Thursday, April 4, 2013

Wealth and Income Inequality

Wealth and income inequality is discussed a lot today and with the economy struggling, the rich receiving a lot of the blame.  Groups like the occupy movement and other socialist/communist/anarchist groups love to throw out the statistics that the to 1 percent of the earners have a growing percent of the total wealth and income.  But is this true, and if so is it bad for America? If the rich are getting richer, are the poor getting poorer?  How has the relative Like many other political discussions, the truth is often obscured by rhetoric and grandstanding.

To analyze these claims it is important to differentiate wealth from income.  Like the debt and deficit debate, these two terms are also confused and used incorrectly interchangeably.   Wealth is a stock measure, it is the sum of all the static assets in the possession of an individual.  Things that account wealth are bank account balances, investment balances, property valuations, and the like.  Income is a flow measure meaning it is the the difference between inflows and outflows over a period of time.  Income measures include pay rates, capital gains, and interest on investments and accounts. 



Income Inequality
The most superficial way to measure income in the US is to look at the median income.  Median incomes (in 2005 dollars) have increased from $21,000 in 1994 to a peak of $ 25.000 in 2007 before dipping again to $23,000 in 2008 and 2009.  Overall this shows that the overall incomes are increasing but it does not tell you anything about the individuals.  On one hand and increasing medial income could signal an across the board increase of all incomes or just a larger increase of the highest incomes. It could also signal a large increase among incomes of any group.  This measure is largely ineffective when examining the income breakdown among individuals.

The next measure that is commonly used when looking at income inequality is household income.  Over time household incomes have increased but it is important to note how this statistic is calculated and the factors that can skew the actual meaning of the numbers.  Overall household incomes have increased over time according to the US Census data tables but have decreased overall in recent years during the recession.



Although the household income yields some important data on income among households in general, it does not show the relative incomes between the lower, middle, and high income earners and the number of earners in each group.  It should also be noted that the average number of people per household can skew the household data.  On average there were move people living in each household in the 1970's and 80's as compared to the 90's and 2000's.  If more people live in a household, the income will be higher since more incomes reside in that household.  This skews the older data since today, fewer people live in each household and thus yields a lower income over most households.

In short income inequality means that more income accumulating with one group while another group is loosing income and the gap between the two in increasing.  From the data it is clear that the top income earners are making more income than in the past.  What most critics tend to overlook is that the lower income brackets also make more money than in the past.  If you look at the breakdown of all the income earners since 1994 an interesting pattern emerges.  The percentage of earners in the lowest brackets (0 to 25k) has decreased from 70.7 percent in 1994 to 51.55 percent in 2011.  As the percentage of low earners has decreased, the percentage of earners making middle and higher incomes has increased.  In 1994, the percentage of earners making a middle income (25k to 100K) increased from 26.46 percent in 1994 to 41.49 percent in 2011.  Finally, the highest earners (100k and over) also increased from 1.84 percent in 1994 to 6.96 percent in 2011.



The fact that more people were making higher incomes and fewer were making lower incomes shows that all earners were improving their economic standing.  If incomes were decreasing for everyone but the rich, there would have been an increase in earners in the lower brackets.  Income inequality is also exaggerated by the basic mathematics of the way it is presented.  Because there isn't an upper bound to the top earners, as everyone increases their income by 10 percent, more total income will occur with the higher incomes because 10 percent of a larger number is larger than 10 percent of a smaller number.  Even though everyone's incomes are increasing, it appears that the gap is widening and income is concentrating at the top.

It is important to note that a rich person getting richer does not mean that a poor person gets poorer.  This is another misconception about the income situation in the US.  It is not a zero sum game where one group must lose for another to win.  The data shows that there is a significant level of economic mobility in the US which means that any one individual usually does not spend their entire life in one income bracket.  More often than not an individual will see many increases and some decreases in their income over their life.  By saying that the rich are getting richer does not explain much if the "rich" are different people at any given time.

One factor that is hurting the lower income brackets is the workforce participation rate.  The percent of the total population that earned an income has decreased over time.  In 1994, 92 percent of the population earned some form of income while only 86.5 percent earned an income in 2011.  The percent of the workforce that has employment (workforce participation rate) over that same time frame also decreased from 66 percent to 63 percent.  The workforce participation rate has not been as low as 63 percent since 1979 and that highlights the true income disparity between those who work and those who do not.  A majority of the unemployed are not working through no fault of their own, the recession and extensive government expansion has stifled any real economic recovery and expansion.  The employment gap is the real income crisis and if an individual can not find work, they truly will be stuck in the lowest income levels based on welfare transfer payments. 

Moral Hazard and Wealth Inequality
As opposed to income, wealth is the sum total of acquired assets through a variety of means including income.  The common sentiment among the progressive critics is that the rich are too rich and they need to "give" back for the collective good.  The problem is that unless the someone steals or cheats to acquire an asset, that asset is rightfully owned as their property and can not be seized for the welfare of anyone else.  Once an individual owns a piece of property, decisions relating to that property are entirely in the hands of the owners provided it does not have debt leveraged against its ownership.  Various other people may have moral arguments on what the property owners should do with their wealth but they have not claim to that property.  

There are many in this country who are in need, and many who could give more but the sacred trust of a free society is one without the threat of unjust coercion. The truth of the matter is that the US is by far the most charitable country and the individuals donate more to charity than any other populous in the world.  Virtue is erased from an action if it is coerced as in the use of government action to dictate how an individual allocates their wealth.  And in the absence of government coercion, a vast majority of individuals use free will to donate their wealth.

It is true that there is a small percent of the country that is much richer than the rest of the country (i.e. the "1%") but like the income disparity, it does not make the rest of the country worse off.  Many in the "1 percent" are inventors, business starters, investors, or entertainers.  Each of which serves a positive economic purpose that allows the country to function and the economy to grow.  The entrepeneur who creates a product useful enough that society pays for it in great enough quantities, makes society better off then it was before.  The entrepeneur who starts a business and expands to a middle to large corporation creates many jobs that would not have existed otherwise on top of the vast opportunities for investment.  Wealth accumulation allows for the investment in projects that would not otherwise exist without that financial flexibility.  Individuals who have a lot of extra wealth have the ability to invest with confidence that their financial well being is not in peril with any one investment and thus they can invest in riskier, and possibly more lucrative, ventures.  Many performers who are part of the "1 percent" also add to the overall well being to society.  Performers provide a service that many people are willing to pay a fee to take in the performances. 

The overall measure of wealth is the aggregate result of many factors including some luck and economic status, savings, investment, work ethic, education, and other personal decisions that an individuals makes regarding trade offs.  An individual can make the decision that working more hours in the day is not worth their time and thus they give up extra income that they would otherwise make and save to increase their wealth.  Other individuals choose not to invest and save at significant levels which also affects their overall wealth.  Sometimes economic circumstances just prevent some individuals from being able to grow their wealth and that is a circumstance that will always occur.   Over time those in dire economic circumstances have increased their prospective wealth along with everyone else.  Although they remain "poor", today they have access to resources that were unimaginable y ago.  Since WWII, the expansion of welfare spending per person (in 2005 dollars) has exploded from 535 million per US resident in 1950 to 2.2 billion in 2011.  The benefits afforded to the poorest elements of the country have dramatically expanded and provided for their most basic needs.  The country's ability to pay for these increases is largely due to the very people that the critics want to restrict from earning and accumulating wealth over a certain threshold. 

Overall, the debate over the significance of the income and wealth inequalities of the US comes down to the rightful claim to property.  Once income is rightfully earned or an asset is fairly acquired, it becomes the property of the individual.  The data shows that the income disparity actually isn't a disparity at all, in fact it shows positive signs of economic mobility in the country.  there is a gap between the wealth of the rich and that of most of the rest of the country but if they have acquired it legally and in good faith, it is their property.  As the rich have become richer, so have the lower brackets as well.  The poor today have access to resources that they could only dream of decades ago.  The poorest of this country are often able to call an apartment or small home theirs where the poor around the world often have no shelter over their head.  Those that like to criticize the US about wealth inequality do not realize there are many countries in the Middle East, Africa, and Asia that receive millions in US foreign aid and the money goes to secure the lifestyles of the richest while the general population lives in abject poverty.






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