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Income and wealth are not the same thing. Wealth is a measure of total assets, while income is annual wages and investment income. A lot of high income people

Income and wealth are not the same thing. Wealth is a measure of total assets, while income is annual wages and investment income. A lot of high income people carry huge student loan and housing debt and are not wealthy.

mikeash 13y ago
Housing debt won't drag your total assets down unless you happened to buy a house that's now underwater. The usual situation is for the difference of house value and mortgage amount to be significantly positive. Income and wealth aren't the same thing, but they are highly correlated.
- Afforess 13y ago
  >Income and wealth aren't the same thing, but they are highly correlated. No they are not. According to the US Treasury: "These low realized rates of return call into serious question the use of realized income from capital as part of any measure of well-being or ability-to-pay. For owners of capital, economic income may have little relationship to realized income, and rates of realization may vary according to the assets they hold." According to the Federal Reserve: "...very wealthy people try quite hard to minimize their income." [1] http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/ota50.pdf http://www.treasury.gov/resource-center/tax-policy/tax-analy... [2] http://www.federalreserve.gov/econresdata/scf/files/wealthincome7web.pdf http://www.federalreserve.gov/econresdata/scf/files/wealthin...
  - mjn 13y ago
    They are actually quite correlated. Your links argue that there are cases where wealthy people don't have high income and vice-versa, but that doesn't disprove the quite strong general trend. See table 5 (pg. 36) here, which shows both net worth by income percentile, and income by net worth percentile, to see the strong relationship between being high-net-worth and high-income: http://www.federalreserve.gov/pubs/feds/2009/200913/200913pap.pdf http://www.federalreserve.gov/pubs/feds/2009/200913/200913pa... Example numbers: the top 1% of 2007 income-earners held 26% of U.S. wealth, and the top 1% of households by net worth in 2006 earned 16% of the year's income. Meanwhile, the bottom 50% of income-earners held only 14% of U.S. wealth, and the bottom 50% by net worth earned only 22% of U.S. income. The general trend holds in the in-between categories as well: the 95-99th percentile of incomes hold about twice as much wealth as the 90-95th percentile, etc. So the relationship is not perfect, but taking the groups in aggregate, higher-income-earners control considerably more wealth than lower-income-earners. Some of the later figures in the document explicitly plot some ratios.
    - Afforess 13y ago
      The correlation exists, but is not extremely strong, as the GP stated, which is what my point was. I never said there was no correlation.
      - mjn 13y ago
        How is it "not extremely strong"? If there were no correlation, you would expect the top 1% of income earners to hold 1% of net worth, because there's no expected relationship between being high in income and high in net worth. If there were a correlation but a weak one, you might expect them to own a few times the uncorrelated amount. Maybe they'd own 2% of U.S. assets (twice the otherwise expected amount), maybe even 5% (five times the expected amount). Either of those would be enough to establish a clear relationship, but a weak one. But they actually own 26% of American assets, twenty-six times the amount you'd expect in the uncorrelated case! The top 1% of Americans by income own a full quarter of all the country's assets— stocks, bonds, real-estate, etc. That seems like a pretty strong relationship.
        enoch_r 13y ago
        This just isn't good statistics. The fact that the vast majority of hysterectomies are performed on women doesn't tell us anything about the probability that a randomly selected woman has had a hysterectomy; the fact that the vast majority of wealth is held by the rich doesn't tell us anything about the probability that a randomly selected rich person has a lot of wealth.
        mjn 13y ago
        Err, the fact that the vast majority of hysterectomies are performed on women does tell us that hysterectomies are strongly correlated with sex. That was the initial dispute: whether wealth and income are strongly correlated or not. The distribution is a separate argument, although I'll note that the PDF I linked has some data on the distributions as well, and it does not support the "weak link between them" argument. The proportion of very-wealthy people with low incomes, and very-high-income people with low wealth, is actually quite small.
  - run4yourlives 13y ago
    There's a correlation in the truest sense between income and wealth - your chances of creating wealth increase with the level of your income. This doesn't mean that having a high income means you are wealthy, as you suggest, but that they are correlated.
    - Afforess 13y ago
      GP suggested they were highly correlated, I disagreed. You are stating that they are correlated but not highly so. So you agree with me then?
      - run4yourlives 13y ago
        I think overall it is rather highly correlated, yes. In fact, I'd submit that the number one predictor of having a high net worth would be to also have (or have had) a high income. The easiest formula to build wealth is to have positive result to the income -expenses equation. If you accept that, income and expenses should be the two strongest correlations to large amounts of wealth overall. Considering expenses need to be something north of zero in the best case and income has no upper bound, I'd give income the edge over the two in terms of overall strongest factor.
        enoch_r 13y ago
        You're looking at one year of wealth creation here, and dancing around the obvious third variable: time. Old people are much more wealthy than young people[1] despite having comparable or lower incomes. [1] http://www.pewsocialtrends.org/2011/11/07/the-rising-age-gap-in-economic-well-being/ http://www.pewsocialtrends.org/2011/11/07/the-rising-age-gap...
        run4yourlives 13y ago
        Sure, they are. I'm not sure how that translates into an argument either for or against high income correlating to high wealth. We're all using the same variables for time.
- run4yourlives 13y ago
  Just to add: Income to wealth correlation though is a matter of one being used to create another. The level of one's income has an impact on how easy it is to create wealth. Aside from that though, the two should never be conflated. Many people are able to create wealth with small to moderate incomes, while higher income doesn't mean higher wealth if you also have high expenses.
  - mikeash 13y ago
    I think it's also important to note that the causal relationship goes in both directions. Higher income increases the ability to create wealth, but also higher wealth increases the ability to have a higher income. Certainly, they are very different things, and individual variance can be high, but they are definitely strongly correlated in the population at large.
    - run4yourlives 13y ago
      but also higher wealth increases the ability to have a higher income. This I don't quite agree with. Overall it makes sense but it is not as direct a correlation. Wealth gives you leverage, but only by the weakest of factors can it give you higher income directly. There would always be some sort of intermediate step. There are few ways you can transform wealth directly into income without significant work. (At that point it becomes less a factor of the wealth directly and more you earning an income.) Eg. You are born wealthy and because of that your father knows a lot of people willing to give you an opportunity that a person not born wealthy wouldn't have. This only works if you aren't an idiot, or an alcoholic, etc. If you are, the chances of you turning your own wealth into income which you can then convert back into more wealth is significantly hampered compared to someone without these issues but less starting wealth. If you aren't putting work and effort into exploiting the leverage that wealth provides, you will not create income.
bradleyjg 13y ago
There are few student loan totals large enough to make what is otherwise considered "high income" not wealthy. The difference in lifetime earning between two people, both of whom have a high five figure or low six figure income and good growth potential, one of whom has $150,000 in student loan debt, is not very large. Housing debt isn't relevant unless to wealth unless the house in question is underwater.
- Retric 13y ago
  Don't forget about lost earnings and interest. Med school followed by 250k job vs. 120k withought med school is not as clear of a win as you might think.
  - bradleyjg 13y ago
    So I did a back of the envelope. If you start at a $120,000/yr job at 22 and retire at 65, with increases of 2% a year, you will earn ~$8.3 million nominal over the course of your career. If you start at a $250,000/yr job at age 30 and retire at 65 , with increases of 2% a year, you will earn ~13 million nominal over the course of your career. That doesn't include the (modest) pay during the second half of medical training. The estimated cost of attendance for the most expensive medical schools top out at around $60,000 a year for four years. Assuming you meet the requirements, the federal government will lend you $40,000 of that at 6.8% and the rest at 8.5%. If nothing is paid off until after one's residency, that means our doctor would be starting his career with $330,500 in debt and a $250,000 salary. Meanwhile our petroleum engineer(?) would be earning $140,600 at that point. If the doctor put away the difference every year until his debt was paid off, it would take less than four years.
    - Retric 13y ago
      So at 34 your doctor has zero debt. Let's assume the 120k job is saving 10% at 8%ROI for those 12 years that's worth ~250k at 34 and adds an efective 20k a year in interest. On top of that there paying significantly more in taxes and that lifetime earnings gap is far less meaningful.
cmbaus 13y ago
I wish more people understood this, especially in regard to tax policy.
bconway 13y ago
Exactly this. Likewise, many of us would be unable to pick out many/most of the Millionaires Next Door in a pinch.
dionidium 13y ago
Person A starts with $0. Person B starts with $10,000 and spends it. Now they both have $0. They are not equal.
- YoukaiCountry 13y ago
  That would depend on what person B spent the $10,000 on.
  - dionidium 13y ago
    No, it wouldn't. People with high incomes like to pretend that worthwhile uses of that money -- student loans, school for their kids, a house in a safe neighborhood -- somehow shouldn't count toward their spending. But that's the whole point of money! You get to spend it on the things you think are worthwhile! "I'm not wealthy! I spend my entire (large) income every month!" is a profoundly silly thing to say.
    - run4yourlives 13y ago
      I don't think you understand the concept of wealth and income from an economics perspective. When person B has $10,000 he is wealthier than person A. If person B spends $10,000 he is losing wealth. Depending on how he spends his 10,000, this may result in an overall net gain in his wealth (i.e., an investment, like buying a house) or an overall net loss to his wealth (i.e. a purchase, like buying a car, since cars depreciate). Your wealth is an overall assessment of what you have accumulated. Your wealth is the sum of your current position + (revenue - expenses). Note that your current position can be negative regardless of how many cars, boats and homes you are entitled to use at the moment. This is the situation of many, many Americans at this time. Your income, on the other hand, is simply the revenue. A relatively tiny part of the equation. So it is entirely true that you can have a high income and little to no wealth. While it might seem silly to you from the perspective of someone that is looking at the use of possessions, depreciating or overly-leveraged positions make the statement a perfectly normal thing to say. You might envy the house, but if that house is unable to be leveraged because more is owed to the bank than it is worth, it is actually a net loss when trying to determine wealth. A renter is actually better off than this homeowner. Once you understand this, you'll realize that even with a low income, maximizing wealth creation opportunities is what pays off in the end.
king_jester 13y ago
I don't see this as counter to income and wealth inequality. Certainly there are those with medium to high income whose debts put significant pressure on their lives, but having access to homes and higher education is a big part of the wealth and income inequality in the US, so even having access to those things already means you have a certain level of wealth or privilege that many poor people do not.

mikeash 13y ago

Housing debt won't drag your total assets down unless you happened to buy a house that's now underwater. The usual situation is for the difference of house value and mortgage amount to be significantly positive. Income and wealth aren't the same thing, but they are highly correlated.

Afforess 13y ago
>Income and wealth aren't the same thing, but they are highly correlated. No they are not. According to the US Treasury: "These low realized rates of return call into serious question the use of realized income from capital as part of any measure of well-being or ability-to-pay. For owners of capital, economic income may have little relationship to realized income, and rates of realization may vary according to the assets they hold." According to the Federal Reserve: "...very wealthy people try quite hard to minimize their income." [1] http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/ota50.pdf http://www.treasury.gov/resource-center/tax-policy/tax-analy... [2] http://www.federalreserve.gov/econresdata/scf/files/wealthincome7web.pdf http://www.federalreserve.gov/econresdata/scf/files/wealthin...
- mjn 13y ago
  They are actually quite correlated. Your links argue that there are cases where wealthy people don't have high income and vice-versa, but that doesn't disprove the quite strong general trend. See table 5 (pg. 36) here, which shows both net worth by income percentile, and income by net worth percentile, to see the strong relationship between being high-net-worth and high-income: http://www.federalreserve.gov/pubs/feds/2009/200913/200913pap.pdf http://www.federalreserve.gov/pubs/feds/2009/200913/200913pa... Example numbers: the top 1% of 2007 income-earners held 26% of U.S. wealth, and the top 1% of households by net worth in 2006 earned 16% of the year's income. Meanwhile, the bottom 50% of income-earners held only 14% of U.S. wealth, and the bottom 50% by net worth earned only 22% of U.S. income. The general trend holds in the in-between categories as well: the 95-99th percentile of incomes hold about twice as much wealth as the 90-95th percentile, etc. So the relationship is not perfect, but taking the groups in aggregate, higher-income-earners control considerably more wealth than lower-income-earners. Some of the later figures in the document explicitly plot some ratios.
  - Afforess 13y ago
    The correlation exists, but is not extremely strong, as the GP stated, which is what my point was. I never said there was no correlation.
    - mjn 13y ago
      How is it "not extremely strong"? If there were no correlation, you would expect the top 1% of income earners to hold 1% of net worth, because there's no expected relationship between being high in income and high in net worth. If there were a correlation but a weak one, you might expect them to own a few times the uncorrelated amount. Maybe they'd own 2% of U.S. assets (twice the otherwise expected amount), maybe even 5% (five times the expected amount). Either of those would be enough to establish a clear relationship, but a weak one. But they actually own 26% of American assets, twenty-six times the amount you'd expect in the uncorrelated case! The top 1% of Americans by income own a full quarter of all the country's assets— stocks, bonds, real-estate, etc. That seems like a pretty strong relationship.
      - enoch_r 13y ago
        This just isn't good statistics. The fact that the vast majority of hysterectomies are performed on women doesn't tell us anything about the probability that a randomly selected woman has had a hysterectomy; the fact that the vast majority of wealth is held by the rich doesn't tell us anything about the probability that a randomly selected rich person has a lot of wealth.
        mjn 13y ago
        Err, the fact that the vast majority of hysterectomies are performed on women does tell us that hysterectomies are strongly correlated with sex. That was the initial dispute: whether wealth and income are strongly correlated or not. The distribution is a separate argument, although I'll note that the PDF I linked has some data on the distributions as well, and it does not support the "weak link between them" argument. The proportion of very-wealthy people with low incomes, and very-high-income people with low wealth, is actually quite small.
- run4yourlives 13y ago
  There's a correlation in the truest sense between income and wealth - your chances of creating wealth increase with the level of your income. This doesn't mean that having a high income means you are wealthy, as you suggest, but that they are correlated.
  - Afforess 13y ago
    GP suggested they were highly correlated, I disagreed. You are stating that they are correlated but not highly so. So you agree with me then?
    - run4yourlives 13y ago
      I think overall it is rather highly correlated, yes. In fact, I'd submit that the number one predictor of having a high net worth would be to also have (or have had) a high income. The easiest formula to build wealth is to have positive result to the income -expenses equation. If you accept that, income and expenses should be the two strongest correlations to large amounts of wealth overall. Considering expenses need to be something north of zero in the best case and income has no upper bound, I'd give income the edge over the two in terms of overall strongest factor.
      - enoch_r 13y ago
        You're looking at one year of wealth creation here, and dancing around the obvious third variable: time. Old people are much more wealthy than young people[1] despite having comparable or lower incomes. [1] http://www.pewsocialtrends.org/2011/11/07/the-rising-age-gap-in-economic-well-being/ http://www.pewsocialtrends.org/2011/11/07/the-rising-age-gap...
        run4yourlives 13y ago
        Sure, they are. I'm not sure how that translates into an argument either for or against high income correlating to high wealth. We're all using the same variables for time.
run4yourlives 13y ago
Just to add: Income to wealth correlation though is a matter of one being used to create another. The level of one's income has an impact on how easy it is to create wealth. Aside from that though, the two should never be conflated. Many people are able to create wealth with small to moderate incomes, while higher income doesn't mean higher wealth if you also have high expenses.
- mikeash 13y ago
  I think it's also important to note that the causal relationship goes in both directions. Higher income increases the ability to create wealth, but also higher wealth increases the ability to have a higher income. Certainly, they are very different things, and individual variance can be high, but they are definitely strongly correlated in the population at large.
  - run4yourlives 13y ago
    but also higher wealth increases the ability to have a higher income. This I don't quite agree with. Overall it makes sense but it is not as direct a correlation. Wealth gives you leverage, but only by the weakest of factors can it give you higher income directly. There would always be some sort of intermediate step. There are few ways you can transform wealth directly into income without significant work. (At that point it becomes less a factor of the wealth directly and more you earning an income.) Eg. You are born wealthy and because of that your father knows a lot of people willing to give you an opportunity that a person not born wealthy wouldn't have. This only works if you aren't an idiot, or an alcoholic, etc. If you are, the chances of you turning your own wealth into income which you can then convert back into more wealth is significantly hampered compared to someone without these issues but less starting wealth. If you aren't putting work and effort into exploiting the leverage that wealth provides, you will not create income.

bradleyjg 13y ago

There are few student loan totals large enough to make what is otherwise considered "high income" not wealthy. The difference in lifetime earning between two people, both of whom have a high five figure or low six figure income and good growth potential, one of whom has $150,000 in student loan debt, is not very large. Housing debt isn't relevant unless to wealth unless the house in question is underwater.

Retric 13y ago
Don't forget about lost earnings and interest. Med school followed by 250k job vs. 120k withought med school is not as clear of a win as you might think.
- bradleyjg 13y ago
  So I did a back of the envelope. If you start at a $120,000/yr job at 22 and retire at 65, with increases of 2% a year, you will earn ~$8.3 million nominal over the course of your career. If you start at a $250,000/yr job at age 30 and retire at 65 , with increases of 2% a year, you will earn ~13 million nominal over the course of your career. That doesn't include the (modest) pay during the second half of medical training. The estimated cost of attendance for the most expensive medical schools top out at around $60,000 a year for four years. Assuming you meet the requirements, the federal government will lend you $40,000 of that at 6.8% and the rest at 8.5%. If nothing is paid off until after one's residency, that means our doctor would be starting his career with $330,500 in debt and a $250,000 salary. Meanwhile our petroleum engineer(?) would be earning $140,600 at that point. If the doctor put away the difference every year until his debt was paid off, it would take less than four years.
  - Retric 13y ago
    So at 34 your doctor has zero debt. Let's assume the 120k job is saving 10% at 8%ROI for those 12 years that's worth ~250k at 34 and adds an efective 20k a year in interest. On top of that there paying significantly more in taxes and that lifetime earnings gap is far less meaningful.

cmbaus 13y ago

I wish more people understood this, especially in regard to tax policy.

bconway 13y ago

Exactly this. Likewise, many of us would be unable to pick out many/most of the Millionaires Next Door in a pinch.

dionidium 13y ago

Person A starts with $0. Person B starts with $10,000 and spends it. Now they both have $0. They are not equal.

YoukaiCountry 13y ago
That would depend on what person B spent the $10,000 on.
- dionidium 13y ago
  No, it wouldn't. People with high incomes like to pretend that worthwhile uses of that money -- student loans, school for their kids, a house in a safe neighborhood -- somehow shouldn't count toward their spending. But that's the whole point of money! You get to spend it on the things you think are worthwhile! "I'm not wealthy! I spend my entire (large) income every month!" is a profoundly silly thing to say.
  - run4yourlives 13y ago
    I don't think you understand the concept of wealth and income from an economics perspective. When person B has $10,000 he is wealthier than person A. If person B spends $10,000 he is losing wealth. Depending on how he spends his 10,000, this may result in an overall net gain in his wealth (i.e., an investment, like buying a house) or an overall net loss to his wealth (i.e. a purchase, like buying a car, since cars depreciate). Your wealth is an overall assessment of what you have accumulated. Your wealth is the sum of your current position + (revenue - expenses). Note that your current position can be negative regardless of how many cars, boats and homes you are entitled to use at the moment. This is the situation of many, many Americans at this time. Your income, on the other hand, is simply the revenue. A relatively tiny part of the equation. So it is entirely true that you can have a high income and little to no wealth. While it might seem silly to you from the perspective of someone that is looking at the use of possessions, depreciating or overly-leveraged positions make the statement a perfectly normal thing to say. You might envy the house, but if that house is unable to be leveraged because more is owed to the bank than it is worth, it is actually a net loss when trying to determine wealth. A renter is actually better off than this homeowner. Once you understand this, you'll realize that even with a low income, maximizing wealth creation opportunities is what pays off in the end.

king_jester 13y ago

I don't see this as counter to income and wealth inequality. Certainly there are those with medium to high income whose debts put significant pressure on their lives, but having access to homes and higher education is a big part of the wealth and income inequality in the US, so even having access to those things already means you have a certain level of wealth or privilege that many poor people do not.