The wealth gap is now being used by the liberals to highlight their desire for more redistribution of wealth.
The News
The graphic that caught my eye is shown below.
Although Dr. Wolff (named on lower figure) has impressive credentials, I'm not buying his result.
Some Reasoning
First, regarding the map. It's hard to link income to wealth.
But even if the bottom 40% all made minimum wage, they take home (no income taxes on this income) $15,000 x 56,000,000 workers (40% of US workforce) or $840 billion; roughly 5% of US GDP.
Add to this the portion of 9% of GDP spent on welfare and medicaid and we're talking 2.5% more of GDP for the bottom 40% (after subtracting the 263% overhead of government delivery). In addition, the reality is that the top end of the bottom 40% earns twice the minimum wage, adding another 2.5% of GDP for them for a total of 10%.
Take away government spending of 40% of GDP and we have 50% left for the top 60%.
So, 10% for the bottom 40%, 50% for the top 60% and 40% for government. On first glance, it appears that government and the bottom 40 are reversed but sadly, it ain't so.
Of the 40% government 'take' we have roughly 10% ($1.6 trillion) for actual government, 10% for entitlements, 10% for education and 10% for charity (welfare and medicaid) of which about 2.48% actually makes to to the poor people.
No card-carrying liberal who is interested in an equitable society can fail to be irked by this unfairness. I have said myself that nobody has a harder job than the president of the USA (salary $400,000) so nobody deserves a $1 million (or greater) salary. Stock in a private company is different; if you built it, it should be yours to do with as you please. Stock in publicly-held companies is controlled by shareholders; they own it and should also be able to dispose of it as they please though many of us question the mega-compensation of industry executives.
The Reality
But the unfairness is not unexpected.
But the unfairness is not unexpected.
What the liberals are fighting (consciously or unconsciously) is the 80/20 rule – a staple in scientific, economic and business textbooks, the go-to idea to show how the outcome of a set of natural events is not always what you might recognize as, well, natural.
The math underlying the 80/20 rule, known as the power law distribution, is found in many natural systems over which no single human has much influence. Its concentration of the extremes seems built into the fabric of complex systems that depend on numerous factors that continually change over time.
According to Wolff (second diagram from top), the bottom 80% have just 16% of the wealth.
I'd say that if the bottom 40% earn 7.5% as reasoned above, then the next 40% earn 15% (since the power law curve tail section is fairly linear). The total for the bottom 80% is then 25% (with the ineffective 2.5% government contribution thrown on top; without this it would be 22.5%).
The simplest version says that 80% of your company sales will come from 20% of your customers; that 80% of the world's internet traffic will go to 20% of the websites; 80% of the film industry's money gets made by 20% of its movies; 80% of the usage of the English language involves just 20% of its words. You get the picture.
I'd say that if the bottom 40% earn 7.5% as reasoned above, then the next 40% earn 15% (since the power law curve tail section is fairly linear). The total for the bottom 80% is then 25% (with the ineffective 2.5% government contribution thrown on top; without this it would be 22.5%).
The simplest version says that 80% of your company sales will come from 20% of your customers; that 80% of the world's internet traffic will go to 20% of the websites; 80% of the film industry's money gets made by 20% of its movies; 80% of the usage of the English language involves just 20% of its words. You get the picture.
A distribution based on a power law says extreme events (or richest people, or biggest websites) account for most of the impact in that particular world, and everything falls off quickly afterwards. The combined wealth of the top 10 richest people in the world is much greater than the next 10, which is much greater than the next 10, and so on. The rest of the field sits in a long, almost-irrelevant tail.
This distribution might sound odd. At school, we're introduced to a different distribution, the more familiar "normal" (or Gaussian), which is best displayed in the bell-curve spread of values around an average. Measure the heights of a random selection of men, say, and most will be around the average value, with progressively fewer as you go in either direction away from the middle. Plot this on a graph and you get the bell curve.
Power law distributions, however, do not cluster around a single value. The impact of one big earthquake, for example, is bigger than the sum of millions of smaller, more common ones. Very few huge solar flares erupt from the surface of the sun, but those few are more significant than the endless thousands of smaller ones. The same applies to the numbers of big cities, the size of the Moon's craters and the occurrence and citations of scientific papers.
For the USA, I'd guess that our inventiveness has played a large role in the distribution; the transistor, the telephone, the light bulb, the personal computer, the internet and the affordable automobile were all invented here so a very few people made tons of money; illustrative of the Power Law distribution.
For the USA, I'd guess that our inventiveness has played a large role in the distribution; the transistor, the telephone, the light bulb, the personal computer, the internet and the affordable automobile were all invented here so a very few people made tons of money; illustrative of the Power Law distribution.
Verifiable Data
Once you know power law distributions exist, they become very useful. The concept of the "average" or "mean" is useless, for example, when talking about things that follow power laws. The average height of the people in a room (following the normal distribution) might tell you a lot about the spread heights of people in that room, but the average wealth of a country's citizens (which follows a power law distribution) tells you little or nothing about how rich or poor most people are. It is useful in flat taxation schemes as opposed to the bizarre tax code in the US.
Once you know power law distributions exist, they become very useful. The concept of the "average" or "mean" is useless, for example, when talking about things that follow power laws. The average height of the people in a room (following the normal distribution) might tell you a lot about the spread heights of people in that room, but the average wealth of a country's citizens (which follows a power law distribution) tells you little or nothing about how rich or poor most people are. It is useful in flat taxation schemes as opposed to the bizarre tax code in the US.
Now, going from a discussion about income to a discussion of wealth is problematic since public records are not available on the wealth of individuals. For that matter, there are no public records on gross incomes either.
Given roughly 115 million US households, and the median net worth of them, this table suggests that the wealth is; $142 billion for the bottom 20% ($6,200 net worth times 23 million households) and $589 billion for the next 20% for a total of about $731 billion.
I used the median in keeping with the idea that means (or averages) are meaningless in discussions of power law phenomenon.
The top 10% has $13.7 trillion, the next 10% has $3.2 trillion, the next 20% has $2.9 trillion and the last 20% has $1.5 trillion.
Income (%) Net Worth ($ Billions) Percentage Mean/Median
Bottom 20 $ 142 0.64 18.8
Next 20 $ 589 2.67 4.9
Next 20 $ 1,500 6.81 3.0
Next 20 $ 2,900 13.18 2.3
Top 20 $ 16,900 76.81 2.1
Next 20 $ 589 2.67 4.9
Next 20 $ 1,500 6.81 3.0
Next 20 $ 2,900 13.18 2.3
Top 20 $ 16,900 76.81 2.1
Total $ 22,031
So, from a total of $22 trillion, the bottom 40% has 3.3%, the bottom 80% has 23%; very close to the 22-25% I predicted above. This also refutes Wolff, as expected.
Observations
The big driver is that lower income folks save a lot less; this is shown in the rightmost column of the table.
The big driver is that lower income folks save a lot less; this is shown in the rightmost column of the table.
To understand why the wealth gap is so large, the mean data becomes instructive.
In the lowest group, the ratio of mean to median net worth is 18.8 whereas in the top groups it is only 2.1. This suggests that higher income groups have much more similar (and better) saving habits than lower income groups. It also suggests that workers don't stay on the bottom long enough to accumulate much, but some do.
Similarly, the ratios of top/bottom medians is 192 whereas the ratios of top/bottom means is just 25. This suggests that the wealth gap is largely self-inflicted by lack of saving in the lower income groups where saving was clearly possible (as shown by the mean data).
What Can be Done?
The (liberal) politicians will try to fix this by punishing earners above the inflection point of the power-law distribution curve because, hey, that's where the money is, right?
The (liberal) politicians will try to fix this by punishing earners above the inflection point of the power-law distribution curve because, hey, that's where the money is, right?
This is a slippery slope since power-law curves are scale invariant.
The formula for a Power Law distribution is f(x) = Kx^-α. The constant K essentially represents the total money supply. The exponent α represents the complex economic behavior of society as a whole.
This stuff makes my head hurt but the idea is that the final curve looks just like the original, sort of like fractals. I plotted a few variations of this equation to see what happens.
The basic curve is shown in blue with K=1, and the exponent α=-1. The vertical axis shows wealth and the horizontal axis shows population; few have a lot and many have little.
Scaling the curve by a constant (red curve, K=1.2) adds more to the left (the top 20% get $3.4 trillion while the bottom 80% get $1 trillion based on the CRS table) than it does for the right (the poor) even though everyone gets a 20% boost.
I'd guess that all of the money printing of the last decade has served to widen the wealth gap by artificially inflating the money supply.
I'm no economist but I'd also have to guess that raising the minimum wage would have the same effect since it also inflates the money supply artificially; wage increases lead to cost increases lead to price increases which lead to larger revenue all around; a good argument against raising the minimum wage.
Reducing the exponent from α = -1 to α = -0.8 (green curve) has the intended effect of increasing the height of the right tail portion, increasing the relative wealth of the poor. This curve actually has a pretty good fit to the actual gross income distribution in the US; if an income of '1' is normalized to the $900,000 (projected gross income from adjusted gross income) of the top 1% then a minimum wage earner at $15,000 is at the bottom. $150,000 at the 10% mark also fits nicely.
Making α = 0 makes the curve totally flat; the socialist's ideal. However, the exponent in nature is typically between 1 and 3 for wealth distributions. Having an exponent of 0.8 is actually pretty good for an inventive, entrepreneurial society like ours (see section 1.2.1 in the hyperlink).
I suspect that since the exponent doesn't naturally go much below a value of 1, this is the reason for the graduated tax brackets; they serve as a shovel to move cash progressively from the head to the tail.
The problem is that most of the shoveled money (except for Social Security and Medicare) lands at the curved section between the head and the tail in the form of government employee salaries, benefits and pensions; bloat.
What Else?
A couple of things come to mind.
The first thing is that there is no natural way to get a flat curve; and it would not be desirable since it takes away the incentive for excellence.
The second thing is that since poor people retire on Social Security and Social Security savings cannot be transferred between generations by inheritance, it is difficult for poor families to move from the tail to the head over time.
The third thing is that society encourages spending over saving. The Congressional Research Service table above shows that this alone can increase the wealth (wealth is the accumulation of assets) of the lowest earners by roughly a factor of 20 or more.
My own analysis shows that a minimum wage worker can accumulate more than $150,000 with just 5.25% more than Social Security (17.65% total savings) in a 3% interest account; this is the current mean net worth of someone in the 50th percentile.
The formula for a Power Law distribution is f(x) = Kx^-α. The constant K essentially represents the total money supply. The exponent α represents the complex economic behavior of society as a whole.
This stuff makes my head hurt but the idea is that the final curve looks just like the original, sort of like fractals. I plotted a few variations of this equation to see what happens.
The basic curve is shown in blue with K=1, and the exponent α=-1. The vertical axis shows wealth and the horizontal axis shows population; few have a lot and many have little.
Scaling the curve by a constant (red curve, K=1.2) adds more to the left (the top 20% get $3.4 trillion while the bottom 80% get $1 trillion based on the CRS table) than it does for the right (the poor) even though everyone gets a 20% boost.
I'd guess that all of the money printing of the last decade has served to widen the wealth gap by artificially inflating the money supply.
I'm no economist but I'd also have to guess that raising the minimum wage would have the same effect since it also inflates the money supply artificially; wage increases lead to cost increases lead to price increases which lead to larger revenue all around; a good argument against raising the minimum wage.
Reducing the exponent from α = -1 to α = -0.8 (green curve) has the intended effect of increasing the height of the right tail portion, increasing the relative wealth of the poor. This curve actually has a pretty good fit to the actual gross income distribution in the US; if an income of '1' is normalized to the $900,000 (projected gross income from adjusted gross income) of the top 1% then a minimum wage earner at $15,000 is at the bottom. $150,000 at the 10% mark also fits nicely.
Making α = 0 makes the curve totally flat; the socialist's ideal. However, the exponent in nature is typically between 1 and 3 for wealth distributions. Having an exponent of 0.8 is actually pretty good for an inventive, entrepreneurial society like ours (see section 1.2.1 in the hyperlink).
I suspect that since the exponent doesn't naturally go much below a value of 1, this is the reason for the graduated tax brackets; they serve as a shovel to move cash progressively from the head to the tail.
The problem is that most of the shoveled money (except for Social Security and Medicare) lands at the curved section between the head and the tail in the form of government employee salaries, benefits and pensions; bloat.
What Else?
A couple of things come to mind.
The first thing is that there is no natural way to get a flat curve; and it would not be desirable since it takes away the incentive for excellence.
The second thing is that since poor people retire on Social Security and Social Security savings cannot be transferred between generations by inheritance, it is difficult for poor families to move from the tail to the head over time.
The third thing is that society encourages spending over saving. The Congressional Research Service table above shows that this alone can increase the wealth (wealth is the accumulation of assets) of the lowest earners by roughly a factor of 20 or more.
My own analysis shows that a minimum wage worker can accumulate more than $150,000 with just 5.25% more than Social Security (17.65% total savings) in a 3% interest account; this is the current mean net worth of someone in the 50th percentile.
Of course, nobody should really have to work for minimum wage for their whole career but the point is that this is well above the mean in the Congressional Research Service table and would represent a major closure of the wealth gap.
Making this wealth transferable by inheritance would be highly desirable. Currently, many workers pay more into the system than they will receive in benefits. The benefit for a lifetime minimum wage worker would be less than $300/month ($3,600/year); a $54,000 payout over the expected 15 years. Compared to the $83,000 paid in, you'll see my point.
Spending by the rich is as good for closing the gap as saving by the poor; and better than government confiscation and redistribution since demand is created, giving a non-artificial boost to employment and wages.
The fourth thing is regressive taxation that hurts low wage earners disproportionately; sales taxes, fuel taxes and property taxes.
The national average sales tax is about 6%. Given that low wage earners spend everything they don't save, this amounts to at least $500/year.
To a low wage earner struggling to save $2,500 per year, $1,000 in yearly fuel tax is huge (fuel taxes average $1/gal). That hurts!
A low-to-middle wage family with a car of home or both will pay perhaps hundreds of dollars in tax on the car and 1.4% of the home's market value (typically 2% of the 70% assessment value) in tax.
If this money were saved directly instead of collected as tax and redistributed by inefficient means, it would have a huge impact (60% or more) on the wealth of low income households.
Summary
The wealth gap in America is big because the income gap is big; the ratio of the income of a bottom-of-the-top 1% earner to a minimum wage earner is 60:1.
The gap is a well-known phenomenon and is probably driven by innovation and entrepreneurial spirit.
The actual gap, while undeniably large, is a great deal smaller than advertised by liberals; Wolff shows the bottom 40% at 0.2% while the Congressional Research Service table show 3.3%, a ratio of 16.5:1.
The easiest and most efficient remedy is for low wage earners to save more and be able to pass their wealth to their heirs.
Regressive taxes like fuel, sales and property taxes exacerbate the phenomenon by taking discretionary income away from what could be saved.
Scaling the currency supply has no positive impact on the wealth gap; printing money at the Federal Reserve and raising the minimum wage have the same negative impact; the wealthy benefit by a 3.4:1 margin.
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