Wealth Inequality in America: A Partial Critique

So I’m a little late on this one, but there is a viral video on wealth inequality in the United States going around that compares what a survey of 5000 Americans said they thought wealth inequality should be and then compared that to what it actually is. Well, as many of you know, wealth inequality is substantially larger than most Americans think it is:

Now I should start off by saying I agree with this video in part. Wealth inequality in the United States is too high and it’s getting worse. While proponents of free markets rarely complain about income inequality directly like say Joseph Stiglitz, they do complain a lot about corporate welfare. Tim Carney’s book, The Big Ripoff, is to me the best rundown on the whole bloated mess. And what would corporate welfare probably lead to… well, more income inequality.

That being said, there are problems that should be highlighted. Some of these problems relate to what is considered wealth but the big one is actually a sort of meta-problem with the way that normal people think about inequality. In other words, what people think inequality should be doesn’t make any sense if they actually think about. Why you ask? Well, let me explain:

1. The Big Missing Variable

The big missing variable when discussing income inequality is increased exponentially in terms of it’s importance when discussing wealth inequality. Indeed, it may be startling to think of how simple a variable this is.

Age.

It seems obvious now that you think about it, doesn’t it.

After all, how much money were you making when you were 25 compared to 45. Probably less than half. But when it comes to wealth, oh lord, it’s not even close. The wealth inequality figures discussed in the video make no attempt to control for age. And as a matter of fact, the gap in wealth between the young and the old has been growing.

According to a Pew study, the net wealth of those over 65 between 1989 and 2009 went from $120,000 to $170,000, a 42% increase. For those younger than 35, their wealth actually decreased from $11,500 to $3500, a 68% decrease. And more importantly, $170,000 is 4850% of $3500!

Now remember that these aren’t the same people being measured over time. Perhaps this has something do with people going to college more and thereby 1) starting their career later and 2) having a lot of student debt to pay off. Thereby they’re worth less when they’re young, but more when they’re old. Or perhaps kids these days just don’t know how to save like they’re folks did.

But when you boil it down, people under the age of 44 only possess 11% of the wealth in the United States. That’s an incredible figure if you think about it. And remember, these people are going to get older. They’re going to pay off their student debts, get that big promotion, pay off their house, inherit their parents wealth, etc.

For example, take this thought experiment; say everyone in the country made the same income, but each decade of life they got a promotion. They start at $20,000/year in their 20’s, then they go to $30,000/year in their 30’s, etc. In addition, they save 5% of their income each year and make no return on their savings. Assuming there are as many people in their 70’s as 20’s (which of course there aren’t, but bear with me), this is what the income and wealth inequality would look like:

Or as the video presents it:

And that’s assuming that everyone is equally talented, that every industry is equally as profitable and that everyone has just as good of saving and investment habits. Furthermore, if I put in just a small return, that chart would be skewed even more. At 3% interest, if the person contributes every month, on their 30th birthday they will be worth $11,627. On their 60th, they will be worth $198,486. In that case the bottom 20% is worth only 2.69% and the top is worth 45.6% of the total. And that acts as if everyone in their 20’s is worth over $10,000 when in reality most are worth next to nothing.

Any serious look at wealth inequality, and income inequality for that matter, has to take age into account.

2. Entitlements

OK, our entitlement systems are a little underwater, but ignore that for a second. Payroll taxes are capped at $113,000, so in some ways it acts as a regressive tax. But then again, it’s not supposed to be a tax, it’s a government mandated insurance scheme.

Well, throwing in Medicare and Social Security add a little for the rich, but they do add a substantial amount of wealth to the poor in relative terms. How much more wealth would the poor and middle class have if instead of paying into a government program they were mandated to put that money in a health savings account or IRA or something to that effect? Well, it would be quite a bit. This would smooth out the curve a bit. While it makes sense that the author of the study don’t include entitlements since it’s based on when you need it (Medicare) or how long you live (Social Security), conceptually, we need to take them into account.

So let’s take a shot at it. According to Bankrate.com:

… A male average earner who retired at age 65 in 2010 paid out $345,000 in total Social Security and Medicare taxes, but will receive $417,000 in total lifetime benefits ($464,000 for a woman)… In the case of a household with only one wage earner, the taxes paid out were $345,000, but the benefits received by both parties will be $778,000. For two-earner couples where one earned the average wage and the other earned a low wage ($19,400), tax payout was $500,000, but benefits will be $800,000.

OK, that doesn’t sound particularly sustainable, but if that average person is taking out some $400,000 plus in benefits, couldn’t that be thought of as a form of wealth?

3. Individuals vs. Families

In the video, the narrator describes the survey as separating the American population into “groups.” Groups of what? Well he doesn’t say. Luckily the links in the lowbar did. And you guessed it, it’s family wealth, not individual. Once again I have to clarify this ridiculous error. When family sizes vary in shape and size you simply cannot compare them as if they were the same. As Thomas Sowell has noted:

 Households are of different sizes, they vary over time, they vary from one group to another, they vary from one income level to another. So for example, there are 39 million people in the bottom 20% of households, and 64 million in the top 20%. So you’re saying, yes, 24 million additional people do tend to have more money.

Or in other words, the top 20% has almost 60% more people in it than the bottom. Even if there were an equal number of people in the other three “groups” and every individual had the same wealth, the top 20% would have almost 25% of the wealth and the bottom 20% would have barely 15%. When we further take into account that many in the bottom 20% are in prison, single parents, people on welfare, disabled, drug addicts, homeless, etc. it becomes clear that dividing the country into such groups is simplistic at best.

In Other Words…

Now again, even after all that, I do think this is a problem. And I will join liberals in denouncing the major role corporate welfare played in all of this (and I would add, Federal Reserve policy). However, before liberals get too far into their rant about about taxes being too low and regulation being too light, I should note some other possible reasons.

1. Immigration: I believe the impact is relatively small on income inequality (David Card, for example estimates it’s share is only 5% of the increase between 1980 and 2000), I do think it’s effect on wealth inequality is large. Most immigrants, after all, come to the United States relatively poor.

2. Dependency and Welfare: Charles Murray’s new book, Coming Apart, makes the case that the values of the upper class and lower class have diverged, and I do think there’s something to this. Indeed, while in 1960 only 9% of men in the bottom 30% between the ages of 20 and 64 were working. In 2000 it was 30%! In 1996, only 0.286 people in single person households in the lower median worked. It’s hard to increase one’s income, and very hard to increase one’s wealth when you aren’t working. How much has this separation in values played a part? And oh by the way, the decline in marriage probably hasn’t helped either.

3. Technology: I think this is the big one. Charles Murray touches on it a lot as have many others from all across the political spectrum. To use Murray’s example, in the 60’s, someone who was really good at math could become a math teach and make a decent living. Today they could go work for a Quant Fund on Wall Street or maybe for Google and pull seven figures a year. Or take music. Back in the day, musicians wasn’t such a feast or famine gig, because there were no recording devices. So the gigs were how you made a living. Today there’s a bunch of starving artists and a few megastars. And then of course there’s automation and robots and computer algorithms that are making lower end manual labor jobs less necessary, and they’re starting to do a number on service jobs as well.

In other words, the problem is complicated. I do think globalization plays a role (although I think it plays a role in lowering poverty levels around the world too). And of course it should be mentioned too that people have different levels of talent and produce different levels. Those who produce the most should be rewarded. And without some inequality, there’s no incentive, at least no material incentive, to work hard and bring great products and services to the market.

It’s just that inequality is too high. And while that’s still a subjective opinion, I think it rings true for most of us. Just be careful to wade through these statistics before yelling that the sky is falling.

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Swift Reviews: Coming Apart

Coming Apart is the latest book from the highly controversial author, Charles Murray. It is definitely food for thought as well as quite alarming. Murray shows how the upper class and lower class of the United States have diverged in just about everything. He focuses only on white people until the very end to emphasize it’s not a racial problem (in fact, adding race back in hardly makes a difference). While the top and bottom of American society have always been quite different, the trends are pushing them apart into something unprecedented.

The theme, boiled down, is that the “founding virtues” or what Murray believes are the important building blocks of civic society—namely marriage, industriousness, honesty and religiosity—have declined dramatically among the lower class, but have thrived among the upper class. In addition, what’s called social capital (the networks and organizations throughout society), while dissipating throughout society, has plunged in the bottom third. This is not a new discovery, Robert Putnam discussed it at length in Bowling Alone. However Murray has expanded on that by showing the drastic contrast between the classes. He also notes how this trend is compounded by primarily technological forces that have made intelligence much more important. 50 years ago, someone who was really good at math and what not would become a math teacher and get by on a decent salary. Today, they go work for a hedge fund, Google or one of those mysterious quant funds and pull in seven to eight figures a year!

Early on, Murray actually hurts his argument by conceding that “real family income for families in the middle was flat” (pg. 50). In fact, the term “family income” or household income” is highly misleading. As Thomas Sowell has pointed out:

It is an undisputed fact that the average real income… of American households rose by only 6 percent from 1969 to 1996… But it is an equally undisputed fact that the average real income per person in the United States rose by 51% over that very same period. How can both these statistics be true? Because the average number of people per household was declining during those years. (Economic Facts and Fallacies, Pg. 125)

So the only reason the lower and middle classes have a “flat” income is because there are less people in each household working. And yet, the “founding virtues” have still deteriorated.

In one of the most bizarre mysteries of our day, he notes what David Brooks has termed the “bourgeois bohemians.” Namely, very liberal people who live very conservative lifestyles. These are typically the elite of society; those that live in the super zips (zip codes in the 99th percentile of wealth). They get married, stay married, work for a corporation usually, have kids, don’t do drugs, rarely drink and more often than you would think, go to church.

If you go outside of San Francisco, Los Angeles, New York and Washington D.C., those who comprise the super zips are about evenly split between conservatives and liberals. And funny enough, while they’re politics are polar opposites, they’re behavior is basically the same. The elite, or top 20% of society, Murray refers to as Belmont. And whether it’s the tree-hugging or gun-toting sort of Belmont, the people generally adhere to the four “founding virtues.”

At the bottom, things are much different. Charles Murray splits the bottom off at the bottom 30% of white Americans, which he calls Fishtown. Let’s take an example from industriousness:

In the 1960 census, about 9 percent of all Fishtown men ages 20-64 were not in the labor force. In the 2000 census, about 30 percent of Fishtown men in the same age range were not in the labor force. (pg. 216)

Indeed, the number of people on disability insurance has increased by a somewhat significant 900% since 1960! And it should be noted that life and work are getting safer, not more dangerous.

With regards to marriage, it is well established that two parent families do the best in the aggregate. Well, in a truly haunting chart on page 167, Murray shows the percentage of children living with both biological parents in Fishtown when the mother is 40 fell from 95% to 35% in from 1960 to 2005. In Belmont, it stayed put at about 90%.

Murray primarily focuses on the crime rate when discussing honesty. The crime rate is down recently, but is still up a lot (at least in Fishtown) since 1960. I think he again shoots himself in the foot here as I’ve heard of several studies showing a decline in honesty. Here’s one from Britain and I believe the same trend is mirrored in the United States. Still, the crime rate is bad enough, especially given how high the American prison population is.

All this shows a decline in social capital, or the connections between individuals through various civic organizations. This is why Murray finds the decline in religiosity troubling. Although this mostly has to do with the secular (not atheist) poor. It may be the lack of belief in a reason to existence provides no incentive to act or a no moral code to follow. Or it may simply be a lack of social and charitable organizations to take the church’s place. 

Murray does give his prescription, which is similar to mine; the government has usurped the civic institutions at the local level and created dependency through its welfare programs. It needs to get out of the way for civic society to reemerge. I should note, this is basically the thesis of Robert  Nisbet’s great book The Quest for Community. The bigger the government, the smaller the individual… and civic institutions for that matter. It is not the supporters of the free market who are atomistic or whatever. It is the supporters of big government who are.

Murray also chastises the upper class for both their non-judgementalism (which, in my judgement, is just a way to say you’re too lazy or scarred to have an opinion) and their unseemliness. I heard of a guy building a house with 5 bedrooms, 8 bathrooms, 3 kitchens, 2 glass elevators and an indoor swimming pool with a retractable roof. No one needs that. It seems that the upper classes have simultaneously lost their judgmentalism and their shame, and it all just drives the classes further apart. Classes that have been fairly fluid in years past, but are becoming more solidified.

Murray’s central argument is that this class-solidification is not economic, as liberals tend to say, but a separation of values and behaviors. I think there’s some truth to both (corporate favoritism and Federal Reserve policies have driven some of the class divide, and part of it is overstated in my opinion), but from the work of Murray and others, as well as working in and near lower end areas and witnessing much of this self-destructive behavior first hand, I have to agree more with Murray.

But as he cautions, this book is not primarily about solutions. Instead it’s the first step, and that is to simply admit we have a problem.

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Republicans use Political Correctness Too

In my series of “mommy he did it too” articles, I now turn to the dreaded political correctness. Political correctness apparently came to us from the Frankfurt School and critical theory which, as Herbert Mercuse posited, the oppressed should have the rights to free expression, but the oppressors should be bound by censorship. Or at least something to that effect. Thereby, Django can kill a bunch of white people but just imagine trying to make that movie the other way around. And if you say the word “macaca” you can lose your Senate race. You can have different prices for different people if your bake sale is protesting the mythical wage gap, but not if you’re protesting affirmative action. It can get so out of hand that a student employee reading Notre Dame vs the Klan (where the Klan is portrayed as the bad guy) can be found guilty of racial harassment. Or if you say there is a possibility that the reason there are more men than women in the top levels of science is maybe because while women and men have the same average IQ, men possibly have a higher variance putting more men at the bottom and the top, then well, you get fired from being the Dean of Harvard. On the other hand, if you say that men can benefit from being falsely accused of rape, like Catherine Commins of Vassar College, well oh well, ho hum.

And thus conservatives complain ad infinitum, often with good cause.

But wait,  wasn’t Helen Thomas forced to resign for saying negative things about the Republicans favorite ally, Israel?

Ward Churhill may have been a plagarist, but even before that came to light, conservatives were calling for his job solely for his anti-American rhetoric.

Indeed, much of John McCain’s 2008 Presidential campaign centered around anti-American comments made by Obama’s former pastor, Jeremiah Wright.

Or how about how some anti-war people were treated, especially by the likes of Fox News, prior to the Iraq War. It wasn’t so easy to be anti-war then like it is now. Here’s one example with Janeane Garofalo, who I should note, I’m not much a fan of.

It may be easier to make fun of Christianity these days then say Islam, but then again, the only open atheist in Congress lost his bid for re-election. Just try running for office as an atheist or even an agnostic and then let me know how that goes. Some Jews and Mormons have been elected. But how about running as a Muslim. Best of luck to you.

While being in favor or women’s issues or talking about a mostly imaginary “war on women” can get some votes, being a radical feminist, or even labeling yourself a feminist isn’t particularly popular these days in anything other than the coffee shop, urban yuppie, oh-sure-I’m-a-feminist-because-I-believe-in-equality-although-I’ve-never-really-thought-about-it sort of way. Same goes for race. Being against racism is good, being in favor of liberation theology or black nationalism or anything like that, is bad. And while our government grows and grows, openly supporting socialism is certainly a no-no.

And some of this backlash isn’t necessarily a bad thing. Bad ideas and merely unpopular ideas are more likely to get shot down. But while the left may jump on anyone for making an even slightly racist (against non-whites), sexist (against women), homophobic, or anti-religion (other than Christianity) comment, the right is little better. Make an anti-American, anti-Christian or pro-socialist comment and see how well you fare. You may be able to get by like Barack Obama did after Reverend Wright’s speeches came out. Or you may go the way of Helen Thomas. And I should note, even anti-white comments can get you fired from time to time. Think of what happened to poor Shirley Sherrod.

Indeed, some on the right (or on the left, but victims of liberal political correctness none the less) endure. Patrick Buchanan may have gotten fired from MSNBC for his book, but while Charles Murray got blasted over and over again when he released the highly controversial Bell Curve with Dick Hernstein, the book was a bestseller. Sometimes the outrage from political correctness run amok works in the ‘any press is good press’ sort of way. And it obviously didn’t destroy Murray’s career or make him untouchable. After all, he just recently had another best seller.

Still, just because political correctness can backfire on those who wield it, does not make it a good thing. And while some may say that political correctness is just politeness, it is of course, not. After all, it isn’t particularly polite to boycott, slander and fire people for having an opinion you dislike. No, political correctness is an attempt to control speech and thereby thought. Indeed, this doesn’t mean we shouldn’t speak out against hateful speech or even mere bad ideas. But the firings, intimidation, threats, boycotts and slandering often go too far. Often way too far. Remember, political correctness adheres to no particular ideology. In Nazi Germany, antisemitism was politically correct. In the Soviet Union, expropriating people’s homes and property was politically correct. Under the Khmer Rouge killing off intellectuals and merchants was politically correct. Political correctness is a means to shut up the opposition to whatever policy those enforcing said political correctness want. The policy could be good (although it usually isn’t), but the method used to enforce it, i.e. political correctness, is not. And the means don’t justify the ends.

Just don’t think that liberals have a monopoly on this particular means.

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The Decline and Fall of American Marriage

Conservatives baffle me to no end with all the hubbub they make about gay marriage. Honestly, who cares? As Theodore Olson, veteran of the Reagan and Bush administrations, says: “Marriage is one of the basic building blocks of our neighborhoods and our nation…The fact that individuals who happen to be gay want to share in this vital social institution is evidence that conservative ideals enjoy widespread acceptance. Conservatives should celebrate this, rather than lament it.” You’d think that conservatives’ bigger concern would be that “individuals who happen to be gay” seem to be the only folks wanting “to share in this vital social institution” these days.

Everyone knows that divorce rates are sky high, about 50% (although there’s some debate about this). But I don’t think most people realize just how far the institution has fallen. So, let’s present a graphic representation, with thanks to the University of Maryland.

Here’s the divorce rate graphically; basically it shot up in the 60’s as the counter-culture began and no-fault divorce became common, then the rate settled in at about double the previous rate:

So there are a lot of divorces, everybody knows this. What most people don’t realize, however, is that a lot fewer people are getting married now than before. In fact marriages are down by about half:

The common thought here might be that women have become more career oriented and have foregone family. That doesn’t appear to be the case however. As the Pew Research Center has shown, marriage is still relatively strong among the affluent, but has utterly collapsed among the working class:

Overall, the percentage of people 18 years and older who were currently married fell from 72% to 52% from 1960 to 2008. Furthermore, another issue that should be concerning is the reduced fertility rate. Japan is going through a decades long demographic nightmare; basically too many old people and not enough kids. A replacement fertility rate, i.e. to keep the population steady with no immigration or emmigration, is 2.1 children per women. Right now, the U.S. is just below that at 2.05:

This could obviously spell a lot of trouble for our entitlement system which is built on unfunded liabilities like a Ponzi scheme, requiring an ever greater population to subsidize the current beneficiaries. Luckily (or unluckily depending on your point of view), much of Europe, and the rest of the modern world is in even worse shape. Not only do they have bigger welfare states, their fertility rates have imploded:

Upside down family trees make welfare states no-worky. Furthermore, while we’re having less children, more and more of the few children we do have are being born to people who aren’t in a good position to take care of them. Out-of-wedlock births have skyrocketed in the last 50 years to over 40%:

By 2000, female-headed households had increased from 6% to 23% and male-headed (single parent) households from 1% to 6%. According to Pew, only 4% of people see this as a good thing (69% as bad). And empirically, the majority of Pew respondents have a point since the vast majority of murderers, suicides, delinquents, rapists, drug addicts, high school dropouts and the like come from broken families. Of course this isn’t a gender thing, after all, gay parents do just as well as straight ones. It’s a math thing: 2 > 1.

The ever so controversial Charles Murray has a book coming out called Coming Apart which argues that this trend is the major force behind class stagnation and class separation and blames cultural shifts and the incentives created by the welfare state. He discusses it here, I think it’s definitely worth your time. Either way, it’s clear that marriage in the United States is collapsing.

Photo Credit: University of Maryland and Pew

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