6 ms·

When many people have few assets, and few people have many, and you cause the value of assets to go up, the nominal gap between two is larger, but the relative

When many people have few assets, and few people have many, and you cause the value of assets to go up, the nominal gap between two is larger, but the relative amounts are the same. This is basic math. Suppose we have two individuals who experience 25% growth due to QE: Person A: $1,000 * 25% growth = $1,250 Person B: $1,000,000 * 25% growth = $1,250,000 Originally, the wealth gap between A and B was 1000:1. It remains 1000:1 after the asset appreciation. However, because wage income has long been stagnant, it becomes increasingly difficult for the poorer person to play catch up, because labor income can't scale in the way capital can. Both the proportional change and real change are worth considering when it comes to setting public policy.

kranke155 5y ago
Thomas Picketty - didn’t he show returns on assets far outgain salary growth ?
- bhupy 5y ago
  That was his thesis, but it's since been questioned/refuted: https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf > Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests. Results are robust to several alternative estimates of r-g. https://www.economist.com/briefing/2019/11/28/economists-are-rethinking-the-numbers-on-inequality https://www.economist.com/briefing/2019/11/28/economists-are... http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequality.pdf http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequali... > Top income share estimates based only on individual tax returns, such as Piketty and Saez (2003), are biased by tax-base changes, major social changes, and missing income sources. Addressing these issues requires numerous assumptions, especially for broadening income beyond that reported on tax returns. This paper shows the effects of adjusting for technical tax issues and the sensitivity to alternative assumptions for distributing missing income sources. Our results suggest that top income shares are lower than other tax-based estimates, and since the early 1960s, increasing government transfers and tax progressivity resulted in little change in after-tax top income shares.
  - kranke155 5y ago
    I am not familiar with any complete refutation of his work. Some questions here and there
  - throw0101a 5y ago
    Piketty on Góes's IMF paper: > Piketty's response[55] noted, however, that Góes used measures of income inequality rather than wealth inequality, and inappropriately took the interest rate on sovereign debt as his index of the rate of return on capital, which makes his results not commensurate with those of Piketty's study. * https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century#Criticism https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce... [55] FR: https://www.lesechos.fr/2016/09/thomas-piketty-repond-a-letude-du-fmi-qui-contredisait-son-livre-216953 https://www.lesechos.fr/2016/09/thomas-piketty-repond-a-letu...
    - bhupy 5y ago
      Yeah the Auten-Splinter research is the most contemporary critique, relative to the 2014 IMF paper, and is the one that's most widely accepted now. Piketty, Saez, et al have yet to really address anything there.
- imtringued 5y ago
  Yields have gone down as assets go up. Interest has gone down. Only land follows that pattern.
nly 5y ago
Compounding returns makes growth exponential. When you look at it that way the rich guy is just further up the curve, but you're on the same trajectory. In your simple example (25% returns annualised) he's only 31 years ahead! Don't you just feel better now?
- 88913527 5y ago
  Let's do the math for compounding returns. Suppose 7% growth for 30 years, same Person A and B: $1000 * (1.07 ^ 30) = 7,612.25 $1,000,000 * (1.07 ^ 30) = 7,612,255.04 Proportionally, It's still 1000:1. So we see compounding doesn't change the relative difference. But now we're getting to absolute gap that's simply uncoverable by wage income, unless you can land in the professional management class, which effectively sets its own wages (board members voting for compensation packages for one another).
  - notahacker 5y ago
    If wages also go up by 7% then the absolute gap definitely is uncoverable by wage income. Sure, they often don't but the reason they don't has little to do with QE. After all, the entire point of QE and monetary stimulus in general is central banks are concerned that not enough jobs are being created and real wage cuts and layoffs will result. And in that scenario where credit is expensive and businesses are looking at layoffs, our wealthy investor is still getting 7% returns, just from offering expensive short term credit to struggling businesses rather than seeing the long term shareholder value of thriving businesses rise. But the worker is even further from catching them up, because they're struggling to find a job.
  - deleted 5y ago
    [deleted]
  - nly 5y ago
    Sure, they'll always be ahead, but 1000x as wealth sounds pretty impossible compared to 'a lifetime or so of compound returns'. Most people only need to build a $2-3M pot to be financially independent, be able to stop working, and still live better than most working Americans, which is the biggest quality of life improvement there is in acquiring wealth. The utility of wealth falls off a cliff pretty quickly. Replacing a $200K/yr salary from passive income in perpetuity with a good level of certainty would require a pot of $6-7M At 7% (above inflation), most people still need to spend 30 years saving 30% of their salary before they can reach a level (30x) that can replace it. 15% over 40 years also works.
bhupy 5y ago
That's the logical hypothesis, but the article we're commenting on seems to show that it's more complicated. FTA: "The logical case for why the Fed’s activities cause wealth concentration is that low interest rates and high levels of QE tend to boost asset prices, such as stocks and real estate, which are primarily owned by the wealthy. By making homes and stocks more expensive and unaffordable, it widens the wealth gap between those who owned those assets before the Fed began its QE vs those who were not yet significant asset holders when this occurred. There are other more nuanced arguments, but let’s start with that one, because that’s the main one. If that’s the case, and QE is indeed a powerful force for wealth concentration, we should see that the nations that have the lowest interest rates and that have performed the most QE relative to their GDP, have the highest levels of wealth inequality, right? In reality, we find the opposite. ... The regions that did the most QE relative to their GDP, and that have had lower interest rates for longer, have less wealth inequality, not more, as measured by the ratio of the mean wealth divided by the median wealth. If the prior theory was true, we should have seen the opposite. More of a correlation, rather than an inverse correlation. ... I’m not making the argument that QE reduces wealth concentration, because that’s not the case either. Instead the point is, it’s complicated. QE and interest rates by themselves are significantly uncorrelated (or even inversely correlated) variables vs how much wealth concentration a country has, when comparing between countries. That is an uncommon view, but that’s simply how the math works out. Clearly we need to look at the nuances."
- whimsicalism 5y ago
  It seems like many people in this thread are missing that poor people are often underwater in debt, so lower rates help them. There is a reason most of the farmer uprisings in the early US were over wanting more inflation rather than deflationary policy that made the value of their debt payments higher.
  - ruined 5y ago
    poor people don't get lower rates. they get payday loans and 19% credit cards, or a tent. inflation is "good" for debts if your budget is otherwise balanced and your income rises apace, but if either is not the case inflation will only depress purchasing power. historical farmer revolts were interested in higher inflation because they had land, a real asset, and sold crops, real commodities, that provided appropriate income. modern poor people generally have zero assets.
tomp 5y ago
Until next month, when person A has $0 compounding at 25%, and person B has $1 249 000 compounding at 25% (a.k.a. cost of living).
iovrthoughtthis 5y ago
as is traditional in brief economic analysis, time is not accounted for here.
certnlyuncertn 5y ago
Your scenario is missing the very common case where people have exactly zero assets. If you take that (common) case into consideration it is very clear that both the nominal gap and the relative gap increases.

kranke155 5y ago

Thomas Picketty - didn’t he show returns on assets far outgain salary growth ?

bhupy 5y ago
That was his thesis, but it's since been questioned/refuted: https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf > Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests. Results are robust to several alternative estimates of r-g. https://www.economist.com/briefing/2019/11/28/economists-are-rethinking-the-numbers-on-inequality https://www.economist.com/briefing/2019/11/28/economists-are... http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequality.pdf http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequali... > Top income share estimates based only on individual tax returns, such as Piketty and Saez (2003), are biased by tax-base changes, major social changes, and missing income sources. Addressing these issues requires numerous assumptions, especially for broadening income beyond that reported on tax returns. This paper shows the effects of adjusting for technical tax issues and the sensitivity to alternative assumptions for distributing missing income sources. Our results suggest that top income shares are lower than other tax-based estimates, and since the early 1960s, increasing government transfers and tax progressivity resulted in little change in after-tax top income shares.
- kranke155 5y ago
  I am not familiar with any complete refutation of his work. Some questions here and there
- throw0101a 5y ago
  Piketty on Góes's IMF paper: > Piketty's response[55] noted, however, that Góes used measures of income inequality rather than wealth inequality, and inappropriately took the interest rate on sovereign debt as his index of the rate of return on capital, which makes his results not commensurate with those of Piketty's study. * https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century#Criticism https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce... [55] FR: https://www.lesechos.fr/2016/09/thomas-piketty-repond-a-letude-du-fmi-qui-contredisait-son-livre-216953 https://www.lesechos.fr/2016/09/thomas-piketty-repond-a-letu...
  - bhupy 5y ago
    Yeah the Auten-Splinter research is the most contemporary critique, relative to the 2014 IMF paper, and is the one that's most widely accepted now. Piketty, Saez, et al have yet to really address anything there.
imtringued 5y ago
Yields have gone down as assets go up. Interest has gone down. Only land follows that pattern.

nly 5y ago

Compounding returns makes growth exponential. When you look at it that way the rich guy is just further up the curve, but you're on the same trajectory. In your simple example (25% returns annualised) he's only 31 years ahead! Don't you just feel better now?

88913527 5y ago
Let's do the math for compounding returns. Suppose 7% growth for 30 years, same Person A and B: $1000 * (1.07 ^ 30) = 7,612.25 $1,000,000 * (1.07 ^ 30) = 7,612,255.04 Proportionally, It's still 1000:1. So we see compounding doesn't change the relative difference. But now we're getting to absolute gap that's simply uncoverable by wage income, unless you can land in the professional management class, which effectively sets its own wages (board members voting for compensation packages for one another).
- notahacker 5y ago
  If wages also go up by 7% then the absolute gap definitely is uncoverable by wage income. Sure, they often don't but the reason they don't has little to do with QE. After all, the entire point of QE and monetary stimulus in general is central banks are concerned that not enough jobs are being created and real wage cuts and layoffs will result. And in that scenario where credit is expensive and businesses are looking at layoffs, our wealthy investor is still getting 7% returns, just from offering expensive short term credit to struggling businesses rather than seeing the long term shareholder value of thriving businesses rise. But the worker is even further from catching them up, because they're struggling to find a job.
- deleted 5y ago
  [deleted]
- nly 5y ago
  Sure, they'll always be ahead, but 1000x as wealth sounds pretty impossible compared to 'a lifetime or so of compound returns'. Most people only need to build a $2-3M pot to be financially independent, be able to stop working, and still live better than most working Americans, which is the biggest quality of life improvement there is in acquiring wealth. The utility of wealth falls off a cliff pretty quickly. Replacing a $200K/yr salary from passive income in perpetuity with a good level of certainty would require a pot of $6-7M At 7% (above inflation), most people still need to spend 30 years saving 30% of their salary before they can reach a level (30x) that can replace it. 15% over 40 years also works.

bhupy 5y ago

That's the logical hypothesis, but the article we're commenting on seems to show that it's more complicated. FTA: "The logical case for why the Fed’s activities cause wealth concentration is that low interest rates and high levels of QE tend to boost asset prices, such as stocks and real estate, which are primarily owned by the wealthy. By making homes and stocks more expensive and unaffordable, it widens the wealth gap between those who owned those assets before the Fed began its QE vs those who were not yet significant asset holders when this occurred. There are other more nuanced arguments, but let’s start with that one, because that’s the main one. If that’s the case, and QE is indeed a powerful force for wealth concentration, we should see that the nations that have the lowest interest rates and that have performed the most QE relative to their GDP, have the highest levels of wealth inequality, right? In reality, we find the opposite. ... The regions that did the most QE relative to their GDP, and that have had lower interest rates for longer, have less wealth inequality, not more, as measured by the ratio of the mean wealth divided by the median wealth. If the prior theory was true, we should have seen the opposite. More of a correlation, rather than an inverse correlation. ... I’m not making the argument that QE reduces wealth concentration, because that’s not the case either. Instead the point is, it’s complicated. QE and interest rates by themselves are significantly uncorrelated (or even inversely correlated) variables vs how much wealth concentration a country has, when comparing between countries. That is an uncommon view, but that’s simply how the math works out. Clearly we need to look at the nuances."

whimsicalism 5y ago
It seems like many people in this thread are missing that poor people are often underwater in debt, so lower rates help them. There is a reason most of the farmer uprisings in the early US were over wanting more inflation rather than deflationary policy that made the value of their debt payments higher.
- ruined 5y ago
  poor people don't get lower rates. they get payday loans and 19% credit cards, or a tent. inflation is "good" for debts if your budget is otherwise balanced and your income rises apace, but if either is not the case inflation will only depress purchasing power. historical farmer revolts were interested in higher inflation because they had land, a real asset, and sold crops, real commodities, that provided appropriate income. modern poor people generally have zero assets.

tomp 5y ago

Until next month, when person A has $0 compounding at 25%, and person B has $1 249 000 compounding at 25% (a.k.a. cost of living).

iovrthoughtthis 5y ago

as is traditional in brief economic analysis, time is not accounted for here.

certnlyuncertn 5y ago

Your scenario is missing the very common case where people have exactly zero assets. If you take that (common) case into consideration it is very clear that both the nominal gap and the relative gap increases.