6 ms·

Whenever I read an article about income inequality, I can't help but ponder the phrase "the rich get richer." Consider the process by which people acquire extre

by jfasi 13y ago

Whenever I read an article about income inequality, I can't help but ponder the phrase "the rich get richer." Consider the process by which people acquire extreme wealth: invest your money in various vehicles, hopefully collect gains (money, prestige, experience), reinvest the gains. This process doesn't by any means guarantee wealth, but it can be very kind to those blessed with good judgement, good fortune, and initial excess capital. In a discussion of income inequality, the most relevant factor is excess capital. For those on the bottom of the ladder, whose money goes toward basic expenses, this potentially virtuous cycle is completely out of reach. Their money is best spent on purchasing stability rather than attempting to secure wealth. For those in the middle nurturing already-comfortable lives, the upside of shooting the moon in an attempt to gain wealth is often outweighed by the risk of sustaining financially disruptive losses, as well as the discomfort inherent in turning away from a lifestyle that pleases them. [1] Then there are the wealthy. I'm not talking about the faux-wealthy whose lifestyle preferences drive them to buy Maseratis and condos on credit and spending the rest of their lives wearing golden handcuffs. I'm talking about those who have money left over after they've secured themselves a comfortable lifestyle. They have excess capital. Ten thousand dollars can go into the stock market, a hundred thousand dollars can go into a small business, a million dollars can go into a more sizable business, ten million can go into multiple sizable businesses, etc. The opportunities for growth scale with the size of your disposable income. If you take this view, it suddenly becomes stupidly obvious why the one percent of the one percent makes so much more than the ninety-nine percent of the one percent: they had more to begin with. I'm all but certain if you zoom in on the the one percent of the one percent of the one percent, you'll see a similar disparity. Unrelated corollary: This also helps to explain both why traditional entrepreneurs are older, and why tech entrepreneurs tend to be younger: non-tech leaders spend their lives amassing wealth, techies are so in demand they get a good dose of it when they're young. Although the acquisition appetites of behemoths like Google and Facebook certainly don't hurt. [1] I'm so certain someone will respond to this comment by quoting that one study where happiness flattens around like $75,000 that I won't even bother finding it myself.

microcolonel 13y ago
Keep in mind that many people who believe they're hitting the limits of their means simply don't have the personal will(not that it's their fault) to pick up that book which would tell them they could save enough and invest pretty well with some basic knowledge. And typically they wouldn't need to sacrifice quality of life. I know lots of young people here in Canada at least work paycheck-to-paycheck but instead of buying stocks or at least saving, they will spend their unaccounted money on booze and video games(if they have any at all), it wouldn't take much for them to save up a couple thousand bucks and invest in something better for themselves. They just don't want to, or don't know how to make that sort of decision. Then of course there are people who are ACTUALLY poor, that's where my empathy starts. I recently helped a homeless man work the computers at the local library(not that I consider that a significant act in itself), and I know just how hard it is to work with people who are seriously SOL; they're even resistant to help. That said, I don't think being harder on billionaires is going to help people down on their luck, it's only going to serve the egos of those who have no idea what it means to be in either of those positions. EDIT: It seems people misunderstood what I meant by investment. I include in this investing in things like transportation, raw materials, and (if applicable) time off to pursue greater potential, and not just playing markets and buying shares.
- rdudek 13y ago
  That is true. Best thing to do is start with small changes so that you don't even notice it and all of a sudden, your bank account has more money in it. Also, which book would you recommend?
  - npsimons 13y ago
    Also, which book would you recommend? Seconded; while I am very skeptical of the "invest to get (a little) rich(er)" approach[1], I'm open to and curious of what books the GP considers good. [1] - Every single way of investing that I've looked at is either (1) not worth it (doesn't even beat inflation) and/or (2) more work than it's worth (I've already got hobbies I like; why should I waste my unpaid time playing even more into the rat race by tracking markets and probably never making a profit?)
thenomad 13y ago
And today offers more opportunities for rapid scaling of successful investments (key word: rapid) than ever before - which is why the rich are getting richer faster.
kingraoul3 13y ago
But this analysis doesn't explain the change in the share of income the %1 has accumulated to itself in the last 30 years. In other words if this analysis were complete, we would expect to see straight line growth.
- cadlin 13y ago
  There is a book called "Capital in the Twenty-First Century" currently being discussed in the economics world that examines this phenomenon (wealth, however, not income). The tl;dr is that World War I, The Great Depression, and World War II distorted wealth accumulation, and the world is back on track to straight line wealth capture. A more detailed analysis: http://www.nytimes.com/2014/01/29/opinion/capitalism-vs-democracy.html?_r=0 http://www.nytimes.com/2014/01/29/opinion/capitalism-vs-demo...
- LanceH 13y ago
  Nor does it track what happened to the 1% from 30 years ago and whether they are even the same 1% today. Until this fact is acknowledged, they have no business even bringing up numbers. Another possible point of confusion: Maybe the top 1% aren't merely wealthier, maybe the top .1% is more numerous. Wouldn't that be good news?
  - roc 13y ago
    > "maybe the top .1% is more numerous." You may want to rethink that.
- JamisonM 13y ago
  Why? As excess capital accumulates it compounds earning potential by creating more excess capital with new earnings. Given a favourable environment one would expect something greater than straight line growth, right?
afterburner 13y ago
"but it can be very kind to those blessed with good judgement, good fortune, and initial excess capital" Those with excess capital can purchase good judgement, which increases your odds of good fortune. In fact purchasing good judgement may not even be necessary, since you can probably get buy simply copying what other wealthy are doing (ie. the people you talk to most). So all you really need is excess capital, and not have really bad judgement.
- brazzy 13y ago
  Is that you, Bernie Madoff?
  - afterburner 13y ago
    Touche. Hey, apparently they've recovered a third of the money lost, and found half of it. More than I would have thought.
- marcosdumay 13y ago
  You have to make a judgement about buying or using your judgment, and still judge the people you are buying it from, or copying it for free. God judgement is essential from anybody from getting from X to Y where Y > X.
kaa2102 13y ago
The "rich get richer" is not always a given. When the top tax rate was 90% the "rich stay rich". Robert Reich addressed growing income inequality and the virtuous cycle in his recent documentary inequalityforall.com. Taxation, when used effectively, can encourage individuals with low or no marginal propensity to consume to focus on consuming rather than investing or sitting on piles of cash.
ogrisel 13y ago
Agreed but that alone does not explain all the plot [1]: the slope of all the curves was zero or even slightly negative until 1980. Then the share of the top 0.01% started to climb very significantly. I don't know what could explain such a change. Were the capital gains taxes prior to 1980 high enough to ensure a strong enough redistribution of the wealth creation so that the shares were almost stable over time? Arguably the maximum capital gains rate has decreased after 1980 [2]. But could that explain everything? Or maybe the rich US residents are getting much better at finding creative ways to evade US taxes nowadays (legally or not)? [1] http://cdn.theatlantic.com/newsroom/img/posts/houseofdebt_SaezZucman21.png http://cdn.theatlantic.com/newsroom/img/posts/houseofdebt_Sa... [2] http://en.wikipedia.org/wiki/File:Top_Capital_Gains_Tax_Rates_and_Economic_Growth_1950-2011.jpg http://en.wikipedia.org/wiki/File:Top_Capital_Gains_Tax_Rate...
- DougWebb 13y ago
  "Trickle-Down Economics" became a big thing right about that time. Also massive military-industrial-complex investment. Between them they probably accounted for a big stock market boom, and based on the article most of that boom probably went to the 0.01% bankers and investors.
deleted 13y ago
[deleted]
api 13y ago
While what you say is certainly true, I also wonder about political aspects to this. To what extent is the extreme hockey stick here indirect evidence of the existence of an oligarchy with the ability to subvert or sidestep (e.g. access to Federal contracts, Fed bailouts and 0% interest loans, etc.) the market?
nostrademons 13y ago
I'm reminded of this study: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.10.1356&rep=rep1&type=pdf http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.10.... Which modified wealth as a stochastic multiplicative process beyond a certain threshold (and that threshold was basically the lower end of "upper middle class") and derived results that match the observed distribution very closely.
chalst 13y ago
Since I think it might not be clear, Amir Sufi's analysis concerns wealth, not income - so the 3rd graph in the article is about wealth, but the first two are about income. The Atlantic article is pretty bad about making this clear, though other reporting of Sufi's research is better.

by jfasi 13y ago

microcolonel 13y ago

Keep in mind that many people who believe they're hitting the limits of their means simply don't have the personal will(not that it's their fault) to pick up that book which would tell them they could save enough and invest pretty well with some basic knowledge. And typically they wouldn't need to sacrifice quality of life. I know lots of young people here in Canada at least work paycheck-to-paycheck but instead of buying stocks or at least saving, they will spend their unaccounted money on booze and video games(if they have any at all), it wouldn't take much for them to save up a couple thousand bucks and invest in something better for themselves. They just don't want to, or don't know how to make that sort of decision. Then of course there are people who are ACTUALLY poor, that's where my empathy starts. I recently helped a homeless man work the computers at the local library(not that I consider that a significant act in itself), and I know just how hard it is to work with people who are seriously SOL; they're even resistant to help. That said, I don't think being harder on billionaires is going to help people down on their luck, it's only going to serve the egos of those who have no idea what it means to be in either of those positions. EDIT: It seems people misunderstood what I meant by investment. I include in this investing in things like transportation, raw materials, and (if applicable) time off to pursue greater potential, and not just playing markets and buying shares.

rdudek 13y ago
That is true. Best thing to do is start with small changes so that you don't even notice it and all of a sudden, your bank account has more money in it. Also, which book would you recommend?
- npsimons 13y ago
  Also, which book would you recommend? Seconded; while I am very skeptical of the "invest to get (a little) rich(er)" approach[1], I'm open to and curious of what books the GP considers good. [1] - Every single way of investing that I've looked at is either (1) not worth it (doesn't even beat inflation) and/or (2) more work than it's worth (I've already got hobbies I like; why should I waste my unpaid time playing even more into the rat race by tracking markets and probably never making a profit?)

thenomad 13y ago

And today offers more opportunities for rapid scaling of successful investments (key word: rapid) than ever before - which is why the rich are getting richer faster.

kingraoul3 13y ago

But this analysis doesn't explain the change in the share of income the %1 has accumulated to itself in the last 30 years. In other words if this analysis were complete, we would expect to see straight line growth.

cadlin 13y ago
There is a book called "Capital in the Twenty-First Century" currently being discussed in the economics world that examines this phenomenon (wealth, however, not income). The tl;dr is that World War I, The Great Depression, and World War II distorted wealth accumulation, and the world is back on track to straight line wealth capture. A more detailed analysis: http://www.nytimes.com/2014/01/29/opinion/capitalism-vs-democracy.html?_r=0 http://www.nytimes.com/2014/01/29/opinion/capitalism-vs-demo...
LanceH 13y ago
Nor does it track what happened to the 1% from 30 years ago and whether they are even the same 1% today. Until this fact is acknowledged, they have no business even bringing up numbers. Another possible point of confusion: Maybe the top 1% aren't merely wealthier, maybe the top .1% is more numerous. Wouldn't that be good news?
- roc 13y ago
  > "maybe the top .1% is more numerous." You may want to rethink that.
JamisonM 13y ago
Why? As excess capital accumulates it compounds earning potential by creating more excess capital with new earnings. Given a favourable environment one would expect something greater than straight line growth, right?

afterburner 13y ago

"but it can be very kind to those blessed with good judgement, good fortune, and initial excess capital" Those with excess capital can purchase good judgement, which increases your odds of good fortune. In fact purchasing good judgement may not even be necessary, since you can probably get buy simply copying what other wealthy are doing (ie. the people you talk to most). So all you really need is excess capital, and not have really bad judgement.

brazzy 13y ago
Is that you, Bernie Madoff?
- afterburner 13y ago
  Touche. Hey, apparently they've recovered a third of the money lost, and found half of it. More than I would have thought.
marcosdumay 13y ago
You have to make a judgement about buying or using your judgment, and still judge the people you are buying it from, or copying it for free. God judgement is essential from anybody from getting from X to Y where Y > X.

kaa2102 13y ago

The "rich get richer" is not always a given. When the top tax rate was 90% the "rich stay rich". Robert Reich addressed growing income inequality and the virtuous cycle in his recent documentary inequalityforall.com. Taxation, when used effectively, can encourage individuals with low or no marginal propensity to consume to focus on consuming rather than investing or sitting on piles of cash.

ogrisel 13y ago

Agreed but that alone does not explain all the plot [1]: the slope of all the curves was zero or even slightly negative until 1980. Then the share of the top 0.01% started to climb very significantly. I don't know what could explain such a change. Were the capital gains taxes prior to 1980 high enough to ensure a strong enough redistribution of the wealth creation so that the shares were almost stable over time? Arguably the maximum capital gains rate has decreased after 1980 [2]. But could that explain everything? Or maybe the rich US residents are getting much better at finding creative ways to evade US taxes nowadays (legally or not)? [1] http://cdn.theatlantic.com/newsroom/img/posts/houseofdebt_SaezZucman21.png http://cdn.theatlantic.com/newsroom/img/posts/houseofdebt_Sa... [2] http://en.wikipedia.org/wiki/File:Top_Capital_Gains_Tax_Rates_and_Economic_Growth_1950-2011.jpg http://en.wikipedia.org/wiki/File:Top_Capital_Gains_Tax_Rate...

DougWebb 13y ago
"Trickle-Down Economics" became a big thing right about that time. Also massive military-industrial-complex investment. Between them they probably accounted for a big stock market boom, and based on the article most of that boom probably went to the 0.01% bankers and investors.

deleted 13y ago

[deleted]

api 13y ago

While what you say is certainly true, I also wonder about political aspects to this. To what extent is the extreme hockey stick here indirect evidence of the existence of an oligarchy with the ability to subvert or sidestep (e.g. access to Federal contracts, Fed bailouts and 0% interest loans, etc.) the market?

nostrademons 13y ago

I'm reminded of this study: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.10.1356&rep=rep1&type=pdf http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.10.... Which modified wealth as a stochastic multiplicative process beyond a certain threshold (and that threshold was basically the lower end of "upper middle class") and derived results that match the observed distribution very closely.

chalst 13y ago

Since I think it might not be clear, Amir Sufi's analysis concerns wealth, not income - so the 3rd graph in the article is about wealth, but the first two are about income. The Atlantic article is pretty bad about making this clear, though other reporting of Sufi's research is better.