Thursday, June 6, 2019

Why the concentration of wealth is so big a concern

A lot of people don't seem to understand why the concentration of wealth in fewer and fewer hands is a major economic concern.  I've heard several readers and/or commentators maintain that since a capitalist system "grows the pie", anyone can make more money by being inventive or creative, or working hard;  therefore, since we're not dealing with a finite pie size, it doesn't matter if the rich become richer, because anyone else can, too.

That's a fundamental misunderstanding of the situation.

Regardless of the size of the economic pie at any moment in time, there are several primary functions of money.  One of them is as a measure or unit of account, making it possible to express market value in a common frame of reference.  That doesn't concern us here.  A second is as a medium of exchange - a tool to buy and sell products.  A third is as a store of value - to maintain or increase wealth according to the value of the assets money can buy.  The trouble is, the more money that gets drained from the buy-and-sell economy in order to invest in assets (i.e. it's diverted from being a medium of exchange to being a store of value), the less money is available to exchange.  The money is effectively "locked up" in assets, rather than being free to "move" and thereby keep the economy going (and growing).

This means that less money is available for consumers to buy products, and less is available to corporations and other producers to provide products for them to buy (and to pay salaries to the workers who make those products, which in turn affects their ability to buy products).  That, in turn, leads to pressure to "print money" by extending credit or printing currency without any economic value backing it (a feature of so-called "fiat currency", where its value is whatever a government says it is, and/or the value the market assigns to it).  The generation of more units of currency in that way (because a loan can be spent in the same way as if it were money being printed, thereby increasing the effective money supply even if no more actual cash has been manufactured) has an inflationary effect, which in turn affects the values of assets denominated in that currency (i.e. their "store of value" becomes more valuable in terms of rising prices of assets overall, but less valuable in terms of stability, because asset values are now subject to currency fluctuation).

Thus, headlines such as "The richest 10% of households now represent 70% of all U.S. wealth" are a real and major concern.  Bold, underlined text in the excerpt below is my emphasis.

Deutsche Bank’s Torsten Sløk says that the distribution of household wealth in America has become even more disproportionate over the past decade, with the richest 10% of U.S. households representing 70% of all U.S. wealth in 2018, compared with 60% in 1989, according to a recent study by researchers at the Federal Reserve.

The study finds that the share of wealth among the richest 1% increased to 32% from 23% over the same period.

To make a finer point, Fed researchers say the increase in wealth among the top 10% is largely a result of that cohort obtaining a larger concentration of assets: “The share of assets held by the top 10% of the wealth distribution rose from 55% to 64% since 1989, with asset shares increasing the most for the top 1% of households. These increases were mirrored by decreases for households in the 50-90th percentiles of the wealth distribution,” Fed researchers said.

Sløk said the financial crisis has played a significant part in this growing gap, which resulted in the Federal Reserve stepping in to stem a massive ripple of losses through the global financial system as the housing market imploded.

As a result, the Fed lowered interest rates, which had the knock-on effect of pushing easy money into the hands of the already-wealthy.

. . .

“In sum, this meant that stock prices and home prices have increased but ownership has shrunk to fewer hands and as a result we now have more inequality than ever before,” he explained.

Inequality has partly given rise to Democratic-Socialist Congresswoman Alexandria Ocasio-Cortez, who has proposed leveling massive taxes on the superrich. Her mention in early January of a radical 70% tax on the wealthy has proven divisive in Washington.

The wealth divide has also intensified the debate about the merits of capitalism: the beating heart of the U.S.’s financial system.

Billionaire Ray Dalio said capitalism is no longer working for most Americans
, adding that the expanding wealth gap is creating a volatile environment with disturbing parallels to the economic and social upheaval of the 1930s, he said in a blog on LinkedIn last month.

There's more at the link.

The breeding-ground for socialism and its advocates is thus directly related to the concentration of wealth in fewer hands.  When that gets out of balance (as it is today), the reaction (calls for an imposed, legislated redistribution of wealth - i.e. socialism) becomes stronger.  However, those who've benefited from the concentration of wealth usually have no intention of sharing their good fortune with anyone else.  They've got theirs.  They don't care whether we can get ours under the present system.

Food for thought . . . and for real concern.



Ray - SoCal said...

A related issue is when the super rich decide to influence politics. It’s creating an oligarch type culture of the elite, and everyone else. Victor Hanson writes often on the two California’s.

CEC said...

Also useful to keep in mind that the rich today aren't the rich of yesteryear. Economist Russ Roberts wrote a good article on it (link below).

None of which is to say that wealth inequality isn't a pervasive issue, but perhaps useful to recall that it's not quite the same group of people and their descendants perpetually getting richer. It's also useful to recall that it's an issue that crosses geographic and ideological boundaries. Below are links about income inequality in China and two others looking at differences by political party. None of the articles are ideal (from a statistical perspective), but I think they're interesting and worht reading.

One other thing to keep in mind is that, while I disagree with her proposal, Rep. Ocasio-Cortez's proposal for a 70% tax on the wealthy is not the most radical proposal we have seen. FDR once proposed a 100% marginal tax rate for the wealthy, which was shot down (and was probably as much about political positioning than any expectation of actually getting it passed).

Ram said...

We have so much debt that the only way to pay it off is to print money, cause inflation and devalue the debt. So if you have $10M today and just stuff it under your mattress, it will be only worth $7M in purchasing power in 10 years. Instead if you invest it, maybe it goes up if you are successful and it goes down if you fail. How will it go up? When you are able to provide more value than you are charging for your product. The inequality of wealth does not come from capitalism, it comes from compounding. Successful people continue to compound their wins while unsuccessful people are not able to. I myself am probably in the top 10% but so far have not figured out a way to get into the stop 5% without significant risk of going down to top 20%. So i keep working hard and trying to get ahead just like everyone else should.

Murph said...

“So in some sense the source of higher inequality is Fed policies, which pushed stock prices and home prices higher. But the lack of changes in redistribution by fiscal policy is also playing a role,” Sløk said.

Stocks have enjoyed a massive increase since their crisis lows.

The Dow Jones Industrial Average DJIA, +0.71% has climbed nearly 300% since its closing low in March 2009, the S&P 500 index SPX, +0.61% has climbed 325%, while the Nasdaq Composite Index COMP, +0.53% has soared 535% over the same period.

But homeownership hasn’t moved in step with that stock advance, and many individuals didn’t participate in the stock market’s rally after the crisis, Sløk speculates.

“In sum, this meant that stock prices and home prices have increased but ownership has shrunk to fewer hands and as a result we now have more inequality than ever before,” he explained.

I have a couple of thoughts about these statements.
1) If you look at the top ten holders of stock of those DJIA or S & P 500 companies (YahooFinance makes it pretty easy), you'll find that much of the public float is held by institutional investors, primarily mutual funds, that in turn represent the savings ("wealth") of millions of individuals. I suspect that when the article author uses the term "households" he is not including, for example, individuals' regular and/or tax-deferred accounts benefically held by those institutional investors.
2) Wealth is but deferred spending. Until it is spent, it is invested: in a bank account, in art, in classic cars, in businesses (either directly through stock purchases or indirectly via mutual funds, etc.), in one or more homes & furnishings and maintenance, in a person'a human capital via education and training, etc. In turn, that invested money supports others' emplyment and their spending, investment, etc. Those are the "assets" that the article speaks of. But every asset had a buyer and a seller. When the buyer paid the seller, the seller in turn had to either spend or invest that money. Wealth, in the form of money, constantly moves. It is not static. It is NOT removed from the daily business of getting and spending: it circulates. Constantly.
3) Thomas Sowell has made the point many times that a goodly number of those in the top 10% and even 1% and those in the bottom 10% or 20% are not necessarily the same individuals from one decade to another, or even one year to another. Mark Perry talks about that here, for example, and includes a bit by Sowell:

In any case, it is not capitalism that has failed (and if there actually has been failure is debatable, I'll suggest), but rather what we see is the result of government interference in the regular activities of capitalism. And unlike "more cowbell," more government interference is not, and indeed, is never, the answer.

Murph said...


"person'S" and *emplOyment"

Paul said...

No estate is intact over 3 generations except for a few. If the deep state exists they own it.

you can never make it equal as some people are ok with less and some are not. Live within your means is very good advice.

Contrarian View said...

It isn't the "concentration" of wealth, it's the corruption. Too much money is being concentrated through the abuse of government power to divert income to the Democrat Party's allies, and then to protect their privileges from the natural economic forces of competition. You see it everywhere, from media to defense contracting, from banking to medicine. Where there is government regulation, there is corruption. That's the real problem.

Andrew Carnegie and Henry Ford rose up to become the wealthiest men in America by providing valuable products to large numbers of people, and improved our society enormously by the value they created. Can't say that about Jack Dorsey, Jay-Z, and Jamie Dimon.

Unknown said...

Cutting immigration drastically- both legal and illegal- may be a practical way to increase the wages of the working class and decrease inequality to some degree.

kamas716 said...

As has been pointed out above, the wealthy are generally not the same from generation to generation. Those that provide products/services that are in demand at the time tend to increase their wealth dramatically. The only real problem with wealth disparity is the political clout it affords in control over other people.

Also, unless someone is Scrooge McDucking it with their wealth, swimming in their vaults of gold, they aren't "hoarding it" away. They are investing it, which means that it is available to other people. Exchanging money for products/services means that the people who held those products before/provided those services now have the money. Investing it, even if just sticking it in a savings account, means that it's available to others to use provide more products and services.

I would rather be poor in America today than in the richest .01% of America in any part of the 19th century. Our poor have ready access to nourishing food, clean water, warm clothes and shelter. Most have A/C and can communicate with their friends/families across the world at the touch of a finger. They have access to medical care and forms of entertainment unheard of by our great grandparents.

Complaining that others have "more" is nothing more than envy, pure and simple.

If you want to complain about a problem, it's the debt load. Wealth inequality is a nothingburger.

Murph said...

Fyi, I am in the second of four essays in a small treasure of a book by Thomas Sowell, "The Quest for Cosmic Justice." It was published in 1999, so the essays pre-date that, but as with much of Sowell's works, the data may be, well, dated, but the principles of which he writes transcend any time periods.
The chapter titles:
The Quest for Cosmic Justice
The Mirage of Equality
The Tyranny of Visions
The Quiet Repeal of the American Revolution

Based on what I've read so far, I'd recommend it to anyone (as I would any of the other Sowell books that I've read.)