exponential consequences of uniform miniscule percentages applied across a population of hundreds of millions, we will always be faced with those who cry "unfair!" and insist on forcing their notion of "fair" upon the population. The 20th Century suffered some 100,000,000 dead as a consequence, and the authors of TFA (and, it seems, you (rwl)) want to repeat that toll for want of the 0.000003% more their neighbor makes, when 0.000001% would somehow be OK.
What does that show? Well, it shows exactly what you say: that income in absolute dollars would grow exponentially from one end of the line to the other. I'm not sure what comfort this is supposed to be. Can you say to the guy at the bottom that, just because there's no place on the line where incomes take a big leap (percentage-wise), he should be content to live in a society that's structured this way? that he is unjustified in thinking the global pattern is wrong, because there's no obvious local point where it goes wrong?
I agree that it sounds ludicrous to say a 0.000003% differential is unfair, while a 0.000001% differential would be okay. But it isn't clear that the issue should be framed in terms of a percentage differential at all. You say that this is a "natural, social, statistical" phenomenon -- but why is it more "natural" that wealth should grow exponentially from one end of the line to the other, rather than (say) linearly? (And why should we expect that making society more fair will consist in adjusting a uniform percentage differential in wealth, as opposed to, say, the normal non-uniform means of redistribution we use now, like progressive taxation?)
Moreover, if exponential growth from poorest to richest really is the natural structure of income in modern society, then the question of whether a 0.000003% or 0.000001% differential makes for the best society becomes quite important, for exactly the reasons you point out: such a tiny difference in percentage has enormous consequences when iterated over hundreds of millions of people. And surely, in doing our moral reasoning and in making policy, those global consequences should count for something. We need not be consigned to incredulity that such an apparently tiny difference could matter.
Good. It is. Even when taking into account my own innumeracy and screwing up the calculations so the difference is in fact between 0.000003% vs. 0.0000003%.
It is clear indeed that the issue should be framed in terms of a percentage differential. $100 is a big deal to the guy who sweeps your office, but not so much to the guy who owns it. When asking for a raise, the dollar amount you seek is based on a percentage of your income, not the amount independent of your income: you ask for a $1000 or $10,000 raise, not a $100 one. It makes sense because when you _are_ dealing with large orders of magnitude, you don't maintain the notion that values significant to small orders of magnitude are still relevant (you may waffle over the price of a single doorknob for your home, but not for your office building). I'm not sure how to present a persuasive argument that what is, is. If you're dealing with millions/billions of dollars, a hundred dollars isn't a concern - but if you're scraping by in poverty, it is. Maybe the best argument is that when I plugged in 0.0000003%, 0.0000017% and 0.0000033% as applied exponentially over a large population into Excel (to wit: applied percentages .01%, .05%, and .10% to a population of 100, then scaled to the US population), the resulting graph looked _exactly_ like the one in the article (save for perhaps some slight real-world distortions). The theory, with little effort, matches the reality.
Sure, the question of whether a 0.000003% or 0.0000003% differential makes for the best society becomes quite important, for exactly the reasons you agree to: such a tiny difference in percentage has enormous consequences when iterated over hundreds of millions of people. My concern is what you overlooked in my post: a century of trying to adjust that natural reality resulted in some 100,000,000 deaths under Communism.
Could you elaborate? By the way, the graph is taken from the original paper (click the details link below the graph).
Fairness aside, this is an issue for the rich as well. How you gonna stay rich if the middle class doesn't have disposable income to spend? It seems like a lack of middle class jobs/income would hurt the future value of any investments.
That's the thing I really don't understand about the "I got mine, you can go screw" attitude towards income inequality / income mobility. It hurts you, too, and you have more to lose.
Also, I'd be curious to see stats on time variation on income mobility.
The study you linked upthread said a bunch about income mobility or lack thereof. I see that as a much bigger problem than equality for it's own sake, although I'd be very concerned about a completely hollowed out system.
The total tax burden is equal to government spending [minus any income from government owned productive enterprises]. That total tax burden is financed either through explicitly collected tax or through deficit. During recent decades, the skyrocketing government spending and decreased tax rates mainly for the top, caused skyrocketed deficit spending - the skyrocketing of the tax paid by everybody.
To illustrate, imagine the situation with 0% tax rates and the government financed by printing amount of money equal to 50% of GDP - that will make effective tax rate 33% as 100 dollars of produced goods and services will be presented with 150 dollars of money. So people who made 100 dollars will be able to buy only 66 dollars worth of goods and services - thus effectively have their 33% collected and spent by the government even with 0% explicit tax rate.
edit: please don't mistake described process for inflation which itself is another tax [in addition to described above] collected next year and the year after that and so on... on the earnings of this year.
The deficit tax can be thought of as a dilution in case when government would additionally issue itself a chunk of stock in your company in exchange for some "protection" to you.
The reason for economical problems under Republicans is that business, and thus economy, doesn't do well when total tax burden is increased. The Republicans when in power, especially in 198x and 2001-2008, while decreasing nominal tax rates in some cases, have significantly increased the total tax burden.
Imagine a perfect world where everybody makes the same wages and invests those wages prudently. They're born, go into debt a little to pay for college, make money and save it, then eventually retire on their savings. In this world where everybody's lives are the same there would still be huge inequalities in wealth between people just starting out and people about to retire.
Some people might want to dismiss the idea that things should be or seem fair, but this ignores the fact that fairness is a very important attribute of economic stability. The more unfair the system seems the more unstable it will be in the long term. Social unrest is detrimental to an economy.
I'm guessing that you think that I think that the scenario I gave says something about whether our society is fair or not. I don't think that. Instead what I think, and what I was trying to show, is that if you're concerned about fairness looking at wealth inequality is almost entirely useless when we could be looking at income or consumption inequality - because its very easy to have a society with large amounts of wealth inequality even if almost everybody would agree that it was fair.
I think when people mention wealth inequality they're understanding it in their minds as income inequality; I generally do.
I suspect that musicians are earning less than they did a decade or two ago. There's no way for a Michael Jackson to sell a Thriller album in today's fragmented, digital marketplace.
It doesn't have to be this way. Germany requires that the board includes employees. Japan has also succeeded, perhaps by applying social pressure, in keeping executive salaries reasonable in most cases.
Unless you want to claim that Lady Gaga's performance is superior to that of Johnny Cash, I don't think you can explain the increase in musician pay by performance increases.
I'm all for paying people whatever it takes, even if that means some people make previously insane sums of money. But they should have to make their company MORE profitable, not less.
The answer isn't to take away from the rich and give to the poor. This will just create a class of people that rely on the government for handouts.
We should be educating the poor on poor life decisions. If they still don't listen, there isn't much we can do.
Certainly, there are some individuals that can overcome hardships while coming from any background - but these are rare. The more typical case is someone who will make some good choices and some bad choices. If that individual comes from a well-off background, the poor choices (e.g. kids early) can be papered over while the good choices can be better leveraged through access to more opportunities.
For someone from a less well-off background each mistake can be very costly. Have kids too early and you are unlikely to be able to support the kids while working and paying for college. Opportunities are harder to seize as well - living paycheque to paycheque would make it hard to pick up and move to SF to found a startup for example.
I'm not saying it's impossible to escape poverty without help - as I said, a dedicated individual can most certainly do it. From a statistical point of view, however, poverty will beget more poverty because the average poor person will not have enough second chances to make it out. If we want society to improve, we MUST provide a way for the average poor person to get past some of their mistakes. Yes, it looks like undeserved handouts, but I think it's the right thing to do.
P.S. Don't get me started on education. This is the single best thing we can do to help kids escape their background and we continuously underfund and mismanage it. It's fucking criminal.
What gives me the impression of underfunding though is that education spending is one of the first things to get cut when there is fiscal crunch. I think this is ass-backwards and a result of optimizing for the short term and ignoring the long-term consequences.
Still if the spending is at record levels...
There are always many different types of opportunities around. If someone can't pick up and move to SF, they can run their startup from anywhere. The great part about right now is that you can start up a business with pretty much nothing.
"From a statistical point of view, however, poverty will beget more poverty because the average poor person will not have enough second chances to make it out."
Some decisions in life have long-lasting consequences. The poor should be concentrating on not making those bad decisions in the first place. Another problem is environmental. Parents pass their bad habits and decision making onto their kids. Wealthy parents most likely already have good habits and pass those good habits onto their kids.
"If we want society to improve, we MUST provide a way for the average poor person to get past some of their mistakes. Yes, it looks like undeserved handouts, but I think it's the right thing to do."
I don't think I can agree with you here. If we allow people to easily get past their mistakes, they will continue to make them (and society won't improve) If you know that a mistake can cost you pain and suffering in the future, you will most likely think twice before making it. Some people will never learn, but I don't feel that I should have to continue to pay for those people until they finally do.
Exactly. Even if it's true (and I'm not sure that it is, despite much ado to the contrary) that redistribution will create a class of people that "rely on government handouts," it isn't clear that that's a bad thing, at least as long as the "handouts" are understood to be things like food stamps and welfare checks. No one is getting rich off those. If it's really true that such a class of people necessarily exists whenever you put anti-poverty programs in place, then so be it: I'm happy to let them have the money, especially if it buys a more robust social safety net that the vast majority will use responsibly.
(Now, a different kind of "handout" strikes me as much more problematic: we spend a lot more, it seems to me, on handouts like non-competitive government contracts, government-created monopolies, earmarks, bailouts, etc. -- and people are getting rich off those. But I suppose that's a bit off topic here...)
http://www.bls.gov/cps/cpswp2008.pdf
People below the poverty line also choose to risk unwanted pregnancies at a much higher rates than richer people. (The unwanted pregnancy rate for poor people is 88/1000, vs 29/1000 for people above double the poverty line.
http://www.guttmacher.org/pubs/journals/3002498.html#15
So it's not just the case that bad choices have a disproportionate effect on the poor. The poor also make bad choices at a rate much higher than the non-poor.
The inconvenient truth is that our levels of spending and accumulation is debt is not sustainable, period. That leaves two choices:
1. Dramatically cut entitlement and military spending, which requires that Congress vote for gutting many programs.
2. Continue borrowing and servicing debt by having the Federal Reserve continue printing money. This indirectly cuts entitlement spending by devaluing the benefits and doesn't make elected officials accountable.
So if you're worth hundreds of millions, and that worth isn't in the form of assets with intrinsic value, you may not be worth anything after all. The rest of us, on the other hand are debtors.
I think the author really means equalitarian distribution.