Tag Archives: inequality

The Desperation of the Vanishing Middle Class

By James Kwak

I recently finished reading Pound Foolish, by Helaine Olen, which I discussed earlier (while one-third of the way through). The book is a condemnation of just almost every form of personal financial advice out there, from the personal finance gurus (Suze Orman, Dave Ramsey) to the variable annuity salespeople to the peddlers of real estate get-rich-quick schemes to Sesame Street‘s corporate-sponsored financial education programs. (Of them all, Jane Bryant Quinn is one of the few who generally come off as more good than evil.)

A lot of what’s going on is just semi-sleazy entrepreneurs trying to make a buck, taking “advice” that is equal parts routine, wrong, and contradictory and packaging it into attractive-looking books, TV shows, and in-person events. A lot of the rest is marketing by the real financial industry, which either (a) wants to make a show of promoting financial education so people will think they are good or (b) wants to teach people that they need their products. (You pick.)

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Good Times for Capital

By James Kwak

Last week, the Wall Street Journal highlighted a Federal Reserve report on total household net worth. Surprise! Americans are richer than ever before, both in nominal and real terms.

At the same time, though, wealth inequality is increasing from its already Gilded Era levels. The main factor behind increasing household net worth over the past year was the rising stock market (followed far behind by rising housing prices). These obviously only help you if you own stocks—not if, say, you never had enough money to buy stocks, or you had to cash out your 401(k) in 2009 because you were laid off. Put another way, rising asset values help you if you are a supplier of capital more than a supplier of labor.

Is there anything we can do about this? The conventional wisdom from the political center all the way out to the right fringe is that we shouldn’t tinker too much with the wealth distribution—otherwise people won’t work as hard, which is bad for everyone. But perhaps it isn’t true.

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Retirement Inequality

By James Kwak

The Economic Policy Institute put out a series of charts detailing inequality in retirement savings across several different demographic characteristics. The most obvious picture is that the shift to 401(k) plans has produced vast increases in retirement inequality across income groups.

Here’s one:

Screen shot 2013-09-12 at 9.23.15 AM

 

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File Under Fascinating

By James Kwak

A reader pointed me to “Instability and Concentration in the Distribution of Wealth,” a paper by Ricardo and Robert Fernholz (Vox summary here). It’s a pretty mathematical paper (and I’m not just talking about the usual multivariate regression here), and I didn’t make it through all the equations. But the basic idea is to come up with a model that might explain the high degree of income and wealth inequality we see in advanced economies and particularly in the United States, where 1 percent of the population holds 33 percent of all wealth.

What’s fascinating is that the model assumes that all households are identical with respect to patience (consumption decisions) and skill (earnings ability). Household outcomes differ solely because they have idiosyncratic investment opportunities—that is, they can’t invest in the market, only in things like privately-held businesses or unique pieces of real estate. Yet when you simulate the model, you see an increasing share of wealth finding its way into fewer and fewer hands:

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Correlation, Causation

By James Kwak

XKCD (blacked out until tomorrow).

Economix has a table listing undergraduate majors by the percentage of graduates in each major that are in the “1 percent” (by income, which I think is less important than by wealth). The data are interesting, but I don’t think it’s correct to say that “the majors that give you the best chance of reaching the 1 percent are pre-med, economics, biochemistry, zoology and, yes, biology, in that order.”

All of the pre-med/life sciences majors (numbers 1, 3, 5, 8, and 11 on the list) do arguably increase your chances of making the 1% because they help you become a doctor, and many specialists are in the 1%. Of course, since many science majors are considered more difficult by undergraduates, you could argue that the inherent traits people bring to college are just as important as the majors they choose. Economics is #2, but that’s in part because many of the people who want to be in the 1 percent major in economics.

But the interesting cases are art history (#9), area studies (#12), history (#14), and philosophy (#17), all of which are disproportionately represented in the 1%. (History, for example, ranks right behind finance.) I don’t think anyone would argue that knowledge of art history is likely to earn you a high income; there just aren’t that many executives at Sotheby’s and Christie’s. I think what’s going on is that these are the kinds of things that people study at elite schools—in particular, if you’re not that worried about what you’re going to do after graduation. These are not the things that most people at normal schools study. In 2009, for example, art history didn’t even show up on the list of majors (it’s probably tucked into “liberal arts and sciences, general studies, and humanities,” which came in 11th), area studies was one of the least popular majors, and so was philosophy.

So there are two possible reasons why these people make the top 1 percent. One is that they are talented, hardworking people who succeed (financially) despite what they majored in—but then why are talented, hardworking people overrepresented in these majors? The other is that they are children of the elite who go to elite schools, study whatever they feel like, and succeed because of their upbringing and connections. (The reasons are not mutually exclusive.) Given the increasing evidence that America, the land of opportunity, is actually one of limited social mobility, I think we can’t overlook the latter explanation.

Americans Want to Live in Sweden

By James Kwak

The chart below is from a short paper by Michael Norton and Dan Ariely (author of Predictably Irrational) (hat tip Huffington Post). The top line is the actual U.S.wealth distribution. The second is what Americans think the wealth distribution is. The bottom line is what Americans think the wealth distribution should be.

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The Importance of the 1970s

By James Kwak

It isn’t often that I read two books in a row that both cite Alexis de Tocqueville, probably my favorite Social Studies 10 author (although he was far from my favorite at the time). In Third World America, Arianna Huffington cited Tocqueville’s observation that democracy should promote the interests of “the greatest possible number”; as I pointed out, this is clearly no longer true in America (if it ever was). In Winner-Take-All Politics,* Jacob Hacker and Paul Pierson explain why.

In 13 Bankers, Simon and I argue that the key forces behind the transformation of the financial sector and the resulting financial crisis were political, not simply economic. To this argument, at least two good questions spring to mind: Why finance? And why then? Hacker and Pierson have good answers to both of these questions. Their answer to the latter question is better than (though not inconsistent with) the answer we gave in our book.

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Who’s Got Those Pitchforks?

By James Kwak

The Huffington Post Books section is hosting a discussion of 13 Bankers; there are links to all the posts so far here. Mike Konczal, usually of Rortybomb, weighed in with a post that included this chart:

People from the 90th to the 95th percentile make about 11% of total income; people from the 95th to the 99th percentile make about 15%; and people in the top percentile make about 23% (in 2006, presumably). But mainly, look at the way that black line shoots up relative to the others since 1980 (along with financial sector profits and per-employee banking compensation).

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The Role of Government

By James Kwak

Last week Simon gave a talk sponsored by Larry Lessig’s center at Harvard. Afterward there was a dinner and then another question-and-answer session. Jedediah Purdy (another person to write a book while at Yale  Law School; he is now a professor at Duke’s law school) asked a question that I have rephrased as follows (the words are mine, not Purdy’s; I may have also distorted his original question so much that it is also mine):

“You’ve criticized the government for withdrawing from the economic and particularly financial sphere and allowing private sector actors to do whatever they wanted. Do you think the government should simply act so as to correct the imperfections in free markets? Or do you see a positive role for government in determining what kind of an economy we should have?”

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The Unproven Tradeoff of Growth and Inequality

“How do you feel about paying such high taxes?”

“I think it is terrific. . . . I get a little bit angry because constantly in Denmark there’s this talk that we have to lower the taxes, lower the taxes, lower the taxes. And I can only say I’m very young, I am only 25 years old, and already the system has provided me with a great education and help whenever I need it. I have been able to go the library whenever I needed it. I have not been to the hospital many times in my life, but when I have been it has not been a problem. I mean, I think we are so privileged that it is so wrong to attack this system.”

That’s a Danish student on Planet Money’s latest podcast, around the 14:40 mark. That seems perfectly sensible to me. If you are getting services that you value from your government, then you are going to be more likely to favor a system with high taxes. Obviously not very many Americans feel this way; since the Reagan Revolution if not the 1970s, there has been an increasingly widespread belief that government spending is wasteful, and therefore people want to hold onto their money. But there’s nothing irrational or bizarre about thinking that high taxes and high benefits are good, and you don’t have to agree with her to see that.

But this is what Adam Davidson of Planet Money had to say about it: “David [Kestenbaum, the reporter on that clip], it’s like you went to Bizarroland, where everything is the opposite.”

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Do Smart, Hard-Working People Deserve to Make More Money?

Last weekend Yves Smith posted a story of a family that was down on their luck and struggling with high credit card bills, including plenty of fees. Yesterday she posted a follow-up. Apparently the story triggered a wave of vindictive snobbery from commenters. Here’s one example:

“Sounds like someone doesn’t know how to manage their money. I would bet they are making car payments and eat fast food at least 3 times a week. Probably have cable T.V. and deluxe cell phone plans. They probably get a new car like every two years. What happened to her reenlistment bonuses?”

Here is Yves’s response:

“I think quite a few readers owe her an apology. But I am also sure those readers are so locked into their Calvinist mindset that they will find some basis for criticizing this family. Some people seem constitutionally unable to admit that success and prosperity are not the result of hard work alone.”

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The Two-Track Economy

The quick way to talk about how any economy is doing is in terms of “growth”.  This is just what it sounds – a measure of how much the total value of production in a country has increased in the last month, quarter, or year.

Thinking in terms of total production – more precisely, this is usually Gross Domestic Product, GDP – never tells you everything that you want to know, but it usually gives you a sense of the near term dynamics: are business prospects expanding or contracting; is unemployment going to rise further; and will people’s wages outpace or fall behind inflation? 

Seen in these terms, the balance of opinion on the near term outlook for the U.S. today has definitely shifted towards being more positive.  A number of prominent analysts have revised upwards their growth expectation for the second half of this year considerably – for example, the ever influential Goldman Sachs was recently expecting 1 percent growth (annualized), now they guess it will be closer to 3 percent.

“Potential” growth in the U.S. is generally considered to be between 2 and 3 percent per annum – this is how fast the economy can usually grow without causing inflation to increase.  So the Goldman swing in opinion is equivalent to switching from saying the second half of this year will be “miserable” to saying there will be a fairly strong recovery.

But at this stage in our economic boom-bust cycle, is it still helpful to think in terms of one aggregate measure of output?  Or are we seeing the emergence of a two-track economy: one bouncing back in a relatively healthy fashion, and the other really struggling? Continue reading

Obfuscating Inequality

Will Wilkinson has gotten a lot of Internet love for his article “Thinking Clearly About Economic Inequality” (Free Exchange, Real Time Economics, Yglesias, Klein, Cowen, Rortybomb), which argues that increasing inequality is not as bad as people like Paul Krugman make it out to be. I thought it was a rhetorically clever but deeply misleading attempt to blur the obvious issue – economic inequality is increasing – by looking at it through a dizzying array of qualifying lenses.

Wilkinson marshals an impressive number of arguments to try to make the point that increasing income inequality is not the metric that we should focus on. I’ll try to take them one at a time. (Wilkinson’s arguments are summarized in the numbered paragraphs; the others are my responses.)

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