Wealth Distribution

[radon]

Re: Wealth Distribution

embedding them directly from the article

Why so few nations on the first chart? I noticed that the nations on the far end of wealth disparity were ground central for the series of asset bubbles in the past two decades.

[ASH]

Re: Wealth Distribution

Thanks for embedding the graphs, Rajiv.

This brings to mind the observation that our ideas about what America is are largely taught to children based upon what America was... and that some of the ideas about national identity which persist in adulthood are based upon our perceptions when those ideas first gelled. I think most of my ideas about America were formed between the ages of 5-15, which spanned the 1980's. Looking at graph #2, it seems that my perception of America as a land of relatively high social mobility and opportunity was true... in the 1980's.

Now here's the tricky bit -- my household income is at about the 85th percentile, nationally... and it was closer to the 97th percentile when my wife was working -- and I'm not really volunteering to give any of that income up for the sake of a more even distribution. Both my wife and I came from middle-middleclass families, so our current circumstances reflect upward social mobility (albeit more like half a rung than a rung). I'll support policies that seem likely to raise the value of labor at the low end -- and to curb passive gains from non-labor income (i.e. investment income) at the high end -- but I must admit I feel "entitled" to compensation that reflects some combination of the scarcity of my particular skill set in the labor market, and the impact of my labor upon my employer's revenues. Where does that leave us?

And for the record, I find the new post-editing window very frustrating, because it takes it upon itself to re-center the text window while I'm trying to edit the post. Perhaps there is an option to adjust this behavior, but I wanted to add my own griping about the 'upgrade' (to no one in particular).

EDIT: My perception is that two different mechanisms drive widening income disparity. First, FIRE enhances income disproportionately at the very high end of the distribution, and is responsible for a lot of the income growth for those who mainly live off of passive investment income rather than their labor. On the other hand, it seems to me that trade and immigration -- labor arbitrage, in general -- is responsible for falling wages at the low end. To over-simplify, the value of American labor was higher when America had more of a monopoly on modern factories and an educated work force. Stagnation of wages at the low end of the scale... and creeping progression of where 'the low end' starts, seems like a natural market consequence of global development and "free-ish" trade. (Being a 'natural market consequence' doesn't make it a good thing, socially... but it means we have to choose between goals for the structure of society and cost efficiency.) For that matter, the combination of a very uneven income distribution with high social mobility would be a lot more tolerable than an uneven income distribution and stagnant social mobility. By one set of ethics, an uneven income distribution is "just" to the extent that it reflects labor market conditions, and the moral goal would be to promote mobility within that distribution, based upon merit rather than pedigree. (And, of course, there are other sets of ethics.)

[Rajiv]

Re: Wealth Distribution

I noticed that the nations on the far end of wealth disparity were ground central for the series of asset bubbles in the past two decades.

I would refer you to two articles that appear to answer your question.

First, from Time -- The asset bubble theory of income inequality

There's been a debate going on for a few years about whether the big rise in income inequality in the U.S. over the past three decades has been at least partly a political phenomenon or purely an economic one. The first camp, whose members include political scientist Larry Bartels and economists Thomas Piketty and Emmanuel Saez (pdf), argues that decisions about taxing and government spending made since the early 1980s have increased the disparity of incomes. The second, which consists of the vast majority of economists who study such things (although more have been drifting toward the Bartels-Piketty-Saez camp in recent years), contends that globalization and technological advance have increased the rewards to the most skilled and reduced pay for those whose work can be done by machines or lower-paid workers overseas. Since globalization and technological advance are good things, the increase in inequality thus isn't really something we'd want to stop.

Well now, after looking at the data about the country's 400 highest earners and reading the comments by pneogy and shepherdwong, I am ready to offer an important new theory (well, not entirely new): The rise in income inequality over the past 30 years has to a significant extent been the product of a series of asset-price bubbles. Whenever the market (be it the market in stocks, junk bonds, real estate, whatever) booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble. It's not the same people raking it in every time—there's lots of turnover in the top 400—but skimming the top off of asset bubbles appears to have become the leading way to get rich in these United States in the past three decades.

The second is slightly more detailed - How Wealth and Income Inequality Cause Unstable Credit and Asset Price Bubbles

Income and wealth inequality is the root cause of financial instability. Capital, and the need for capital must be balanced for an economy to function stably.

If the accumulation of capital exceeds the need for capital to fund growth, the taxes on wealth and capital gains must be increased, and taxes on consumption and consumer income decreased .

If consumer demand, and the attendant need for capital, outpace capital accumulation, the reverse is required. Taxes then should be shifted from wealth and capital gains to consumption and consumer income.

Over the past several decades capital accumulation has outpaced the demand for capital, largely due to reductions in top bracket tax rates and stagnation of middle class incomes. The discussion that follows shows what happens when this occurs.

Enterprises need capital to expand and take advantage of new opportunities. This allows economies to grow to accommodate increases in population and the attendant need for new jobs.

If too little capital is accumulated, growth will be curtailed. If the effect is severe enough, sufficient growth will not be achieved to accommodate population increases and the need for additional jobs, and the standard of living will fall.

If too much capital is accumulated, rates of return on capital drop. As rates of return drop, capitalists seek ways to improve them through the use of leverage or the use of techniques to increase the demand for credit.

If leverage is used, risk increases, necessitating even larger rates of return. This leads to a potentially unstable situation. So there is a limit to the amount of leverage that can be used.

As the limits of leverage are reached, investment banks and hedge funds will look for ways to stimulate demand for credit. This can be done by relaxing the standards for issuing credit, and compensating by using techniques that hide risk.

By collateralizing debt and issuing insurance on debt capitalists can be made to feel more comfortable with less secure investments. Debt issued with relaxed credit standards can be mixed with more secure debt making it harder for rating agencies to correctly assess risks. If regulation does not keep up with these measures, or decreases, the value of the collateralized assets and insurance instruments will be jeopardized.

Excess capital can also result in additional risky speculation. When returns on productive investments are low and approaching inflation levels, capitalists will be willing to take larger risks in short term speculation on valuable assets and commodities, causing prices to rise. In turn, the rise in prices creates an upward momentum in asset prices that attracts even more speculation. Such price bubbles tend to be self sustaining as more and more capitalists are willing to take advantage of the upward momentum in prices, until eventually that trend cannot be sustained and the bubbles burst.

All of these measures are driven by the need to increase returns on capital, when there is just too much capital for the real investment needs of the country. This is the situation that has developed over the last few decades largely because returns have been going more and more to capitalists while workers wages have stagnated. With stagnating wages, the demand for goods and services has not kept up with the accumulation of capital.

The stagnation of wages has been caused largely by shrinkage in the manufacturing sector, causing consumers to seek returns in the financial sector and to tap available credit to sustain consumption. This is evidenced by the excessive growth of the financial sector. At the same time, high income and capital gains tax rates have been reduced, accelerating the income and wealth gap between capitalists and middle class consumers. Election laws have allowed capitalists to be the primary funders of elections, allowing them access to politicians, who then water down laws regulating capital and reduce taxes on capital formation.

Unless taxes are shifted to wealth and capital gains from consumption and consumer incomes, this increasing spread in income and wealth will continue to cause instability and the kind of financial crises we are now experiencing.

Also shedding light on wealth inequality, is William Domhoff's work - Wealth, Income, and Power

This document presents details on the wealth and income distributions in the United States, and explains how we use these two distributions as power indicators.

Some of the information might be a surprise to many people. The most amazing numbers on income inequality come last, showing the change in the ratio of the average CEO's paycheck to that of the average factory worker over the past 40 years.

First, though, some definitions. Generally speaking, wealth is the value of everything a person or family owns, minus any debts. However, for purposes of studying the wealth distribution, economists define wealth in terms of marketable assets, such as real estate, stocks, and bonds, leaving aside consumer durables like cars and household items because they are not as readily converted into cash and are more valuable to their owners for use purposes than they are for resale (see Wolff, 2004, p. 4, for a full discussion of these issues). Once the value of all marketable assets is determined, then all debts, such as home mortgages and credit card debts, are subtracted, which yields a person's net worth. In addition, economists use the concept of financial wealth -- also referred to in this document as "non-home wealth" -- which is defined as net worth minus net equity in owner-occupied housing. As Wolff (2004, p. 5) explains, "Financial wealth is a more 'liquid' concept than marketable wealth, since one's home is difficult to convert into cash in the short term. It thus reflects the resources that may be immediately available for consumption or various forms of investments."

We also need to distinguish wealth from income. Income is what people earn from wages, dividends, interest, and any rents or royalties that are paid to them on properties they own. In theory, those who own a great deal of wealth may or may not have high incomes, depending on the returns they receive from their wealth, but in reality those at the very top of the wealth distribution usually have the most income.

As you read through these numbers, please keep in mind that they are usually two or three years out of date because it takes time for one set of experts to collect the basic information and make sure it is accurate, and then still more time for another set of experts to analyze it and write their reports. It's also the case that the infamous housing bubble of the first eight years of the 21st century inflated some of the wealth numbers (but not the ones that don't include home values). The important thing to keep in mind, however, is that the relative shares have likely remained the same since the Great Recession began.

The Wealth Distribution

In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%. Table 1 and Figure 1 present further details drawn from the careful work of economist Edward N. Wolff at New York University (2009).

Table 1: Distribution of net worth and financial wealth in the United States, 1983-2007

	Total Net Worth
	Top 1 percent	Next 19 percent	Bottom 80 percent
1983	33.8%	47.5%	18.7%
1989	37.4%	46.2%	16.5%
1992	37.2%	46.6%	16.2%
1995	38.5%	45.4%	16.1%
1998	38.1%	45.3%	16.6%
2001	33.4%	51.0%	15.6%
2004	34.3%	50.3%	15.3%
2007	34.6%	50.5%	15.0%
	Financial Wealth
	Top 1 percent	Next 19 percent	Bottom 80 percent
1983	42.9%	48.4%	8.7%
1989	46.9%	46.5%	6.6%
1992	45.6%	46.7%	7.7%
1995	47.2%	45.9%	7.0%
1998	47.3%	43.6%	9.1%
2001	39.7%	51.5%	8.7%
2004	42.2%	50.3%	7.5%
2007	42.7%	50.3%	7.0%

Total assets are defined as the sum of: (1) the gross value of owner-occupied housing; (2) other real estate owned by the household; (3) cash and demand deposits; (4) time and savings deposits, certificates of deposit, and money market accounts; (5) government bonds, corporate bonds, foreign bonds, and other financial securities; (6) the cash surrender value of life insurance plans; (7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in unincorporated businesses; and (10) equity in trust funds. Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt, including auto loans; and (3) other debt. From Wolff (2004, 2007, & 2009).

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[don]

Re: Wealth Distribution

De-industrialization is a key component of the current distribution of wealth in America.

Here's a simplified hypothetical:

A burg of 100,000 has a production base that employs 20,000. That's only 20% of the population but it's nearly a guarantee of a healthy economy for that town.

If each factory employee has the cliched 2.5 family members, that means nearly half (45,000) the town is underwritten by the production sector.

Of course the paychecks from those people are spent on the local service economy. The opportunities for small business- setting aside corporate chain warfare- are excellent.

If the town didn't have to sell its soul to retain industry the local tax revenue should go a long way to support the infrastructure.

Now take away all the barbershops. What happens? Except for longer hairstyles, not much.

Close the factories and its the beginning of the end of the town. Americans selling each other stuff at their garage sales.

As far as class positioning- that should come from those in that class- not bestowed from above. Sure, alliances are fine, where mutual interests overlap, but a production economy socializes work as well as makes things. Workers tend to organize- raising their share of the wealth. Bust that up and they have no leverage and become truly wage slaves.

FIRE has done a fine job bringing this and more about. I'm far from an organized labor man myself- I've been self-employed for 30 years. But an economy this one-sided is one rich in opportunities for just a few. Not my cup of tea or bourbon on the rocks.

[Rajiv]

Re: Wealth Distribution

Also, quite surprisingly, China is very high on the wealth inequality front. If you look at the Gini coefficients

Click on image to see larger image




Also Andy Xie had this to say on the topic - Andy Xie: China Has Become A Giant Ponzi Scheme

In addition to net losses the redistribution aspect of a bubble has serious social consequences too. In the stock market bubble most households lose and a few win big. China’s wealth inequality is already very high. The bubbles make it worse. A sizable or even the majority of China’s population may not have meaningful wealth even after China’s urbanization is complete. It will lead to an unstable society. A market economy is stable and efficient when the majority has meaningful wealth and, hence, has a stake in the system.

[radon]

Re: Wealth Distribution

Then why not repeal income tax all together and return power to state and local governments? They already tax property.

[radon]

Re: Wealth Distribution

I curious as to why you think it is surprising to find China high on the wealth inequality front. It seems like a natural outcome of the transfer of political currency, hard to measure, to cash, easier to measure by the central power brokers.

[we_are_toast]

Re: Wealth Distribution

A few more pictures. A funny thing happened in the early 80's.

[chr5648]

Re: Wealth Distribution

Thanks for embedding the graphs, Rajiv.

This brings to mind the observation that our ideas about what America is are largely taught to children based upon what America was... and that some of the ideas about national identity which persist in adulthood are based upon our perceptions when those ideas first gelled. I think most of my ideas about America were formed between the ages of 5-15, which spanned the 1980's. Looking at graph #2, it seems that my perception of America as a land of relatively high social mobility and opportunity was true... in the 1980's.

I wonder who's teaching that? ;) (the smileys don't even look like their winking)

Its also funny who's teaching the solutions to the problems. Looks to me like whole system is by design.

Anyway, you nailed it.

[radon]

Re: Wealth Distribution

Some funny things did happen in the 80's.

A boom in the stock market among other things did not exactly benefit people without property.

[Rajiv]

Re: Wealth Distribution

I curious as to why you think it is surprising to find China high on the wealth inequality front. It seems like a natural outcome of the transfer of political currency, hard to measure, to cash, easier to measure by the central power brokers.

The reason I said surprisingly, is because of the general perception of China as a "communist country" I believe that the Gini Coefficient of China has been steadily increasing since 1978 -- when Deng started the "liberalization" process.

The data indicates that the Gini has risen from 0.304 in 1978 to 0.462 in 2006

Things have likely worsened between 2006 and 2010, and inequality worsening as the Chinese bubble picked up speed!

[jtabeb]

Re: Wealth Distribution

Ash, I don't think any of our problems come from paying people what they are worth (as in your case), that's the whole idea.

The problem is that our society rewards people in the FIRE sector with compensation that is inversely proportional to the societal benefit that they provide. (The more harm you do, the more you make) That is one SICK system. If you are a Producer of goods and services that BENEFIT SOCIETY, you should get what you earn (and in the case of Apple, Google, and Microsoft, Intel, IBM etc. that's quite a lot of societal benefit and so the benefits are and should be quite large). I (and I don't think anyone) should have any problem with that.

But that is NOT what we are talking about here.

I would RATHER have 5000 well trained engineers such as yourself at $200,000 a year vs a SINGLE Hank Paulson, Larry Summers, Loyd Blankfein, Robert Rubin, Jamie Dimon or any other top 20 Hedge Fund Manager at $1,000,000,000 a year.

The FIRE Rewards are disgusting. They are made all the more so because instead of providing ANY benefit to society, they have KNOWINGLY and PURPOSEFULLY caused damage to the tune of 25% of US GDP and similar portion of world GDP.

(I'm not talking about people and institutions that serve their role as efficient capital providers to the productive sector. These people should get rich too, in direct proportion to the service they provide to enhance society's productive output of useful goods and services. That's all well and good and the SHOULD be rewarded accordingly.)


What I AM talking about is people who Destroy the Economy, Destroy People's Lively hoods, Destroy Society, Destroy Countries, Destroy the World (and get rich doing so).


What is beyond comprehension is that this is all deemed in the greater good of society at large (Who cares about the wanton devastation and suffering this causes, right? After all, we are just doing "God's Work".)

What we are talking about here is rewarding those who perpetrate financial terrorism by stealing from the people who are the victims of these crimes.

And that is absolutely repugnant.

[ASH]

Re: Wealth Distribution

Ash, I don't think any of our problems come from paying people what they are worth (as in your case), that's the whole idea.

The problem is that our society rewards people in the FIRE sector with compensation that is inversely proportional to the societal benefit that they provide. (The more harm you do, the more you make) That is one SICK system. If you are a Producer of goods and services that BENEFIT SOCIETY, you should get what you earn (and in the case of Apple, Google, and Microsoft, Intel, IBM etc. that's quite a lot of societal benefit and so the benefits are and should be quite large). I (and I don't think anyone) should have any problem with that.

But that is NOT what we are talking about here.

I would RATHER have 5000 well trained engineers such as yourself at $200,000 a year vs a SINGLE Hank Paulson, Larry Summers, Loyd Blankfein, Robert Rubin, Jamie Dimon or any other top 20 Hedge Fund Manager at $1,000,000,000 a year.

The FIRE Rewards are disgusting. They are made all the more so because instead of providing ANY benefit to society, they have KNOWINGLY and PURPOSEFULLY caused damage to the tune of 25% of US GDP and similar portion of world GDP.

(I'm not talking about people and institutions that serve their role as efficient capital providers to the productive sector. These people should get rich too, in direct proportion to the service they provide to enhance society's productive output of useful goods and services. That's all well and good and the SHOULD be rewarded accordingly.)


What I AM talking about is people who Destroy the Economy, Destroy People's Lively hoods, Destroy Society, Destroy Countries, Destroy the World (and get rich doing so).


What is beyond comprehension is that this is all deemed in the greater good of society at large (Who cares about the wanton devastation and suffering this causes, right? After all, we are just doing "God's Work".)

What we are talking about here is rewarding those who perpetrate financial terrorism by stealing from the people who are the victims of these crimes.

And that is absolutely repugnant.

Thanks, JT. Those thoughts are appreciated, and I (being self-interested), agree with them wholeheartedly.

Here's what I'm wondering: If we discarded hedge fund managers and other FIRE types from the income distribution, would we still have a degree of inequality that is socially unhealthy, simply because of labor arbitrage? I really need to do this calculation sometime, because the outcome will tell me how screwed we really are. My supposition is that there are two things going on -- one morally repugnant (the FIRE games you cite) and one merely inconvenient (market consequences of trade and development overseas) -- and I'm worried that even if there were no investment bankers with outsize bonuses, there would still be social problems associated with the de-industrialization of the US. To my mind, the fact that formerly "middle class" jobs have either disappeared or increasingly do not pay wages that support a secure middle class life style will persist even if pay for FIRE types comes down substantially. FIRE may be tangentially involved with outsourcing industrial jobs, but I disagree with those who see FIRE as the main instigator. FIRE didn't invent the profit motive, or the drive for capital to reduce its labor costs. FIRE lobbying may or may not have enabled trade agreements -- or made our government tolerant of assymmetric practices by some of our trade partners -- but at the end of the day, our problem at the low end of the wage scale is really about labor costs equillibrating with those in an outside world that is by-and-large poorer than the US, with fewer worker rights, environmental safeguards, and other 'niceties' that make life tolerable in a modern democracy (and raise labor costs).

The high wages of FIRE paper-pushers results from the intangible nature of the medium in which they work, and their ability to leverage a small base of underlying physical wealth into an enormous fortune of intangible paper representations of wealth. I think we should clamp down hard on investment banking because, as you note, it is destructive rather than productive. They think they are geniuses because they can apply more leverage in their intangible world of financial instruments than can a farmer or manufacturer of steel pipe in the physical world, when in reality the only reason the 'returns' of their 'work' are so large is because their paper world is only tenuously connected to the phyical wealth of the world. The fact that they are able to lever-up their paper representations of wealth in fairy land yet exchange the paper products of their alchemy for the tangible goods of the physical economy is the con of the century. However, if we do curtail FIRE, *poof* goes a lot of the ficticious wealth spun by these parasites. It won't get redistributed to the lower end of the wage scale; it will vanish, because it has little basis in the physical wealth of the land to begin with. So, in some sense, reining in FIRE won't rebalance the economy in a way that raises the wages of the common man. And, although the articles linked by Don and Rajiv point out that the width of the distribution is more important than the overall affluence of the society, I wonder whether wiping out the statistical outliers of the $1B club will do the sociological trick. Does the top 0.00001% (or whatever) really matter from a sociological standpoint, or do the (I think, legitimate) top 5% or top 1% need to come down as well? And if they do, then maybe we have more of a conflict between ethics and the practical needs of society.

[leegs]

Re: Wealth Distribution

Thanks, JT. Those thoughts are appreciated, and I (being self-interested), agree with them wholeheartedly.

Here's what I'm wondering: If we discarded hedge fund managers and other FIRE types from the income distribution, would we still have a degree of inequality that is socially unhealthy, simply because of labor arbitrage?

That's a very good question Ash and I would like to see the answer. However a tricky parameter would be deciding how far down in the hierarchy the exclusion of FIRE types from the analysis should go. It seems to me that 'regular' real estate and insurance brokers earning well into 6 figures are part of the problem. I don't see these jobs providing real value in proportion to their income, in comparison to those $200k engineers mentioned by jtabeb and exemplified by yourself. Rather I perceive them as remora fish to the FIRE sharks that are siphoning off so much wealth from the real economy.

And by the way, I do not in any way mean this as a personal attack on any such persons reading this post - rather I am referring to the systemic aspects of things.

[marvenger]

Re: Wealth Distribution

its just like any manager, you want a large team with high pay to justify your own massive pay, and contrary to market fundamentalism make believe, this incentive is not a social good.