Wealth Inequality Revisited…Yet Again

wealth coinsA lie gets halfway around the world before the truth has a chance to get its pants on. Winston Churchill

It seems that there is a about wealth inequality that is going “viral.”  This compelling video paints a bleak picture of the haves versus the have-nots (courtesy of very left-leaning websites such as Mother Jones).  On the surface, it tells a story of how people perceive wealth inequality (based on a survey of 5,000 respondents), how it really is (much worse than perceived), and how they think wealth should be distributed.  The problem with this analysis is that it discusses about wealth inequality but then goes on to mostly compare income inequality.  They are different, yet economists and policymakers are constantly misleading people by interchanging the two terms.

Wealth is the stock of one’s assets while income is the flow of assets.  In other words, a person who is earning $40,000 a year in wage income may be earning below the median for the typical household, but he or she may also own a $150,000 home and have $10,000 in a savings account.  These items comprise wealth.  So while the narrator is bemoaning the unequal distribution of wealth, and indeed he alludes to wealth by mentioning the stocks and bond investments of the top 1 percent (with a bit of sad minimalist music playing

in the background), he fails to account for other things that comprise wealth.

Moreover, using only an income measure to determine how people are doing economically, without regard to their ownership of assets or transfer benefits they receive from government (i.e. food stamps, Medicaid, etc.) is simply disingenuous.  Additionally, he gets it wrong when he asks the rhetorical question, “do you really believe that the CEO is working 380 times harder than his average paid employee?”  In reality, the CEO may not work 380 times harder than the average employee, but that is assuming that pay differences are based solely on productivity.  As I have mentioned before, the labor market is a market like many other markets for goods; thus, it is based on supply and demand for workers.  CEOs are not a dime a dozen, so they are paid far more than the average worker in order to attract candidates to that type of job.  But the video simply ignores this fact, along with many others.

zp8497586rq

Comments (26)

Trackback URL | Comments RSS Feed

  1. Anthony Ray says:

    It is certainly true that the pervasive “public measure” for inequality in this country is confused about the difference between wealth and income inequality. That said, the gini coeffient measure concept is quite limited in accuracy of a person’s wealth, as mentioned in this post.

    While I feel it is valid to question certain “bonuses” CEO’s have and still receive from investment companies, oil companies, and other top-industry companies because I don’t think these added incentives truly reflect the true demand for those type of workers, it is nonetheless unfair to sensationalize the notion of wealth redistribution because the outcome is a confused society calling for solutions based on unreliable data.

  2. Kyle says:

    This is excellent analysis of the political dissembling floating around. People are too lazy to go out and educate themselves about this stuff. It seems like such a small difference, wealth vs. income, but when three million people watch a video like this actually believe it…

    It makes me want to go back to taking a test before you’re allowed to vote.

  3. Kevin says:

    Great post. There are a lot of factor to ones income worth. Training, eduction, experience, difficulty or specialty of the position. But that is not why this video is going viral. It’s that the have nots want part of the haves wealth without earning it. They just want it “redistributed” to them.

  4. Jordan says:

    Kevin’s right — even Non-Profit CEO’s can make a TON of money, and it’s not because they’re profiteering. It’s because they perform jobs that few other people could pull off, or they bring something unique to the table.

    They are working not producing 380 times more or working that much harder, that is just the market expressing value on their expertise. While every job from the bottom up is important — taking a page from the Soviet Constitution is retarded.

  5. E. Carr says:

    To understand the difference between wealth and income, I frequently refer friends to the book “Rich Dad, Poor Dad”. The book also stresses the difference between active and passive income. I have no problem with CEO salaries. Bonuses and severance packages are a different story!

  6. Kyle says:

    Does that book really work, Evan? I see the book and speakers advertised frequently.

    So you’re not a fan of the Golden Parachute?

  7. Pam says:

    Actually, I have a different perspective on CEO bonuses and golden parachutes. While you often hear people complain about excessive bonuses, the complainers are usually not shareholders of these companies. The shareholders of these companies are not bothered enough by them to change them through the voting process. I am not judging whether bonuses are excessive or not (that is rather subjective), but the owners (shareholders) or public corporations have mechanisms in which to change things, but they rarely exercise them.

  8. Anthony Sombers says:

    Perhaps oftentimes shareholders of the companies are ignorant of these internal policies, but, it’s true that in the end, it’s up the company and it’s shareholders to decide how to allocate their funds. However, as an external observer, I still don’t quite agree with the logic behind the need for it.

  9. Corey says:

    Pam,

    All of the graphs presented are about wealth inequality, so the video is consistent. It makes arguments using income as another demonstration of general economic inequality. It’s not that their argument is inconsistent, they just have different warrants to support the same claim.

    Do you feel that either income or wealth inequality are not problems in this country? The disparity between what the video points out 92% of respondents described as ideal wealth distribution and actual wealth distribution is fairly drastic.

  10. Pam says:

    Anthony, as a shareholder, I am sent every single piece of information that the company is required to share, as governed by SEC regulations. (Public companies are far more transparent than government, believe me). Not only that, I am sent voting proxies every time there are changes in the company’s board of directors or major company policy changes. If I cared more about what the CEO was making, I would spend lots of time voting and attending shareholder meetings. But in my case the cost outweighs the benefit. However, for some people it does not. At any rate, whether CEO pay or bonuses are “excessive,” (define what is excessive…so far nobody has come up with a clear explanation), to me is not the issue. It is the fact that company stakeholders can actually do something about it if they choose to.

  11. Gabriel Odom says:

    “The share of the top 1% has increased from 9% of GDP in the early 70s to over 24% today.”

    Strangely enough, that’s when Johnson’s War on Poverty started to take effect. Interesting.

  12. Pam says:

    Corey,

    Yes, the graphs are about wealth inequality but the explanation about what wealth is is limited. Thus, it gives the impression to that wealth is merely limited to stocks, bonds and wage or capital income. (What about housing, land, etc.) Furthermore, they oversimplify cause and effect. They reason that if the bottom 40 percent are not invested in stocks and bonds and mutual funds, then they are just scraping by. That is a huge jump from one thing to another. The reality is that people who are not investing in stocks and bonds may have their money tied up in housing, land, cattle, etc. This does not necessarily mean they are “scraping by” as the narrator states.

    Furthermore, they state that wealth inequality has grown over 20 to 30 years, when in fact, it has actually narrowed over the century. Furthermore, the tax burden of the wealthy has grown dramatically while the text burden of the bottom 50 percent has shrunk. That is never mentioned.

    Do I think there are problems with wealthy and income inequality? It’s not the inequality that is the issue, it is the policies that are in place that make it very difficult for people to achieve the American dream, as I have detailed in several previous blogs.

  13. H. James Prince says:

    Corey, it’s no so much as that they are problems, it’s more that this video debases the argument with sheer demagoguery. The monotone narrator, the grey and red colouring, the sombre piano music – they all work to harness the viewer’s emotion.

    Yes, income inequality is a problem in the U.S. However, there are few – if any – ideas that reduce income inequality without using a strategy of “redistribution”. Additionally, if you tax the 1% beyond what they already pay, then they will leave the U.S. and pay nothing. Those of the excessively rich have the capability to pay nothing in taxes at all – if they so desire. I say we lower the taxes on the rich, to encourage more rich people to move to the U.S., and thereby increase tax revenue without increasing taxes.

  14. Neil says:

    I find that the narrator of the video has a problem with definitions…

    He says, “The bottom 40% barely have any money!”… He is correct. The closer to the BOTTOM of the scale you are, the less money you will have. If they had MORE MONEY, they would no longer be at the “bottom”. However, when you are working in percentages, there will ALWAYS be a top AND bottom.

    He then says “The poorest americans dont even register, They’re down to pocket change!”

    -The poorest of any country will not have pocket change… that is why they are the POOREST. If the homeless guy on the corner (presumably the poorest typ of person) had money, he probably would not be begging for money. Because of this, HE IS THE POOREST.

  15. Corey says:

    Pam,

    It is true that the video does not provide an exhaustive definition of what constitutes wealth, but I don’t feel that that undermines the basic point they are trying to make, which is simply that wealth inequality is drastically, drastically, worse than what 92% of Americans think it should be.

    The segment on “stocks, bonds, etc.” is just meant to be another example of the general inequality. The graph takes your “other wealth” argument into account. It would include things like land and houses that you refer to, and it points out that the bottom 80% have only 7% of wealth.

    You may be correct that wealth inequality has decreased over the century, but I’m not sure that that responds to the argument they are making about the current trajectory. There could be 200,000 polio deaths in the US tomorrow. This would still represent a decline in polio deaths in the US over the century, but any person arguing it isn’t worth being concerned over because the general trend over a long period of time has been towards decline would obviously be wrong.

    The tax burden argument is interesting, but if it is true that the tax burden has grown dramatically on the wealthy, and that the wealthy have massively outpaced economic gains for the rest of people, this would seem to discount the argument that increasing the tax burden on the wealthy prevents economic growth.

  16. Patel says:

    I have seen a lot of economic development documentaries that say wealth and income inequality give way to social tension, which ultimately creates a lot of problem for society, but as too how strong this linkage may be, I don’t know. However, I personally think that social mobility should a better measure. Wealth & income inequality should not matter as long as there is greater socio-economic mobility for one to climb up the economic ladder.

  17. Kyle says:

    Income equality exists, and always will.
    The video is misleading.
    The end.

  18. Corey says:

    Kyle,

    Yes, obviously income inequality will always exist. But when that inequality is dramatically more pronounced than 92% of people think it should be something should be done about it.

    Why is the video misleading? This link might help you formulate an argument: http://www-rohan.sdsu.edu/~digger/305/toulmin_model.htm

  19. Kumar says:

    Kyle, that was a dismissive comment. But yes, I the major limitation of the youtube video is the lack of discussion regarding social mobility.

  20. Kyle says:

    I certainly appreciate all the help I can get in formulating arguments. Oh how have I managed to make it so far in life without the Toulmin model?

    Repeating the 92 percent figure certainly helped me understand.

    I’ll save us all some time and pull the sources for this video:
    http://www.motherjones.com/politics/2
    http://danariely.com/2010/09/30/wealt
    http://thinkprogress.org/economy/2011
    http://money.cnn.com/2012/04/19/news/

    Yep, looks reputable to me.

    And yes, it was a dismissive comment. In fact take a look back a few posts I did one on the philosophy of taxation. “The poor” typically argued that they should be taxed more, and found progressive structures unfair.

    If you’re really interested, I’ll take a page from the Uwe Reinhardt playbook and you can send me an e-mail. I’ll supply graphics on how Gabriel was correct, and the bottom 60 percent of Americans haven’t contributed for decades.

  21. Corey says:

    Kyle,

    I posted the Toulmin model link because your posts seem to indicate a misunderstanding of the difference between a claim, a warrant, and evidence. You’re heavy on the claims but you never actually substantiate those claims with a warrant or evidence, things that are critical in the formulation of an actual argument.

    The sources question is another area in which you have repeated this mistake. You sarcastically say they are reputable without introducing any warrant or evidence for why they are not.

    Though you were not successful in copying the links from the references section of the video, I can see what your intent was so I will address the claim you have made.

    The mother jones link is a link to an article about the study the video discusses. That study was conducted by Michael I. Norton, an Associate Professor of Business Administration in the Marketing Unit and Marvin Bower Fellow at the Harvard Business School and Dan Ariely, a professor of psychology and behavioral economics at Duke. Clearly two extremely qualified people.

    The second link is just to Professor Ariely’s site, where he also published the study results.

    The third link is to a thinkprogress article the video uses for it’s claim that the top 1% owns 40% of the nation’s wealth. They cite Joseph Stiglitz for that statistic. Stiglitz is an American economist and a professor at Columbia University who won the Nobel Prize in Economic Sciences. Also obviously extremely qualified.

    The CNN money link is just a report the video cites for its claim that “CEO pay is 380 times average worker’s.” This is objective economic data provided by the Afl-CIO.

    So, yes, all the data comes from extremely reputable, well qualified sources.

    If you have actual data or a warrant for any of the claims you are making, I invite you to share it here.

  22. Kyle says:

    So you want to talk about normative economic policy with all blatantly left leaning sources? Fine.

    Let’s start with Ariely and Norton. They operate under typical utilitarian criterion for normative economics, and applied a Rawlsian “Veil of Ignorance.” Kosher so far. Salient to Pam’s original point, they used Sweden’s income distribution rather than wealth distribution and applied the typical saltwater normative Harsanyi dogma to their survey population. While the other two options of “Equally distributive” or “American” systems were based on wealth distributions. So their Rawlsian constraint is immediately internally flawed. The Panel data which was not released, available, or (as far as I can tell) peer reviewed in any economic forum, must have been absolutely pristine given that their conclusions already exhibit internal validity issues. It was published by the APS – which should give you your first hint, and if the authors don’t have “direct access to panelist response rates,” who am I to judge?

    They’re also using descriptive definitions of normative, and “hasten” to cite other peer reviewed economists and correctly argue their correlation between economic inequality and decreased well-being or health is a weak measure for public policy prescriptions. <— That would be an extension of the Harsanyi utilitarian dilemma, in case you're rusty. NBER working papers from Harvard economists like Matt Weinzierl, actually show that the “poor” and “middle class” often choose against Rawlsian notions of equal justice. That they would actually increase their own tax burden while decreasing the burden on the higher income earners. Interesting. This video is based on an APS publication and a section of economics which basically proves that normal people don't know what they're talking about.

    Ultimately, though… this is all irrelevant. Given everything else, under Rawlsian constraints, respondents in a survey which was subject to no discernible design scrutiny would have chosen to live in Sweden under percentages derived from income, not wealth distribution. Pam is right, the video is wrong, and you're pressing Toulmin on me without burdening yourself.

    Now it IS important to note that Stiglitz being the brilliant Nobel prize winning liberal he is, actually did the majority of his work was in a related field: Information Asymmetry. Ironic right? His article however, is about income, not wealth. He is correct about the marginal-productivity theory of income, that CEO retention fees are inflated – that they're the ones financing big government, twisting their mustaches, stealing money from the real innovators and pioneers, and clubbing baby seals. Personally, I agree with Stiglitz. Our system is broken. Like Stiglitz I have published policy solutions suggesting reduced legislative footprint. I've also published on fee structures which secretly function as regressive average effective tax rates, much like Stiglitz. Yay for information asymmetry (people not knowing wtf they're talking about)! This Stiglitz article has a really interesting bit about the price of patriotism in the middle. What's so interesting is that it really makes the whole article worthless. Well that and Stiglitz shared his nobel prize for Market IA, and works for the World Bank. I can't even describe the hypocrisy of WB policy in LDCs. But he is also patently neglecting the tax burden, which is the whole point of normative economic theory. So all of that demagoguery (well put Prince), lacks context.

    The Economic Policy Institute – another left leaning advocate for poor and middle income Americans wrote that "In 2009, roughly 1 in 4 (24.8%) of American households had zero or negative net worth, up from 18.6% in 2007, and 37.1% of households had net worth of less than $12,000, up from 30.0% in 2007. These households are in financial distress or are extremely vulnerable to it. The bottom 20% of households actually had negative net worth in 2009—gains this cohort made in the 1990s and 2000s have eroded steadily."

    So as we listen to Stiglitz, remember that the majority of Americans who have zero or negative net wealth may not be poor. In fact many of them may have very high incomes, just also have very high obligations. Like school debt! On the video, those people who were "down to pocket change," could be new Wall Street Jr. Associates or new Doctors. Every pre-residency doctor in America would be on the "pocket change" side of that scale.

    Mother Jones, hah. I can't believe we're actually dignifying this. But take a look at their information. It's all based on income quintiles from 2007. This video was posted in 2012.

    IF you're truly concerned with claim/warrant/citation – I suggest you actually read the articles which I had no problem opening. But considering that they are third party moderated my “success” at posting the links might not have actually been up to me.

    So yes, inequality will always exist, the video was misleading, and I'm not sure why we're still talking about this.

    Ah, there I go again being dismissive.

    Maybe it's just my way of expressing how much I care about contextually vacuous argumentation.

    Or maybe YOU'RE trolling to inflate posts!

    Sneaky devil, you.

  23. Kyle says:

    No more debate one normative tax theory makes grad student fellows a sad panda :(

  24. Bob says:

    Many of the above posts seem to be quibbling over semantics. The point is not that wealth has been mistaken for income inequality, nor wether or not it matters. Income inequality does matter. The facts are indisputable. Income inequality and misery are inexorably linked. As income inequality rises, health, mental health, and quality of life, for the vast majority of people declines. As income inequality rises, the income transfered to the 1% goes to the corruption of our political system and to the death of democracy. Clearly, it DOES NOT trickle down. Income inequality not only impacts us here at home, but destroys lives and cultures across the globe. Income inequality allows corporations and “Elites,” the financial wherewithal to deregulate, create loopholes, purchase media, fund “Think Tanks,” and write policy that fixes the system in ever increasing ways, in favor of a crystalizing aristocracy. This is BAD for most people. Income inequality means death to the American Dream, and kills social and economic mobility for the masses.
    Much of the commentary above seems as disconnected and out of touch as that of a lab tech observing a petrie dish, or a future sociopath burning ants with a magnifying glass. I wonder if the South African “establishment,” sounded similarly before the end of Apartheid?

  25. Alfred L. Kreps says:

    Shaft has happened to the concept of working for your income?

  26. Bob says:

    This is exactly the point, Alfred. Most people are working harder than ever. It’s just that wages are being squeezed to the point that workers cannot afford to live well. They are forced to work two and three jobs, buy cheap processed foods. Health, mental health and families suffer, while the massive profits created by unheard of productivity is siphoned up to the top. These hard working people are then forced to take help from social safety net programs. So the truth is that we are subsidizing the low wages and huge profits of major corporations.

    Seems to me your comment reflects a viewpoint reinforced by the corporate media. The vast majority of those receiving support from social safety net programs work very hard. They are just forced to accept sub-subsistance pay.