Wealth inequality is Misunderstood but Real

[WritOfCertiorari]

Imagine if I told you that the idea that 1 percent of the the population owns 40 percent of the wealth is incorrect. Well, it’s true, and in fact it’s not too hard to explain why.

The highest paid CEO makes about 100 million a year  in salary plus compensation. The CEO is traditionally the highest paid employee of the company. If someone was paid a CEOs salary for 45 years, a ridiculous amount of time to be a CEO, they would have less than 5 billion dollars pre tax. After tax, they would be lucky to save up 3 billion dollars.

Well what about compound growth, you say? Even assuming low taxes  and 3% dividends, which would be about 30 million in taxes a year and money invested at a 3% cash dividend, that sums to less than than 10 billion dollars. Again, no person would ever perpetually make 70 million after tax, because being a CEO is a short term prospect for the vast majority of companies. Also, most companies pay much less than 100 million before tax- the average CEO of an S&P 500 company makes 16 million a year, and remember that the average is slightly up-shifted by the top few.

So why do the top few richest people all have around 100 billion dollars, when that seems impossible? The answer is that they don’t. They don’t have anywhere near 100 billion saved. The reason that we saw they have that much money is because of the idea of market capitalization and stock options. Market capitalization is just the last price of a stock multiplied by the amount of shares.It doesn’t mean there are enough people to buy back all of the shares. This, it is in some sense an exaggeration.

Also, stock options mean that taxes don’t have to be paid back until the stock is sold, not each year when the salary dividends paid.

What this means is that this 100 billion of wealth can never, ever be accessed. If they sold their stock, the price would collapse, and also, they would have to pay significant taxes. They would be lucky to get 10 billion dollars in liquid wealth. So really the concentration of wealth is about a third of what the market cap value is, probably about 13 percent of usable wealth per top 1 percent of the population. The sad fact is that most of the wealth in this country is not usable by any one person- it is part of the stock market and real estate and can never be completely liquified at market value.

So what are wages stagnant after inflation? Is it because CEOs are stealing all the wealth? Not a chance. A CEO, even of a small company, would be lucky to get paid even 1 or 2 percent of the total payroll in salary. The reason why payrolls are dropping is because of technology, meaning that supply of labor had increased incredibly while demand has also increased. If you need proof, average wages include the wages of the CEO.

[bagelman]

The hell is this rambling on about when I'm poor (and getting poorer) and my boss is rich (and getting richer)? That's what wealth inequality is, not sage truths about how liquid assets aren't solid or whatnot.

[WritOfCertiorari]

The hell is this rambling on about when I'm poor (and getting poorer) and my boss is rich (and getting richer)? That's what wealth inequality is, not sage truths about how liquid assets aren't solid or whatnot.

Thanks for biting on the bait. Let's have a real discussion. I changed the title, it was meant to be a bit provocative.

The main point isn't to say that there isn't a lot of inequality. However, the real division in society isn't "1% of the country controls X percentage of wealth". The division roughly is:

10% of the country will never have to worry about not having enough money
10% are on their way to financial independence
80% live paycheck to paycheck and will likely always live that way.

If you think about things this way, Bezos having 70 million shares of Amazon has no effect on you, because he's not taking money out of the economy from you... if anything, he's slightly helping you by lowering prices of assets you might actually use (inflation of housing, rent, etc.).

As for your boss, he's not as rich as you think. One recession and he's as screwed as you are (unless you work at a Fortune 500 company or something).

[Boss_Rahm]

It's not even the Jeff Bezos's of the world that piss me off, it's the Walton children of the world that inherit massive fortunes without doing anything to deserve them. For some reason a lot of economic rhetoric presumes that all wealth is earned wealth.

[Cold War Liberal]

It's not even the Jeff Bezos's of the world that piss me off, it's the Walton children of the world that inherit massive fortunes without doing anything to deserve them. For some reason a lot of economic rhetoric presumes that all wealth is earned wealth.

Yes. I admire Bill and Melinda Gates, for instance, since they use their wealth for bettering humanity. I can't stand the Waltons and the Kardashians, the ones who have all this money and just waste it.

[IndustrialJustice]

It's not even the Jeff Bezos's of the world that piss me off, it's the Walton children of the world that inherit massive fortunes without doing anything to deserve them. For some reason a lot of economic rhetoric presumes that all wealth is earned wealth.

Yes. I admire Bill and Melinda Gates, for instance, since they use their wealth for bettering humanity. I can't stand the Waltons and the Kardashians, the ones who have all this money and just waste it.

The Gates family shuttles a massive amount of money to the charter school industry. I'm not sure what there is to admire about the richest couple on Earth trying their best to gut public education.

[parochial boy]

Yeah, this is a pretty tenuous argument, and seems to confuse the difference between wage and wealth inequality. But whatever, a few points that I cannot be bothered to structure into an argument.

 - Trying to differentiate liquid and non-liquid wealth is silly, if I own a house, that makes me richer than someone who doesn't, even if the cash isn't immediately available - the same goes for shares.
 - As we all know, wealth increases in value at a faster rate than either economic growth or wages, so someone whose wealth is largely in assets is going to see their wealth increase at a faster rate than someone who relies on a salary
 - It is a fact that wage growth has stalled while there has been significant asset price inflation
 - It is a fact that wages have dropped as an overall percentage of the economy, claiming this is down to technological improvements is a bit odd, as economic growth should lead to an increase in demand as well as supply - it is clearly much more down to removing bargaining power form the "labour" side of the market, to the advantage of capital owners
 - The difference between CEO, or executive pay, has skyrocketed in the last few decades - from 25 times as high in the 1960s to 300 times as high now. So objectively speaking there has been a regression
 - This is compounded by the fact that much of executive pay is in the form of assets (share options etc) which, as mentioned above, accrue in value much faster than the economy has been
 - on the flip side, home ownership, the traditional route to wealth for the middle class, is on the decline - in part because it has become prohibititavely expensive in the developed world's major agglomerations. In conjunction with this, for a "normal" person to access home ownership, they generally have buy outside of the major urban areas which places them in the dual trap of:
         a) being removed from the locations where property value are rising the fastest (ie big cities), thus causing them to fall further behind in terms of their ability to amass wealth
         b) removing them from access to the labour markets of the major metros, exacerbating inequality as they have to settle for lower wages

[muon2]

I'm glad to see the recognition that income inequality is different than wealth inequality, and perhaps addressing the issue needs different solutions, too. Let me start with a post I made in 2011 about wealth. Unfortunately wormyguy's image that I initially reference no longer displays in Photobucket.

The underlying issue is one of human perspectives of economic distributions. Distributions for population, income, and wealth are different. Moreover, they are related so that each item in that preceding sentence represents an integral of the previous item. If one isn't aware of that difference, the effects can appear quite distorted.

Let me start with the distribution of population by annual household income. Using 2007 data this distribution is roughly flat up to 70K. In other words there are roughly the same number of households earning between 10 and 20K as there are between 30 and 40K or between 60 and 70K. Beyond 70K the distribution falls off exponentially with a drop off such that for every increase by 50K there are half as many households above that number. If you plotted this on a graph you'd see a fairly horizontal line from 0 to 70K and then a curve dropping downward, sort of like this graph, if the 0 line were at about 100K. I'd guess that wouldn't generate a lot of controversy.


This is a different graph than the original which is no longer on the web. Something starting like the purple and ending more like the red is the curve I'm describing. In the next paragraph I'm describing the blue line that cuts off abruptly at 100K$

The income distribution weights each point for the income at that point, and sums the total by means of an integral. To show how this skews the data, lets assume that the population distribution by income were completely flat, and no household made more than 100K. If we divide up the population into 5 equal groups (quintiles), the bottom 20% would get 4% of the total income and the top 20% would get 36% of the total income. That's just the math saying that the integral of a linear function goes as the square of the function.

For a flat distribution the formula would predict that if the lowest share was 1 the next 3 quintiles up would have shares of 3, 5 and 7. Compare that to the actual first four quintiles in the US that have relative shares of 1, 2.6, 4.5, and 7.2 of the total income. Though the match is quite good, it's starting to look unfair since that effect of the square is now factored in.

Of course, the real population distribution is not flat, but has that long tail over 100K like the graph above. Since it is at the high end its effect is magnified by the income integral. It reduces the bottom 20% from a 4% income share to a 3% income share, with the same relative shares quoted above. That leaves 53% in the top 20% instead of 36% from the flat distribution. It's still just due to the income factor squared by the integral.

Wealth is not income, but can be approximated as an accumulated income, which in turn is another integral. Integrating a linear function twice gives a distribution that goes as the cube, or the third power. If I applied this to the flat population distribution described above, then the bottom 20% would have 1% of the wealth and the top 20% would have 49% of the wealth. Even with this absolutely even population distribution many might find this quite unfair - but it's just the nature of the distribution.

Now if one factors in that high income tail, small as it is, the power of the cube, both reduces the bottom and increases the top fractions. The numbers in the thread title are very much in line with the math.

So, I think the question for those who are concerned about wealth or income distribution is to go to the population distribution (something like the graph above) and describe what one would like it to be.

The short form is that the math of wealth vs income dominates the result. Even a uniform income distribution from 0 to 100K$ will produce a skewed wealth distribution due to the way income accumulates (by integration) to become wealth. The only way to have a flat wealth distribution is for everyone to have the same income (or more accurately the same disposable income).

[muon2]

Part 2 is about income and how it has given rise to the discussions about the rich being richer. This is from 2015 with apologies for my homemade chart based on Census data.

I'm cross posting this from US General Politics since it seems relevant here, too. This chart should help guide one's attempts at a solution. The drift of the upper three quintiles away from the lower two quintiles has been generally slow and steady over the last 35 years. The decade before Reagan isn't appreciably different than the decade after, despite considerable differences in national policy.

It seems clear that wealth has migrated towards the skilled professions, even in the middle class, as the global information age has progressed. The greater the skills required, the more rapid the increase in wages. To me that suggests the most effective changes would direct more resources towards education for the skills needed in the current economy, not large scale wealth redistribution or an investment in jobs in less skilled sectors from economies of the past.

Here's a better chart in response to Ernest. This is also from the historical household income data at the US Census. I found that the top of the second quintile (40%) was the most stable in real dollars, only increasing 5% from 1969 to 2014, so I used that to compare the other quintiles. The bottom quintile remained almost unchanged compared to the second quintile during that span of years and is very close to half the second quintile.

The growth is in the upper three quintiles. The middle quintile grew about 17% compared to the bottom two quintiles. Since the bottom two quintiles had little growth in real dollars, that 17% is close to the growth in real dollars since 1967.  The fourth quintile grew at 35% compared to the bottom two quintiles, or about double the rate of the middle. The limit for the upper 5% grew at 54% compared to the bottom two quintiles, or about triple the rate of the middle. My apologies for the year sequence which looked fine until the software rendered it to a bitmap.

The short form here is that it isn't merely about the gains of the top 1%. The entire upper half of household incomes has risen steadily while the lower half has remained stagnant. Within the upper half, the higher the percentile, the more rapid the income rise. But it's been slow and steady over the decades, not something sudden and recent and confined to the 1%.

[OSR stands with Israel]

Yeah, this is a pretty tenuous argument, and seems to confuse the difference between wage and wealth inequality. But whatever, a few points that I cannot be bothered to structure into an argument.

 - Trying to differentiate liquid and non-liquid wealth is silly, if I own a house, that makes me richer than someone who doesn't, even if the cash isn't immediately available - the same goes for shares.
 - As we all know, wealth increases in value at a faster rate than either economic growth or wages, so someone whose wealth is largely in assets is going to see their wealth increase at a faster rate than someone who relies on a salary
 - It is a fact that wage growth has stalled while there has been significant asset price inflation
 - It is a fact that wages have dropped as an overall percentage of the economy, claiming this is down to technological improvements is a bit odd, as economic growth should lead to an increase in demand as well as supply - it is clearly much more down to removing bargaining power form the "labour" side of the market, to the advantage of capital owners
 - The difference between CEO, or executive pay, has skyrocketed in the last few decades - from 25 times as high in the 1960s to 300 times as high now. So objectively speaking there has been a regression
 - This is compounded by the fact that much of executive pay is in the form of assets (share options etc) which, as mentioned above, accrue in value much faster than the economy has been
 - on the flip side, home ownership, the traditional route to wealth for the middle class, is on the decline - in part because it has become prohibititavely expensive in the developed world's major agglomerations. In conjunction with this, for a "normal" person to access home ownership, they generally have buy outside of the major urban areas which places them in the dual trap of:
         a) being removed from the locations where property value are rising the fastest (ie big cities), thus causing them to fall further behind in terms of their ability to amass wealth
         b) removing them from access to the labour markets of the major metros, exacerbating inequality as they have to settle for lower wages

except the price of your house wont drop by more than 50% if you sold your house.


If Bezos says hes going to sell all his shares in Amazon, he would get maybe about 1/3 of what they are worth now(and that is before taxes).

[Since I'm the mad scientist proclaimed by myself]

Yeah, this is a pretty tenuous argument, and seems to confuse the difference between wage and wealth inequality. But whatever, a few points that I cannot be bothered to structure into an argument.

 - Trying to differentiate liquid and non-liquid wealth is silly, if I own a house, that makes me richer than someone who doesn't, even if the cash isn't immediately available - the same goes for shares.
 - As we all know, wealth increases in value at a faster rate than either economic growth or wages, so someone whose wealth is largely in assets is going to see their wealth increase at a faster rate than someone who relies on a salary
 - It is a fact that wage growth has stalled while there has been significant asset price inflation
 - It is a fact that wages have dropped as an overall percentage of the economy, claiming this is down to technological improvements is a bit odd, as economic growth should lead to an increase in demand as well as supply - it is clearly much more down to removing bargaining power form the "labour" side of the market, to the advantage of capital owners
 - The difference between CEO, or executive pay, has skyrocketed in the last few decades - from 25 times as high in the 1960s to 300 times as high now. So objectively speaking there has been a regression
 - This is compounded by the fact that much of executive pay is in the form of assets (share options etc) which, as mentioned above, accrue in value much faster than the economy has been
 - on the flip side, home ownership, the traditional route to wealth for the middle class, is on the decline - in part because it has become prohibititavely expensive in the developed world's major agglomerations. In conjunction with this, for a "normal" person to access home ownership, they generally have buy outside of the major urban areas which places them in the dual trap of:
         a) being removed from the locations where property value are rising the fastest (ie big cities), thus causing them to fall further behind in terms of their ability to amass wealth
         b) removing them from access to the labour markets of the major metros, exacerbating inequality as they have to settle for lower wages

except the price of your house wont drop by more than 50% if you sold your house.


If Bezos says hes going to sell all his shares in Amazon, he would get maybe about 1/3 of what they are worth now(and that is before taxes).

If you want sell a house quickly, you have to sell for much less then it's worth, and you still need to have another one, plus you can't take advantage of fluctuations in the market like you can with stocks, you have to buy in the same market you sold in, so in the end you're not making much unless you buy something a lot cheaper than you used to own. If Bezos sold his stock over time (or kept it for dividends. I don't actually know if you can do that, but it would be a farce of a system if the only way to profit off of shares was to sell them.) he'd probably get near 100% of his wealth value. You have to get pretty rich to be able to invest in the things with the best returns. The wealth of the rich is dramatically more liquifiable than that of normal people. New cars lose most of their value the second they're bought, most products, smaller household objects can't be sold for less then a pittance, and paying off those necessary things takes up most of a persons income. The rich have to pay a lower percentage of their income on these things, and have huge amounts of their money open for high return investments. And this applies to a much greater degree if you compare the middle class to the poor.