12 ms·

What if incomes grew like GDP?

reidalert 6y ago
I really like this analysis! Given this hypothetical income growth, what would the distribution of wealth look like today? As far as I know, the distribution of wealth is even more skewed in favour of the rich, with some fraction of people at the bottom having 'negative wealth' i.e. more debts than assets. Wealth also seems to have a compounding effect, in that richer people have a higher savings rate and access to better investment opportunities. So would more equal income growth necessarily lead to a more equal wealth distribution, or are there other factors to account for?
User23 6y ago
You’d have economic prosperity like in the USA between 1945 and 1970.
- danesparza 6y ago
  Spoiler alert!
- klipt 6y ago
  Wasn't that the result of a unique world order where the USA was the only industrialized country not recovering from huge war damage? Doesn't seem like something you could replicate worldwide. Not all countries can be winners all the time.
- boh 6y ago
  Highly unlikely. Productivity growth engendered higher incomes, not the other way around. The 70's is when that growth came to an end.
  - User23 6y ago
    Up until about 1970 workers wages and productivity grew equally, but then while productivity continued growing at the same rate it had been, inflation adjusted real wages plateaued and haven’t much risen since.[1] [1] https://www.epi.org/publication/charting-wage-stagnation/ https://www.epi.org/publication/charting-wage-stagnation/ (see figure 2)
hliyan 6y ago
I always like to say that we live in an exponential meritocracy, where your accumulated merit enhances your ability to accumulate more merit, eventually resulting in a small minority rapidly pulling ahead of the pack. Goes with the old adage: turning $100 into $120 is work; turning $100 million into $120 million is inevitable. Perhaps we need a linear meritocratic function.
- gruez 6y ago
  >Perhaps we need a linear meritocratic function. So basically, some way to prevent wealth from being passed across generations?
  - nine_k 6y ago
    Neither Gates, nor Jobs, nor Zuckerberg, nor Bezos, nor Musk inherited their billions. At best they inherited access to the social circles of their parents, and maybe paid-for education (too lazy to check). Knowing the right people is not something you can, or want, to limit or forbid. Should anyone suggest to prevent passing as much as, say, $100k to your child (an approximate price of a university tuition), said anyone will see a massive push back from basically all strata of the society.
    - rmrfstar 6y ago
      Yeah, but they benefited from a system that coerces people to trade their labor for less than it is worth. Zuckerberg is worth >3x the annual income of all surgeons in the US. It is implausible that his net worth reflects his replacement cost. Even PG has said (to Zuckerberg) that if it wasn't him, it would have been someone else.
      - imgabe 6y ago
        The amount of value you can obtain by trading something is by definition what it is worth. If nobody is willing to pay you an amount for something, it's not worth that much. > It is implausible that his net worth reflects his replacement cost. Why should it? His net worth reflects the expected value of the portion of Facebook that he owns. Why would it have anything to do with his replacement cost?
fovc 6y ago
There is a huge definitional challenge here. For more on that see https://slatestarcodex.com/2019/02/25/wage-stagnation-much-more-than-you-wanted-to-know/ https://slatestarcodex.com/2019/02/25/wage-stagnation-much-m... I seldom see addressed how they factor changes in group composition. If the 1% are a constantly changing bunch, the narrative is very different than if it's always the same group of people. I wonder if age composition also has something to do with it (I imagine retiree income differences are much more stark than at 30y)
lostmsu 6y ago
The analysis needs to be deeper to draw any conclusions. For example, ~7% of U.S. GDP in 2017 is "Digital Economy", which basically did not exist in 1975 and does not involve a lot of bottom incomers to produce.
boh 6y ago
Macro-analyses like this aren't particularly representative of any relevant point. For one thing GDP is a poor measure of the general increases of wealth. The US's pivot to services isn't represented in GDP since it only accurately measures physical production (Microsoft/Google/Facebook etc. aren't accurately represented). The actual increases that wind up going into salaries (particularly at the top half) are heavily impacted by these intangible aspects of the economy (so if you isolated this report to just Mark Zuckerberg you'd see billions in wealth but no growth to account for it). At the lower end of the income spectrum, you'd miss the growth of surplus labor. Only 25% of people in the US have an undergraduate degree or higher, and of the people that don't, labor participation is only around 49%. So seeing limited gains in the people who still have jobs isn't that shocking. Whatever general idea of "inequality" this shallow report is meant to convey isn't particularly instructive. Enough data is available to make more interesting analyses. *edited for clarity
- alexpetralia 6y ago
  Can you elaborate on how services aren't factored into GDP? That was not my understanding.
  - boh 6y ago
    Digital services have always been either improperly factored or not factored at all. Software was only included after 1999, tech growth from Google and Facebook are still not included since they offer "free" services.
- JMTQp8lwXL 6y ago
  It would seem services like cloud services, ad services, etc (Google, FB, MSFT) would be included in GDP. > GDP is perhaps the most closely-watched and important economic indicator for both economists and investors alike because it is a representation of the total dollar value of all goods and services produced by an economy over a specific time period. https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/ https://www.investopedia.com/ask/answers/what-is-gdp-why-its...
lend000 6y ago
A more apt comparison would be incomes vs. (GDP / size of labor force). Therefore GDP growth should always be higher than individual income if the size of the labor population is growing. However, the article is more-so comparing how this number has changed over time, which should be even more accentuated if you make the population adjustment, since the population was growing faster in the baby boomer period. The article is just presenting data, but if you're interested in why this phenomenon exists, research Bretton Woods and US inflation figures over the 20th century to the present. Surprise: when you make your currency inflationary and wealth management becomes more complex than saving money in a mattress, those at the top will fare exponentially better than those at the bottom. Working class people shouldn't be forced to become "financially literate" to accumulate meaningful wealth (which is simply not realistic -- public market investing is game theory and some elements of it are zero-sum), but in today's society it's a prerequisite.
oblib 6y ago
The charts look a lot different when you measure worker productivity vs income.
jonhohle 6y ago
Odd to see no discussion of gold. In 1971 the dollar began to float in relation to gold. For most people operating in the realm of dollars their net worth decreases as the dollar price deviates from gold. For wealthy individuals, most of their wealth is not in dollars but in property and equities. As the value of the dollar decreases, asset prices increase - great if you own assets, bad if you just own dollars. Not that gold is the be-all, end-all of real money, but in the past when people owned dollars, they effectively owned a commodity with utility. Meanwhile, at the top, the wealthy are largely paid in equity with a much smaller portion of income in dollars.
- devdas 6y ago
  The US dollar is backed by oil selling nations only being willing to sell in USD.
deleted 6y ago
[deleted]

I really like this analysis! Given this hypothetical income growth, what would the distribution of wealth look like today? As far as I know, the distribution of wealth is even more skewed in favour of the rich, with some fraction of people at the bottom having 'negative wealth' i.e. more debts than assets. Wealth also seems to have a compounding effect, in that richer people have a higher savings rate and access to better investment opportunities. So would more equal income growth necessarily lead to a more equal wealth distribution, or are there other factors to account for?

User23 6y ago

You’d have economic prosperity like in the USA between 1945 and 1970.

danesparza 6y ago
Spoiler alert!
klipt 6y ago
Wasn't that the result of a unique world order where the USA was the only industrialized country not recovering from huge war damage? Doesn't seem like something you could replicate worldwide. Not all countries can be winners all the time.
boh 6y ago
Highly unlikely. Productivity growth engendered higher incomes, not the other way around. The 70's is when that growth came to an end.
- User23 6y ago
  Up until about 1970 workers wages and productivity grew equally, but then while productivity continued growing at the same rate it had been, inflation adjusted real wages plateaued and haven’t much risen since.[1] [1] https://www.epi.org/publication/charting-wage-stagnation/ https://www.epi.org/publication/charting-wage-stagnation/ (see figure 2)

hliyan 6y ago

I always like to say that we live in an exponential meritocracy, where your accumulated merit enhances your ability to accumulate more merit, eventually resulting in a small minority rapidly pulling ahead of the pack. Goes with the old adage: turning $100 into $120 is work; turning $100 million into $120 million is inevitable. Perhaps we need a linear meritocratic function.

gruez 6y ago
>Perhaps we need a linear meritocratic function. So basically, some way to prevent wealth from being passed across generations?
- nine_k 6y ago
  Neither Gates, nor Jobs, nor Zuckerberg, nor Bezos, nor Musk inherited their billions. At best they inherited access to the social circles of their parents, and maybe paid-for education (too lazy to check). Knowing the right people is not something you can, or want, to limit or forbid. Should anyone suggest to prevent passing as much as, say, $100k to your child (an approximate price of a university tuition), said anyone will see a massive push back from basically all strata of the society.
  - rmrfstar 6y ago
    Yeah, but they benefited from a system that coerces people to trade their labor for less than it is worth. Zuckerberg is worth >3x the annual income of all surgeons in the US. It is implausible that his net worth reflects his replacement cost. Even PG has said (to Zuckerberg) that if it wasn't him, it would have been someone else.
    - imgabe 6y ago
      The amount of value you can obtain by trading something is by definition what it is worth. If nobody is willing to pay you an amount for something, it's not worth that much. > It is implausible that his net worth reflects his replacement cost. Why should it? His net worth reflects the expected value of the portion of Facebook that he owns. Why would it have anything to do with his replacement cost?

fovc 6y ago

There is a huge definitional challenge here. For more on that see https://slatestarcodex.com/2019/02/25/wage-stagnation-much-more-than-you-wanted-to-know/ https://slatestarcodex.com/2019/02/25/wage-stagnation-much-m... I seldom see addressed how they factor changes in group composition. If the 1% are a constantly changing bunch, the narrative is very different than if it's always the same group of people. I wonder if age composition also has something to do with it (I imagine retiree income differences are much more stark than at 30y)

lostmsu 6y ago

The analysis needs to be deeper to draw any conclusions. For example, ~7% of U.S. GDP in 2017 is "Digital Economy", which basically did not exist in 1975 and does not involve a lot of bottom incomers to produce.

boh 6y ago

Macro-analyses like this aren't particularly representative of any relevant point. For one thing GDP is a poor measure of the general increases of wealth. The US's pivot to services isn't represented in GDP since it only accurately measures physical production (Microsoft/Google/Facebook etc. aren't accurately represented). The actual increases that wind up going into salaries (particularly at the top half) are heavily impacted by these intangible aspects of the economy (so if you isolated this report to just Mark Zuckerberg you'd see billions in wealth but no growth to account for it). At the lower end of the income spectrum, you'd miss the growth of surplus labor. Only 25% of people in the US have an undergraduate degree or higher, and of the people that don't, labor participation is only around 49%. So seeing limited gains in the people who still have jobs isn't that shocking. Whatever general idea of "inequality" this shallow report is meant to convey isn't particularly instructive. Enough data is available to make more interesting analyses. *edited for clarity

alexpetralia 6y ago
Can you elaborate on how services aren't factored into GDP? That was not my understanding.
- boh 6y ago
  Digital services have always been either improperly factored or not factored at all. Software was only included after 1999, tech growth from Google and Facebook are still not included since they offer "free" services.
JMTQp8lwXL 6y ago
It would seem services like cloud services, ad services, etc (Google, FB, MSFT) would be included in GDP. > GDP is perhaps the most closely-watched and important economic indicator for both economists and investors alike because it is a representation of the total dollar value of all goods and services produced by an economy over a specific time period. https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/ https://www.investopedia.com/ask/answers/what-is-gdp-why-its...

lend000 6y ago

A more apt comparison would be incomes vs. (GDP / size of labor force). Therefore GDP growth should always be higher than individual income if the size of the labor population is growing. However, the article is more-so comparing how this number has changed over time, which should be even more accentuated if you make the population adjustment, since the population was growing faster in the baby boomer period. The article is just presenting data, but if you're interested in why this phenomenon exists, research Bretton Woods and US inflation figures over the 20th century to the present. Surprise: when you make your currency inflationary and wealth management becomes more complex than saving money in a mattress, those at the top will fare exponentially better than those at the bottom. Working class people shouldn't be forced to become "financially literate" to accumulate meaningful wealth (which is simply not realistic -- public market investing is game theory and some elements of it are zero-sum), but in today's society it's a prerequisite.

oblib 6y ago

The charts look a lot different when you measure worker productivity vs income.

jonhohle 6y ago

Odd to see no discussion of gold. In 1971 the dollar began to float in relation to gold. For most people operating in the realm of dollars their net worth decreases as the dollar price deviates from gold. For wealthy individuals, most of their wealth is not in dollars but in property and equities. As the value of the dollar decreases, asset prices increase - great if you own assets, bad if you just own dollars. Not that gold is the be-all, end-all of real money, but in the past when people owned dollars, they effectively owned a commodity with utility. Meanwhile, at the top, the wealthy are largely paid in equity with a much smaller portion of income in dollars.

devdas 6y ago
The US dollar is backed by oil selling nations only being willing to sell in USD.

deleted 6y ago

[deleted]