Wednesday, June 4, 2014

Inherited wealth provides such a staggering income advantage that it really is ridiculous.

Unless you've been living under a rock like the cavemen in the now infamous Geico commercials, you might have heard of Thomas Picketty. But in case you haven't (or are more concerned with things like Candy Crush) he's the author of a 700 page academic book published by Harvard University Press, and it's filled with dense mathematical formulae, graphs, and footnotes. You might ask, why on Earth is Mike interested in reading something that sounds so difficult to understand? Well, currently it's at the center of a firestorm in the United States regarding the debate of income inequality because it questions whether capitalism actually has the power to improve our quality of life. And when I say "our" I mean you and me who don't count ourselves as being rich, who drive old cars, and have a bad day when an unexpected bill for $700 arrives on "our" front doorstep.

If you take the time to read Picketty's book, Capital in the Twenty-First Century, and you unashamedly admire rich people because you think they worked hard for their wealth and that this same opportunity is there for you if you just try hard enough, you're probably not going to like the answer. Piketty basically calls capitalists on all their lies, debunking everything they've said for years regarding the ethical status of making money. The most profound lie may be this: that the commanding heights of the economy are controlled by talented individuals.

Picketty spent two decades studying inequality and currently teaches at the Paris School of Economics. I watched him on Squawk on the Street this week, and he's made the rounds on the Colbert Report and just about any media outlet you can shake a stick at. At the center of Picketty's work is not that a huge amount of wealth is concentrated in the top 1% of earners, but an analysis of what's causing this: the process of saving, investing, and building wealth. Picketty defines "capital" as any asset that generates a monetary return. He also believes that the inequality can't be separated from politics.

The examples of how much wealth has diverged within the lifetime of many baby boomers is staggering. In the 1950's the average American CEO was paid twenty times as much as the typical employee of their firm. Today, this ratio is 200 to 1. A popular model of economic growth by Robert Solow shows how the economy progresses along a balanced growth path with the shares of national income received by owners of capital and labor being pretty much constant over time. In reality, the share of income going to wages and other forms of labor compensation has dropped from 68% in 1970 to 62% in 2010. This is a decline of a trillion dollars. The richest 85 people in the world own more wealth than the roughly 3.5 billion people who make up the poorest half of the world's population.

Those of you out there who are fans of Jane Austen may support this kind of inequality in the United States because it means the emergence of a patrimonial society. If Picketty is believed (which I think he should be) then it's safe to say that your children will be living in a land where a few dynasties live lavishly on the fruits of their inherited wealth while the rest of the country struggles to put food on the table. Pickety points out that the share of the top income percentile is bigger than it was in South Africa in the 1960's, and in terms of income generated by work, the level of inequality is higher than in any other society at any time in the past, anywhere in the world.

In my opinion, inherited wealth provides such a staggering income advantage that it's ridiculous. Let me show you by example what I would do with just a million dollars (a laughable sum by today's standards of "being rich"). If I had a wealthy family and they offered to loan me one million dollars for just five years, and it was interest free, I'd totally take them up on that offer. Hell, I'd take anyone up on that offer. I would take the money and buy $1 million in AT&T stock or in BP (British Petroleum) and generate a staggering $50,000 a year in dividends alone. This would double my income for five years and put $250,000 in my pocket that I didn't have to lift a finger to earn. And in that time, the price of the stock would probably inch up and then I'd scoop some more money on the sale of the stock and return the million. That's how powerful inherited wealth is. Oh, and on that $250,000, I'd only have to pay a 25% capital gains tax. I wouldn't have to pay any social security at all and when I sold the stock in which I had the million invested, I'd only have to pay a 15% capital gains tax (and social security). Pretty nice gig, right?

And what would I do with the $250,000 in dividends? I'd again, invest that in a stock with a dividend paying 5%. This would effectively increase my current wage by 60%, adding $13.00 an hour to what I make now. Considering that in the six years that I've worked my government job here in Utah I've only managed to increase my wage by $3.00, this is amazing. Here's a sad fact for you: now that it's June, I'm looking forward to my "yearly cost of living" raise, which (this year) is a generous .23 cents an hour. Yes, I get a .23 cent raise for 2014. Suddenly, all that was fuzzy has now become crystal clear.

Not surprisingly, I've joined the chorus of those who, like Picketty, are calling for a wealth tax with the idea of restraining the immense power of inherited wealth. In the least, people should wake up to the fact that those who defend unrestrained capitalism will push America to be a land that would be unrecognizeable to those in the baby boomer generation. If we don't get a reign on this out-of-control wealth generation, poverty may just end up as the new face of America by the end of the century as we're ruled by oligarchs who were just lucky enough to be born into the right family.


  1. Is this your insecurity for the day?

  2. I guess I do live under a rock. Never heard of the guy, though I'm familiar with the subject. CEO pay is something that can get my blood pressure elevated instantly. Thanks for that, Mike. :P

  3. And doesn't the Fed's constant Quantitative Easing actually support this phenomena?

    Stocks and such go up, which helps the wealthy beef up their portfolios. But it also makes commodities go up.

    And that means your grocery bill goes up too.

  4. It'd be great if I could get a couple million to invest for a few months. The sad thing is when the poor support the oligarchs, like those Tea Party morons who support all those Republican policies that just make it easier for the 1% to create and hoard more wealth while giving little or nothing back to those supporters.

    I read a Yahoo! article about this guy's book recently and in the Facebook comments some idiot was like, "Oh yeah, well how well did socialism work in Cuba and North Korea?!" The fact these people don't even know the difference between socialism and communism is another part of the problem.

    But the thing is if you create a "wealth tax" the rich will just hide more money offshore where no one can touch them. The whole system is gamed to their benefit, not ours.

  5. @Alex: Doh! I forgot.

    @Jay: "Printing money" is a conservative spin job on QE. What's really going on is the Federal Reserve is buying treasuries and bonds allowing corporations to experience tremendous liquidity. Because corporations can "borrow" money so cheaply through bonds, they spend the money in stock repurchase programs to "short" their own stock in order to drive the value up. This in turn motivates ppl to invest in companies in search of "yield" because interest rates anywhere else cannot keep up with inflation. As for inflation, it is too low. Inflation can actually help you pay off bills. The key is to keep it in check using monetary policy.

  6. Well, you've made me feel insecure, so maybe your post does count as an IWSG post. I agree the salaries for CEOs are outrageous.

    One thing I'd add to the other side of the wealthy ledger is that people like Bill Gates, the Rockerfellers etc. give tons of money to charity. I'd rather they do it than the government create more entitlement program.

  7. There is certainly a difference in working hard and becoming a success verses living off the success of your parents. This is why I opted to provide for myself as much as possible and not depend on my parents for financial support, which I'm see has become a larger, if not expected or entitled, aspect of our society. Regardless of what financial success I might gain in this life, I hope to die broke. I can't take it with me, after all. :)

  8. I want to read that book.
    I've listened to him a couple of times on NPR talking about it.

  9. With more than three decades of the failed 'trickle-down economics' begun under Reagan, it would sure be nice to institute some trickle-up economics for a while. Actually, trickle-up economics would work far better, since the poorer classes actually spend their money, rather than hoard it like the wealthy do.

  10. Gee, a republic eventually purchased by wealthy families at the expense of the once thriving middle class that built that republic? This sounds so familiar. It was called The Roman Empire.

  11. (Note: I'm not well-versed on any of this. The following is just my opinion.)

    Roughly 100 years ago the rich had a monopoly on commerce and such. They built palaces. And the poor suffered. Then the Progressives came in and regulated all that away. But not before the stock market crash of 1929.

    Things got better for a while. The middle class expanded. But the rich resented this, so they worked to get these policies rescinded. Then the '80s happened.

    And now it's just like it was back in the bad old days. Time for the pendulum to swing back. I hope.

  12. Not even worrying about getting rich, it's frustrating that the cost of living continues to increase so much more then wages. It would be nice to at least surpass inflation each year.

  13. And in the 1950s the extremely wealthy were taxed at a higher rate than they are now, and unlike today the middle class was thriving. History has proven time and again that unless a society has a strong, secure, and large middle class, it will destabilize and decline.

    I haven't read Picketty's book, but I've read enough editorials by Joseph Stieglitz and Paul Krugman, both Nobel Prize winners in economics, to know that these guys have accurately predicted everything that's happened to our economy and society. They've also been saying that the wealthy oligarchs are out of control and our middle class is on the skids, and we must change this extreme inequality or our country will go to hell in a handbasket.

  14. Well, Michael....

    This is certainly not a surprise to me.... this country has gotten OUTRAGEOUS... SALARIES are RIDICULOUS... And don't even get me started on what SPORTS FIGURES MAKE! NO ONE deserves millions a year just to play some silly game. Sorry sports activists... I don't get your obsession.

    At my age I remember how much better life was back in the early 70's. Yes, I was a kid, but I remember. We didn't have much, but I lived in a nice neighborhood, had food on the table, and went to the movies a LOT MORE than I do now. One could go out and have fun without spending a hundred bucks. A piece of pizza was .25 cents, A coffee, .50... not FIVE BUCKS!

    Taxes weren't insane! Sales tax here in Chicago is a whopping 9.25 percent. Add a .05 tax on all bottled beverages and $4.35 for a gallon of regular gas... INSANE.... Only the insanely rich can manage with these prices for sure. I DOUBLE property tax on my condo, then I did on my house with LAND. City living has gone up so much, I have to move and can't wait to do so.... Trying to sell the condo now and move far away from here....

  15. Michael - love the new look of your blog, and very impressed with all those books sliding smoothly atthe top - very slick.

    Yeah I hear what you're saying in this post, and I've got to be honest, I'm not overly surprised. I don't live in the States, being a Londoner and all, but the difference isnt' that large in terms of capitalism.

    When you look at the average 9-5 day job, we're paid just enough to live. Dodgy. What system does that sound similar to?

    Also, people (whether they have inherited money or struggling) often don't feel they can make enough to live the way they want to. The truth is they actually can. I don't think any man-made system can stop someone, but that is belief, and that starts in the head and heart. But until we all start treating others as we want to be treated, which means no cheating, lying, stealing etc, these inequalities will persist.

    Oh, and I'm back blogging now :o)

    I've missed it1


  16. So this is what you were talking about at lunch!

    I've missed a lot, because apparently my blog feeder decided to drop you from my list. And here I thought you just weren't blogging anymore. #fail

  17. It's the same here in Australia. The Federal Government has recently delivered its budget. Severe cuts and increased fees all round. Those who can least afford them, the poor, elderly and students are penalised as much as the rich. The rich can afford the changes, everyone else becomes poorer, or can no longer afford a university education. This is a world wide trend which has been happening for many, many years.

  18. I agree there's something wrong with our system. Historically, big gaps between rich and poor lead to economic collapse and civil unrest--sometimes overthrowing governments. It bred socialism and communism.

    Your "cost of living" increase doesn't actually cover the cost of living. The Horatio Alger story is still alive and well, but it's the same myth it's always been. Sadly, you work hard and do more than these people who live on interest.

  19. Yayyyyy Thomas Piketty! He's making a real racket out there and has the corporate media all pissed off. I heard that the Financial Times tried to say he didn't do the math right but turns out they didn't know what they were talking about! HA HA HA! Did you watch his conversation with Elizabeth Warren? Brilliant!!!! It's on Alternet.

  20. I already believe the rich are going to bankrupt America. Then they'll claim sanctuary in a foreign country they voted to bomb and abscond with all the money, living high and mighty and going on without sparing a blink for the world they destroyed.

  21. Yeah... I agree with you. (Although I'm not quite getting the random South Africa reference.)

    Point of fact is that South Africa is more unequal now (regardless of race) than it was in the 60's.

    I'd know because I also wrote an inequality essay for economics in order to get my degree.

  22. @Misha: The reference is not random as you say. If you are truly interested, please look up Gini Coefficient. It's some rather dense math but attempts to measure the disparity of income inequality for a country. According to UNICEF, South Africa had the highest income Gini index score indicating a gap between population and wealth concentration.

  23. One of the hidden drags on the US economy for the last generation is the push to outsource jobs to India and China. This has help keep prices lower than they would have been otherwise but much of this savings is passed back to the CEO and his support staff in the form of stock options.

    I helped my company eliminate over a 1000 clerical jobs during this time and it saved tens of millions of dollars. Most of the first few years savings went right into the upper management's pocket who then moved on to the next company for their next payday.

    The question I asked at the time was - isn't this process a little like the ourobouros? The answer was a predictable as my Econ 101 class which says that by putting people out of work they are pushed to create new opportunities and move the world economy forward. What they were saying is that by laying off workers, the bosses were actually doing themselves and the economy a favor.

    I've always thought they said this to help them sleep at night but the truth is that in the 80s the United States had 5% of the world's population and 25% of the world's economy. Another Econ 101 concept is that kind of disparity cannot continue in an environment with competition which is why we the United States is hemorrhaging jobs. And in their defense, the bosses at outsourcing companies are as helpless as their underlings because if they didn't do it, the next guy would.

    That is where our government has failed us. Ask a politician why they don't stop some of the worst examples of corporate overcompensation by taxes you will get the response that "companies need to do this to get the best talent. It's the market".

    This is total BS. Are US politicians really saying that if we forced CEOs to make 20 times the average cost of their employees that they'd all move to China? Or Germany? Or Japan?

    It wouldn't happen and perhaps with less incentive to move jobs overseas, there would be more workers with good paying jobs in the United States. The United States is still the biggest economy in the world but if we keep to the current course a day is coming when American CEOs will have no choice but to move overseas if they want good pay because Americans are no longer producing anything.

  24. @Kevin: Very thought-provoking analysis. I'm glad you stopped by :)