How Everyone Got the Top 1% Wrong

I know lots of young people here in Canada at least work paycheck-to-paycheck but instead of buying stocks or at least saving, they will spend their unaccounted money on booze and video games(if they have any at all), it wouldn't take much for them to save up a couple thousand bucks and invest in something better for themselves. They just don't want to, or don't know how to make that sort of decision.

Then of course there are people who are ACTUALLY poor, that's where my empathy starts. I recently helped a homeless man work the computers at the local library(not that I consider that a significant act in itself), and I know just how hard it is to work with people who are seriously SOL; they're even resistant to help. That said, I don't think being harder on billionaires is going to help people down on their luck, it's only going to serve the egos of those who have no idea what it means to be in either of those positions.

EDIT: It seems people misunderstood what I meant by investment. I include in this investing in things like transportation, raw materials, and (if applicable) time off to pursue greater potential, and not just playing markets and buying shares.

In other words if this analysis were complete, we would expect to see straight line growth.

Those with excess capital can purchase good judgement, which increases your odds of good fortune. In fact purchasing good judgement may not even be necessary, since you can probably get buy simply copying what other wealthy are doing (ie. the people you talk to most).

So all you really need is excess capital, and not have really bad judgement.

I don't know what could explain such a change. Were the capital gains taxes prior to 1980 high enough to ensure a strong enough redistribution of the wealth creation so that the shares were almost stable over time? Arguably the maximum capital gains rate has decreased after 1980 [2]. But could that explain everything? Or maybe the rich US residents are getting much better at finding creative ways to evade US taxes nowadays (legally or not)?

[1] http://cdn.theatlantic.com/newsroom/img/posts/houseofdebt_Sa...

[2] http://en.wikipedia.org/wiki/File:Top_Capital_Gains_Tax_Rate...

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.10....

Which modified wealth as a stochastic multiplicative process beyond a certain threshold (and that threshold was basically the lower end of "upper middle class") and derived results that match the observed distribution very closely.

Leave 1% out of this. Any couple making 150k each fits in that. That means anyone with a college degree, 15-20 years of experience, and senior managerial position. Also included in this are doctors, lawyers, and engineers. There is a lot to be said about mobility and meritocracy but I don't think you get to be a senior engineer or doctor solely because your parents were.

I remember a good friend of mine who's quite wealthy was talking to my brother-in-law and I at lunch. My brother-in-law had recently closed on a house he was intending to flip. My friend then said to my brother-in-law, "Next time you see an offer like that come through, call me. I can get you that money within 24 hours." Somewhat stunned at with my friend's offer, I then realized that the more capital you have, the more investments routes you have to your disposal.

I would argue that those things haven't happened because no one (including us technical people) have developed business models for those activities.

Maybe it is useful. But it's something that goes from almost self-evident, to badly in need of being established.

On the other hand, the idea that a small handful of people have concentrated such vast wealth that they've disenfranchised the rest of us, a handful that is a great deal less than "the 1%", is actually a wildly more potent political story. Even this here libertarian type might be open to some significant actions taken to ensure that such concentrations of wealth are ameliorated, as a key part of my personal libertarianism is that monopoly busting is a key useful function of government, and I'd consider this to fit in, if it is true. It's still something that needs establishing, though, not mere assertion.

One has a hard time not imagining the .001% cackling with glee as the press focuses on "the 1%"; it still leaves them lost in crowd of millions, hardly singling them out for any treatment, while the 1% itself is peopled with a significant number of people who apparently worked their way up the ladder, however briefly that may have been. That doesn't sound like a good set of people to target, if there's no actual "institution" there.

And now, let me reiterate my first sentence; this is because of the political rhetoric being used. If it wasn't for that, this would be a relatively uninteresting question. But if it's going to become essentially part of the platform of one of the major parties, it's worth examining for truth value.

Yes.

> Competition ensures that only the best deliverers of value are making the money.

I'm not convinced that "competition" is occurring at that level. At least, not in any way comparable to the '2 entities competing in the market' sense.

PS: I like money, a lot. And I have no problems with other people having a lot more of it than I do.

Not necessarily. You are providing a good or service to someone but it isn't necessarily doing any good to "the economy".

An example: You are a successful hedge fund manager. You and your team of quants have a bunch of ingenious strategies for predicting the stock market, spotting arbitrage opportunities in derivative prices, etc. You successfully help your investors to get rich, for which they pay you very handsomely. But, for the most part, what you're enabling them to do is get rich at the expense of other market participants. If you weren't doing your job, the net value of the equities and derivatives markets would be pretty much exactly the same; it's just that it would be parcelled up a little differently.

For the avoidance of doubt, I don't think there's anything wrong with any of that. Our hypothetical hedge fund manager isn't doing any net harm to speak of either. (There might be a bit of net good, through increasing liquidity and helping the market do its information-aggregating thing, and a bit of net good-or-harm depending on exactly who the fund's investors are.) The point is just that what a hedge fund manager is being rewarded for is making a particular set of people rich in what's largely a zero-sum game, not doing any net good overall.

Another example: You study baseball or American football and get very good at identifying undervalued players. You offer your service to a major team. They get some bargains, win a lot of games, and pay you a big pile of money. All very well, and again for the avoidance of doubt I don't think there's anything wrong with this -- but you've benefited one set of people at others' expense. The overall quality of play hasn't changed (the pool of players is the same and you haven't done anything to make them play better), you've just enabled one team to get a bigger slice of the same pie.

Note that none of this requires artificial barriers to entry, or crime, or even anything unethical. It's just that what you get paid for is benefiting the people who pay you and often the easiest way to do that is by moving value to them from elsewhere, rather than creating it anew.

Unfortunately, we're doing the opposite: the more power the upper class accumulates, the more it tries to cut such programs, because they personally wouldn't benefit. This is where the problem lies as I see it. The rich very rationally use their massive influence in government (cf Citizens United) to stay rich by passing tax cuts and reducing entitlement spending, while the majority of Americans get the shaft. And because of the two-party system and tactical voting, there's nothing we can do about it at the voting booth.

It seems intuitive (but not logically certain) that the person who has made the greatest contribution to the world should be the richest. But by how much isn't really clear.

What would happen if Bill Gates was the richest man in the world and had $50m, instead of billions. All the incentives scale. I don't think he'd have said 'screw this, I'm not making Word for less than $2 bn'. Sure, inequality is a fair way to reward hard work and brilliance, but what level?

Looking at it another way, sure Bill Gates is a fantastically insightful and driven guy with great business acumen. Is he 100,000 times better than the average person though? Because he's earned 100,000 more than the average American.

Warren Buffett makes the point that if he was born in Bangladesh he would probably be as poor as he was when he was born. Circumstances matter.

I realize you don't say it explicitly, but the implication of what your comment is that they is some kind of cosmic justice that made Larry Page or Steve Jobs billionaires. There isn't. The right level of remuneration is a moral question, not a feature of the natural order. If you really think these people deserve these huge concentrations of wealth, why not more? How amazing could Windows have been if we'd just paid Bill Gates another $50 billion?

They wouldn't have to 'hurt' at all, in fact they could experience personal records for income every year, year after year, and still drop out of the top 400 (or top .01%), since it's a sliding scale.

Insanely wealthy, to me, is the condition of having assets that throw off net income that puts you into the top 1% of income before you've worked 200 hours in a year. (You might have to work a bit to oversee and manage the assets, but it shouldn't represent anything like a work-a-day job.)

These numbers, of course, are the bare minimum for inclusion in this category. By definition, nearly everybody in the 1% makes more than this.

What's interesting is that this argument ignores the "apocalyptic" scenarios I see in other contexts. They typically revolve around increasing scarcity, societal collapse due to depleted resources, etc.

They overlap only in one place; I've seen one "apocalyptic' one that argued the stratification of society means that collapse will occur because the rich/powerful are isolated from feeling the effects of the scarcity until it's too late.

But regardless; we can't have both - one where the earth's resources are depleted, and another where the bounty is so great everyone can enjoy a middle class standard of living, often without economically useful employment.

It'd be interesting to see a breakdown that took the top 1% of successively smaller chunks until we see just how small we can get until the chart starts to flatten out. But then again, maybe the author has already done that and just didn't feel it was important to mention. Maybe 0.01% is the point at which the disparity stops being so gigantic. E.g. the difference between the 0.001% and the 0.01% is not nearly as stark as the difference between the 0.01% and the 0.1% like we see on that second chart.

So, monarchy never happened?

The perception that a major problem with current American society is "resentful abuse" towards the wealthy is strange because from a historical perspective to me it seems like this is the time the wealthy have been treated with the most reverence.

Just as "urban" and "welfare" have become stand-in buzzwords for poor African-Americans, so has the term "1%" become a phrase for, not just the wealthy, but for those among the wealthy who have gained at the expense of others through financial engineering and other schemes. For instance, these same people grew fabulously wealthy by wrecking the economy and not a single one received punishment. In fact, everyone else bailed them out and they went right back to the same schemes and obscene paydays.

Then, there's the general truth that, while people are working harder, wages are effectively stagnant for many and an increasingly larger share of the rewards are accruing to a shrinkingly tiny percentage of the population.

So, I think it's a naive false argument to blame people for "hating the rich". What they really hate is being pimped.