“If poor people knew how rich rich people are, there'd be riots in the streets”(rwer.wordpress.com)
rwer.wordpress.com
“If poor people knew how rich rich people are, there'd be riots in the streets”
https://rwer.wordpress.com/2018/03/06/if-poor-people-knew-how-rich-rich-people-are-there-would-be-riots-in-the-streets/
5 comments
Thanks, we've updated the link from https://www.marketwatch.com/story/econ-professor-says-expert..., which points to this.
Could you provide some detail about what Piketty said?
This is, I'm sure, butchering the details to some degree or another, but in brief:
Piketty's primary thesis is that as the rate of return on capital grows, so too does inequality between holders of capital and the lower classes. The rate of return on capital has been increasing steadily since the start of the industrial revolution. In order to reduce inequality without abolishing our entire system of economy and government, the most obvious lever is to reduce the rate of return on capital. The most obvious way to do that is to tax it.
Piketty's primary thesis is that as the rate of return on capital grows, so too does inequality between holders of capital and the lower classes. The rate of return on capital has been increasing steadily since the start of the industrial revolution. In order to reduce inequality without abolishing our entire system of economy and government, the most obvious lever is to reduce the rate of return on capital. The most obvious way to do that is to tax it.
Specifically, he calls for a global tax on all capital, regardless of whether it's real estate, financial assets, homes, bonds, bank accounts. That way people can't get around it by shifting their assets overseas or into different forms.
Obviously this would be difficult to implement, but it can be done by individual states, then countries, then by groups like the EU, etc.
Obviously this would be difficult to implement, but it can be done by individual states, then countries, then by groups like the EU, etc.
I think this is impossible to implement without a significant fraction of the G-8 or G-20 countries electing technocrats to office.
Right now I'm envisioning Merkel and Macron asking themselves what on earth is happening in the rest of the West, especially in the wake of the election results in Italy over the past couple of days.
Right now I'm envisioning Merkel and Macron asking themselves what on earth is happening in the rest of the West, especially in the wake of the election results in Italy over the past couple of days.
> “If we take out housing and pensions [which in another part of the article we observe 'those two categories comprise most of the so-called wealth of most Americans'] and calculate just the shares of financial or business wealth — and, thus, equities, fixed-income claims, and business assets — the degree of inequality is much, much worse.
So, if we take out the first two elements of the American dream and likely the first two items that Americans save for, which we've discovered represent most of the wealth of the middle and upper middle class, we find that the remaining wealth is even more unequal.
Well, duh...
So, if we take out the first two elements of the American dream and likely the first two items that Americans save for, which we've discovered represent most of the wealth of the middle and upper middle class, we find that the remaining wealth is even more unequal.
Well, duh...
Basic housing and a sense of security are things that we should like all of our citizens to have access to.
I don't see that it's particularly unreasonable to remove those costs from consideration when we consider a person's wealth. Sure, they are enormous assets for the individual. But if the individual didn't need a place to sleep, it would be a gobsmackingly terrible investment to put most of your life's earnings into one basket like that. It's an investment made under duress, and the anticipated appreciation in value comes from the fact that future generations will be similarly forced.
I don't see that it's particularly unreasonable to remove those costs from consideration when we consider a person's wealth. Sure, they are enormous assets for the individual. But if the individual didn't need a place to sleep, it would be a gobsmackingly terrible investment to put most of your life's earnings into one basket like that. It's an investment made under duress, and the anticipated appreciation in value comes from the fact that future generations will be similarly forced.
It would make some sense to subtract off a fixed amount for "basic housing" and another for a basic pension.
But that's not what Ruccio wants to do. He wants to exclude all housing and pension wealth. That's crazy! It means that given two people in the exact same financial situation, if one of them decides they want to spend more of their money on a really nice house (or a house somewhere really expensive) then suddenly that person is -- for the purposes of Ruccio's calculations -- much poorer. Likewise if one of them decides they want to move a load of their money into (tax-efficient) pension funds. Nonsense: this reflects a difference in priorities and preferences, not in wealth.
But that's not what Ruccio wants to do. He wants to exclude all housing and pension wealth. That's crazy! It means that given two people in the exact same financial situation, if one of them decides they want to spend more of their money on a really nice house (or a house somewhere really expensive) then suddenly that person is -- for the purposes of Ruccio's calculations -- much poorer. Likewise if one of them decides they want to move a load of their money into (tax-efficient) pension funds. Nonsense: this reflects a difference in priorities and preferences, not in wealth.
This isn't about the relative wealth of two people in similar financial situations, it's about the relative wealth of hundreds of millions of people in vastly different financial situations.
Sure, caps for "basic housing" and "basic pension" might make small comparisons easier. But unless 90% of Americans are (in aggregate) so overspending on housing and pensions that it substantially affects their wealth relative to the top 1%, it's not really crazy to exclude it all.
Sure, caps for "basic housing" and "basic pension" might make small comparisons easier. But unless 90% of Americans are (in aggregate) so overspending on housing and pensions that it substantially affects their wealth relative to the top 1%, it's not really crazy to exclude it all.
By the proposed methodology, if I sold stocks and paid off my mortgage, I'd thereby become poorer and if I did a max cash-out refinance, blew half of it Vegas and bought stocks with the other half of that money, I'd become richer.
That seems like a flaw in the methodology to me.
That seems like a flaw in the methodology to me.
I'm not sure "overspending" is at all the right term.
A rough back-of-envelope calculation on my own situation (which I guess isn't outrageously unrepresentative for the comfortable-but-not-1%) suggests that my family's Ruccio-wealth could have been 3-4x greater as a fraction of our nominal wealth, if we had made different but still reasonable choices about how nice a house to have and how much to sink into pension funds.
Our house is nice but by no means a mansion. Our retirement will be comfortable but by no means extravagant. I don't see any good reason to think we're overspending on either.
And I think a 3-4x difference in Ruccio-wealth is substantial; if repeated across the population of decently-off sub-1%ers, I think it would make a big dent in the difference between Ruccio's figures and everyone else's for what fraction of wealth is in the hands of the 1%.
A rough back-of-envelope calculation on my own situation (which I guess isn't outrageously unrepresentative for the comfortable-but-not-1%) suggests that my family's Ruccio-wealth could have been 3-4x greater as a fraction of our nominal wealth, if we had made different but still reasonable choices about how nice a house to have and how much to sink into pension funds.
Our house is nice but by no means a mansion. Our retirement will be comfortable but by no means extravagant. I don't see any good reason to think we're overspending on either.
And I think a 3-4x difference in Ruccio-wealth is substantial; if repeated across the population of decently-off sub-1%ers, I think it would make a big dent in the difference between Ruccio's figures and everyone else's for what fraction of wealth is in the hands of the 1%.
The actual claim seems to be: inequality looks much more extreme if instead of comparing people's total wealth you compute their wealth minus housing and pensions.
I dare say that's true, but I don't see any good reason why you should do the comparison that way. (Other than a desire to make the figures look more extreme, I guess.)
Suppose Alice has $500k in pension funds, a house worth $400k, and $100k in ordinary non-retirement savings. And suppose Bob has $100k in pension funds, rents rather than owns his house (a similar one to Alice's), and has $900k in ordinary non-retirement savings.
Apparently Ruccio wants us to consider Bob much richer than Alice, because he has $900k in non-housing non-pension wealth whereas Alice only has $100k of that. But their real situations are extremely similar, and most likely Alice is actually better off because her pension funds will be subject to less tax.
I dare say that's true, but I don't see any good reason why you should do the comparison that way. (Other than a desire to make the figures look more extreme, I guess.)
Suppose Alice has $500k in pension funds, a house worth $400k, and $100k in ordinary non-retirement savings. And suppose Bob has $100k in pension funds, rents rather than owns his house (a similar one to Alice's), and has $900k in ordinary non-retirement savings.
Apparently Ruccio wants us to consider Bob much richer than Alice, because he has $900k in non-housing non-pension wealth whereas Alice only has $100k of that. But their real situations are extremely similar, and most likely Alice is actually better off because her pension funds will be subject to less tax.
Housing and pension wealth are a fundamentally different kind of wealth than, e.g. factories, farmland, businesses, rental properties etc.
The clearest contrast is between a house and a factory. If you own a factory, you have economic power - you can hire workers, pay them $X dollars, and get $X+Y dollars from what they produce.
The point is that housing and pension wealth doesn't produce surplus, whereas financial and business wealth does. I don't know if I fully understand the pensions argument, but I absolutely agree with the housing argument.
The clearest contrast is between a house and a factory. If you own a factory, you have economic power - you can hire workers, pay them $X dollars, and get $X+Y dollars from what they produce.
The point is that housing and pension wealth doesn't produce surplus, whereas financial and business wealth does. I don't know if I fully understand the pensions argument, but I absolutely agree with the housing argument.
> The clearest contrast is between a house and a factory. If you own a factory, you have economic power
The idea that landlords don't have economic power is pretty amusing from the perspective of Chinese communism, where "landlord" was about as bad as it gets as a term of abuse.
The idea that landlords don't have economic power is pretty amusing from the perspective of Chinese communism, where "landlord" was about as bad as it gets as a term of abuse.
I think there's an interesting distinction to be made between wealth that naturally produces more wealth (like owning a successful business, or a share of it) and wealth that doesn't (like owning a fancy house).
And (something something Piketty r>g something) there is something to be said for measuring how "productive" wealth is distributed, as distinct from things like gold and housing and bank accounts.
But:
That isn't what Ruccio is proposing, nor is yours or anything like it the reason he gives.
My pension funds are approximately 100% equities. They will, if the businesses they're invested in do well, grow. They provide me, in principle, with a tiny amount of power over those businesses (though I'm not sure I have any way to exercise it). But Ruccio wants those excluded from my net wealth when calculating his statistics.
The money in my bank account is (as far as I'm concerned) just cash. I suppose my bank gets to use (most of) it for productive investments, but it makes no surplus for me. But Ruccio wants that included in my net wealth when calculating his statistics.
And (something something Piketty r>g something) there is something to be said for measuring how "productive" wealth is distributed, as distinct from things like gold and housing and bank accounts.
But:
That isn't what Ruccio is proposing, nor is yours or anything like it the reason he gives.
My pension funds are approximately 100% equities. They will, if the businesses they're invested in do well, grow. They provide me, in principle, with a tiny amount of power over those businesses (though I'm not sure I have any way to exercise it). But Ruccio wants those excluded from my net wealth when calculating his statistics.
The money in my bank account is (as far as I'm concerned) just cash. I suppose my bank gets to use (most of) it for productive investments, but it makes no surplus for me. But Ruccio wants that included in my net wealth when calculating his statistics.
here is why:
housing and pensions are obligate sinks of wealth.
the wealth of the rich is purely for investment, luxury, or speculation. the tiny fraction that is obligate overlaps with the rest of the public's.
that's why there is outrage. the rich have tens of thousands of times more wealth than normal people who are heavily (to the point of poverty for 1/6th of them) struggling to even meet needs that come before the "obligate" mortgage/401k.
housing and pensions are obligate sinks of wealth.
the wealth of the rich is purely for investment, luxury, or speculation. the tiny fraction that is obligate overlaps with the rest of the public's.
that's why there is outrage. the rich have tens of thousands of times more wealth than normal people who are heavily (to the point of poverty for 1/6th of them) struggling to even meet needs that come before the "obligate" mortgage/401k.
> housing and pensions are obligate sinks of wealth.
Everyone needs some housing and some provision for old age.
That doesn't mean that all of a person's housing and pension ownership should be ignored when figuring out how well off they are.
Ruccio's methodology would treat someone who's completely broke, living from paycheck to paycheck, barely covering their food and rent, as being in the exact same situation as someone who has a $1M house and a $1M pension fund, and has chosen to sink all their wealth into those things.
That certainly makes it easier to tell a story of how the super-duper-rich have all the wealth, since it reckons our hypothetical only-kinda-rich person as penniless. But it doesn't seem to me like it gives an accurate account of things.
For the avoidance of doubt, I completely agree that there's a hell of a lot of inequality, that there are super-rich people with vast amounts and many millions struggling to meet their basic needs. Nothing about that depends on whether or not you adopt Ruccio's way of calculating wealth distribution statistics.
What Ruccio's trying to do, though, is to do the calculations in a way that collapses all distinctions between the poor, the middle classes, and (some of) the kinda-sorta-rich. And, surprise!, when you do that it turns out that the really-rich have all the money.
But I think that actually weakens the case for outrage about the divide between the super-rich and the not-rich. Because if you frame things Ruccio's way, it gets harder to sustain that outrage once you realise that the poor immiserated people Ruccio's comparing with the super-rich include people who own fancy houses and have comfortable retirement funds.
Might as well make a new graph showing that 99% (or whatever the figure actually is) of the world's yacht wealth is in the hands of the super-rich.
Everyone needs some housing and some provision for old age.
That doesn't mean that all of a person's housing and pension ownership should be ignored when figuring out how well off they are.
Ruccio's methodology would treat someone who's completely broke, living from paycheck to paycheck, barely covering their food and rent, as being in the exact same situation as someone who has a $1M house and a $1M pension fund, and has chosen to sink all their wealth into those things.
That certainly makes it easier to tell a story of how the super-duper-rich have all the wealth, since it reckons our hypothetical only-kinda-rich person as penniless. But it doesn't seem to me like it gives an accurate account of things.
For the avoidance of doubt, I completely agree that there's a hell of a lot of inequality, that there are super-rich people with vast amounts and many millions struggling to meet their basic needs. Nothing about that depends on whether or not you adopt Ruccio's way of calculating wealth distribution statistics.
What Ruccio's trying to do, though, is to do the calculations in a way that collapses all distinctions between the poor, the middle classes, and (some of) the kinda-sorta-rich. And, surprise!, when you do that it turns out that the really-rich have all the money.
But I think that actually weakens the case for outrage about the divide between the super-rich and the not-rich. Because if you frame things Ruccio's way, it gets harder to sustain that outrage once you realise that the poor immiserated people Ruccio's comparing with the super-rich include people who own fancy houses and have comfortable retirement funds.
Might as well make a new graph showing that 99% (or whatever the figure actually is) of the world's yacht wealth is in the hands of the super-rich.
I believe the point is that the $900k in ordinary non-retirement savings is being used to create more wealth by investing in businesses. The widening is made worse because the rich have the means to get richer.
As atestu's (mysteriously downvoted) comment says, exactly the same is true of retirement savings, at least in some cases.
I have some pension funds and some other investments. All of these are composed of much the same mix of assets -- mostly equities, hence "being used to create more wealth by investing in businesses". The only differences are that the pension funds (1) have some tax advantages, in exchange for which (2) I have to wait a while before I get to enjoy them.
The tax advantages aren't huge, so #1 doesn't make that big a difference to me. I'm not a big spender and don't need the money urgently, so #2 doesn't make that big a difference to me. So in practice my situation is almost exactly the same as it would be if I shifted all my pension funds into some non-retirement-focused investment vehicle, or if I shifted all my non-pension investments into pension funds. But Ruccio would consider me much better off in the first case than the second.
Obviously it doesn't matter a bit what Ruccio thinks of me personally. But if the idea is to measure inequality, then the thing we're measuring inequality of ideally shouldn't be wildly sensitive to changes that have minimal effect on a person's actual quality of life, likely future wealth, etc. I think a net wealth measure that excludes all housing and pension wealth (like Ruccio's) fails that test, whereas a more normal reckoning of net wealth passes it.
(In my ideal world, the measure of wealth we'd use for this sort of calculation would include all assets and liabilities. Not just stuff you currently own or owe, but a bunch of other things that make a huge difference and almost always get neglected in these analyses. Future earning potential: a newly minted Harvard grad just starting a new job at a hedge fund may have negative net worth because of student loan debt, but s/he sure as hell isn't poor in any useful sense. Access to government benefits: some people have negligible assets and no earning power but receive a pension, disability allowance, etc., which makes their situation less wretched. Likely inheritance: children of wealthy families may be much better off than they look if you consider only what they already own. Future healthcare costs: if you are in the US and seriously ill, you are probably much poorer than your nominal net wealth suggests. Etc. But trying to include all this sort of stuff would make computing wealth distribution statistics much, much harder.)
I have some pension funds and some other investments. All of these are composed of much the same mix of assets -- mostly equities, hence "being used to create more wealth by investing in businesses". The only differences are that the pension funds (1) have some tax advantages, in exchange for which (2) I have to wait a while before I get to enjoy them.
The tax advantages aren't huge, so #1 doesn't make that big a difference to me. I'm not a big spender and don't need the money urgently, so #2 doesn't make that big a difference to me. So in practice my situation is almost exactly the same as it would be if I shifted all my pension funds into some non-retirement-focused investment vehicle, or if I shifted all my non-pension investments into pension funds. But Ruccio would consider me much better off in the first case than the second.
Obviously it doesn't matter a bit what Ruccio thinks of me personally. But if the idea is to measure inequality, then the thing we're measuring inequality of ideally shouldn't be wildly sensitive to changes that have minimal effect on a person's actual quality of life, likely future wealth, etc. I think a net wealth measure that excludes all housing and pension wealth (like Ruccio's) fails that test, whereas a more normal reckoning of net wealth passes it.
(In my ideal world, the measure of wealth we'd use for this sort of calculation would include all assets and liabilities. Not just stuff you currently own or owe, but a bunch of other things that make a huge difference and almost always get neglected in these analyses. Future earning potential: a newly minted Harvard grad just starting a new job at a hedge fund may have negative net worth because of student loan debt, but s/he sure as hell isn't poor in any useful sense. Access to government benefits: some people have negligible assets and no earning power but receive a pension, disability allowance, etc., which makes their situation less wretched. Likely inheritance: children of wealthy families may be much better off than they look if you consider only what they already own. Future healthcare costs: if you are in the US and seriously ill, you are probably much poorer than your nominal net wealth suggests. Etc. But trying to include all this sort of stuff would make computing wealth distribution statistics much, much harder.)
But the pension funds invest in businesses too
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You just have to look at the first graph you know that something is going extremely wrong. That trend is not sustainable and will split society apart.
> That trend is not sustainable and will split society apart.
Has society ever been together? The middle class is a relatively recent thing.
Has society ever been together? The middle class is a relatively recent thing.
I think historically societies have been divided into haves and have-nots. Over the last 200 years we slowly have moved a state where it was accepted that all citizens have a stake in a country and should have a say (democracy) and it was understood that if the country does better the benefits should be distributed to all and motivate them.
If we go back to the state where improvements in the economy only go to a few people and the rest stagnates we can forget about democracy and just go back to aristocracy.
If we go back to the state where improvements in the economy only go to a few people and the rest stagnates we can forget about democracy and just go back to aristocracy.
That's where we're headed, I agree. But I do believe that the degree of equity has been exaggerated. Spend much time in Central America, for example, and the gulf between classes is obvious. In the US it's far less so. Partly it's pretense. But it's also geographical segregation. It's really in your face, in parts of Manhattan.
I think what counts is the trend and that doesn't look good.
Wait, what? If poor people knew .... ?!
There were riots in England in 2011. There has been rioting in the US.
Usually this rioting is kicked off by police brutality, but it seems to me that it quickly descends into looting.
There were riots in England in 2011. There has been rioting in the US.
Usually this rioting is kicked off by police brutality, but it seems to me that it quickly descends into looting.
Also, like Piketty said in his book, this trend could be inversed and stabilized if we had more taxes on capital, that's literally the solution to world hunger / education / healthcare.