I have been struggling for months to finish a post about wealth inequality. I’m not sure what it means that the rich are getting so much richer when most people are getting poorer in real-terms – or what, if anything, should be done about it. But I’m sure there’s something important going on.
It’s more acute in the US. According to The New York Times (from March):
In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers, those with at least $352,000 in income. That delivered an average single-year pay increase of 11.6 percent to each of these households.
Still more astonishing was the extent to which the super rich got rich faster than the merely rich
In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.
The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.
These are devastating trends, but what to say about them? It’s hard to bring anything but more noise to the debate.
I extracted the angrier elements of my draft for my article about overpaid bankers, where ranting felt justified. But when it comes the wider system – where wealth accumulates not just through capital but also increasingly through network effects, enabled by technology, and where I can’t help feeling we’re at the limits of personal taxation already – it’s not clear to me what’s the solution.
Smarter people than me are also struggling with the issue.
A new article in the FT by Edward and Robert Skidelsky (the latter being nobody’s idea of a bleeding heart socialist) is one of the more thought provoking I’ve read, because it’s not so concerned with those at the top – where envy must always be suspected of adding fuel to any outraged debate – but with the millions of under- or unemployed.
The Skidelskys argue that too many people are working for too long in order to earn too much to buy stuff they don’t need. This isn’t just diminishing their own lives, they claim, but also preventing others from having an acceptable standard of living by reducing the jobs available. (That’s debatable, in my opinion).
Their solution:
We must convince ourselves that there is something called the good life, and that money is simply a means to it. To say that my purpose in life is to make more and more money is as insane as saying my purpose in eating is to get fatter and fatter. But second, there are measures we can take collectively to nudge us off the consumption treadmill.
It’s interesting that eminent economists are now reaching similar conclusions to the legions of personal finance bloggers who have arrived in recent years.
However I don’t think this will be an answer to wealth inequality.
Those who keep playing the game adroitly – and I hope to be a modest member of that club – will continue to gather wealth around them. More free time for the masses to play with their kids in the shadows of the castles of the super-rich doesn’t seem a very sustainable solution.
Of course, I agree people should buy less rubbish. But I think they should save and invest more.
A proper shareholder society instead of a consumer society – with everyone taking more responsibility for themselves – would be a revolution worth having.
The rich get rich primarily because they have more capital. We must save and invest more to fightback for a glorious revolution, my capitalist comrades!
Money and investing blogs
- Risk happens – Five Cent Nickel
- Three keys to greater wealth – Rick Ferri
- Exploring dividend returns via backtesting – Clear Eyes Investing
- Passive fund managers should become non-exec directors – Munro blog
- We need to work less, like the Germans – Simple Living in Suffolk
- Bonds versus equities, via the metaphor of pizza – Investing Caffeine
- Why we’re attracted to clueless, over-precise pundits – The Psy-Fi blog
- How rising rates affect bonds [Canadian, but relevant] – Couch Potato
Product of the week: This new 3.55% one-year fixed rate bond from the Yorkshire Building Society tops the best buy tables. But other banks are paying 4% if you lock away your money for three years.
Mainstream media money
- Peston: The elusive truth about Barclay’s [later] lies – BBC
- Flanders: Bank of England sets sail with QE3 – BBC
- Are you properly diversified? – Marketwatch
- Fire sale on Warren Buffett – Kiplinger
- Higher tax on French holiday homes – FT
- Emerging market bonds – FT
- 78% tax relief lures start-up investors – FT
- John Lee: Why do investors complicate things? – FT
- 10 ways to earn extra cash [slideshow] – Telegraph
- Barclays whistleblower: Culture came from the top – Independent
- Bank of Dave: One man’s attempt to set up a bank – The Guardian
Book of the week: Richard Branson’s new business book, Like A Virgin
Like these links? Get them for free every week by email.
Comments on this entry are closed.
It’s the ‘Psy-Fi’ Blog, not ‘Psi-Fi’, isn’t it? Hello, BTW.
@Alex – It is! Fixed, thanks. I blame too much graphic novels / sci-fi as a kid.
There’s an excellent piece here about the harmful effects of income inequality: http://www.ted.com/talks/richard_wilkinson.html
It affects everything from murder rates to mental health problems and even hurts the rich.
Richard Wilkinson, author of The Spirit Level, also has something to say about how to combat the problem. Progressive taxation and initiatives that foster greater social cohesion (e.g. worker representation at board level) come pretty high up the list.
Also worth checking out is this Analysis programme about the success of the Swedish welfare model as rooted in private-public partnership and a national social contract: http://www.bbc.co.uk/programmes/b01jwk7m
We’ve made a choice, at least in Anglo-Saxon countries to link our notions of status and identity with our consumption. We are what we eat/wear/drive/live in. It’s led us to a place that I think many are disillusioned with but we’re afraid to break out of it. We’re trapped.
Only a change in our cultural values has the power to transform our doubt and discontent into action. That’s what gives us the social wiggle room to believe it’s ok to change our lives, go against the grain, pressurise our leaders.
We’re only really beginning to question the assumptions of the last 25 years and I guess change on this scale either takes decades or happens explosively.
Most people in the UK are rich in possessions and holidays… if that’s what they want to spend their money on that seems okay. Some want to own things, others consume them… in this country I think we have a good balance of boundaries and fall-backs set up to cover most problems so I say that they should be allowed to continue.
This is such an interesting and complicated topic. And if there was an easy answer someone would have thought of it by now.
But surely if everyone stopped consuming then even more people would be out of work (witness the closure of High St shops with just a small decrease in such spending). And your investments are only making money out of those companies which are getting people to consume. Where else would that value come from?
I would love to work fewer hours (not overly fond of my job) and I am on a relatively good salary (top end of average anyway) and I save 40% of my salary. But current situation in work means that I am faced with possibility of being forced to reduce my hours by 20% and I was horrified – even though I know that I would survive and be far from the breadline. But that 20% I see as my escape money – to be able to tell my employer to shove their job when I am 60. So even though I am on a long term learning curve of weaning myself from consumption (a la mr money moustache) my emotional reaction was completely different.
And that 20% of money/employed time would not go to anyone else – it would go towards the cuts my employer has to make.
And greed is universal – witness GPs who won’t attend NHS meetings unless they are paid £200 per meeting. Even though they earn 4 times the average.
Good post.
Wealth inequality is actually a challenge because we don’t resent it. In fact it seems that what we most dislike is our peers or our financial inferiors becoming wealthier than us, rather than there are lots of people out there who are already richer. This potentially explains lots of things, including why stockmarket booms occur (we copy our peers because they’re getting rich), consumer debt issues (we borrow money to buy the things our peers are buying, even if our “peers” are actually shoddy D-list celebs), and why capitalist democracies rarely suffer revolutions because of wealth gaps.
Unsurprisingly this is known as the “Keeping Up With The Joneses Effect”. I must write something on this one day … 😉
“The rich get rich primarily because they have more capital.”
Yes, precisely. When I exhort people to save and invest I point out that the clue to its importance is in the the name of the economic system we live by, i.e. CAPITALism. When we live by another system then perhaps other things will be more important, but until then…
Mate, how does one get highlighted in the book of the week section? I’m interested as I touch up my own!
Another great topic – you’re on a roll!
So, are the poor, poor because the rich are rich? A lot is down to human capital – I didn’t receive much wealth from my parents but I was able to obtain a good (state) education – thanks to their genes and a stable childhood.
To achieve wealth you need (initially – and in my approach subsequently) income – effectively selling yourself in the market. With that income you can build up wealth, including savings and investments – which can build up to give a kind of financial escape velocity. However, like a subsistence farmer, those on low salaries or benefits find it almost impossible to save (I say ‘almost’ because I used to save with relatively little income).
http://www.the-diy-income-investor.com/2011/02/5-steps-to-maximise-your-wealth.html
If the incentives are wrong people will not get on the income ladder and the UK benefit culture was based on trying to resolve the inequality from the wrong direction (i.e. providing the income rather than the job).
So provide more ‘job culture’ (even if subsidised – e.g. apprenticeships, extended work experience,), reduce unemployment benefits and keep raising the income tax threshold. At the same time, eliminate the higher-rate tax breaks.
Interesting subject. People don’t seem to resent even vast wealth if it is made in open competition. The likes of Bill Gates or Warren Buffet. Even Premier League footballers and film stars……..people know it’s ridiculous but at least it is done in the open market. It is not seen as unfair, just bonkers.
The real resentment is directed at those who seem to set their own pay. The CEOs and directors (who are all actually employees) who cosily vote each other extraordinary remuneration . Because there is no open competition there is no way of knowing if they are “worth it” or not. The only justification anyone can give for Bob Diamond’s salary is “look how much Fred Goodwin got”. Monster salaries that come out of the pockets of the shareholders and widely seen unfair..
I don’t know what the answer is. Maybe more shareholder activism will help.
Moneyman,
Perhaps every kind of benefit, from JSA and tax credits through to free school meals [no really, why not educate kids about saving and investing?], should be paid as 90% cash, 10% ISA contribution, with some kind of restriction that you can only sell after a year to discourage impulsive cashing out. Making possesion of an ISA a condition of receiving direct aid from the state would hopefully be a lesson on the power of compound interest.
Fantastic summary of our predicament, it’s inspiring that in the midst of a multi-year recession people are finally starting to ask some of the fundamental questions about is the economy serving us well; is this how we wish to live a life well lived. If there’s one thing that almost always stops people in the rich world getting ahead, then it’s compulsive consumption
> with everyone taking more responsibility for themselves
I fear the the story of the past few decades has not encouraged this in the population at large. We have been encouraged to believe that any dissatisfaction we feel with life us caused by something outside ourselves. Although true in some instances, that working assumption saps the will to roll up our sleeves and tackle the issues that we could do something about.
If there’s one things that has be
I don’t think taxation is as relevant as globalisation itself in what is truly driving the long term trend of the working and middle classes getting progressively poorer as their income drops relative to the cost of living. Check out the excellent blogs of CynicusEconomicus for the background of what is going on and why.
Globalisation enables wealth generation to be greater but more concentrated in the hands of a tiny % of business owners. At the same time it can put pressure on incomes from any type of work in Western countries which can be either offshored or otherwise imported. This in turn depresses other parts of our (or any developed Western) economy.
To reach financial freedom today you either become a business owner yourself, or train for and find a job that pays in the top 5%-10% of income distribution and become exceptional saver and
careful investor. The credit boom of the last decade had masked this reality.
Excellent comments everyone. Thanks for spending them time.
@Accumulator — I’d support more worker involvement at higher levels in companies, and in general I’d support sensible attempts to curb non-entrepreneurial fat-cattery and self-entitlement that has come to define too many boardrooms.
We’re already taxing pretty progressively IMHO, although I’d be more than happy with raising the personal allowance to at least £10,000. I’d prefer to pay for this by shrinking the welfare state a bit, rather than higher taxation. (A third of a £50,000 p.a. earner’s tax bill goes on welfare).
@Rob — True, but the trouble is if they come back in 20-30 years thinking their £50 a week N.I. contributions bought them a £20K a year pension and being surprised. Not to mention health care bills etc.
@Sarah — Sounds like you’re on the right path! Have you considered trying to earn a second income stream (perhaps through passive income?) as an alternative to more hours at work? Self-determination is a valuable thing.
@Timarr — Yes, I’ve read before that it’s a bit of a mystery why the masses don’t vote for higher taxation. At the limit (e.g. elements of the US) it seems like a national con job; I’ve written before about the 70-year old bus driver in Atlanta who took me to a conference telling me how he had to work 80 hours a week still, but then explaining the American dream. And perhaps a dream isn’t to be so easily discounted. I’d prefer a lottery ticket opportunity to advance myself than Soviet style suppression, though thankfully that’s not the choice here.
@William — The only caveat I’d draw is I support very high inheritance tax, so we all earn our capital from scratch, more or less. But vanishingly few people seem to.
@Sam — Anything you write is going to be worth reading, if only for the thought provoking angle. 🙂 Send me an email when it’s done — as long as it’s on Amazon or otherwise available in the UK, I’ll take a look.
@Moneyman — Like Labour famously were, I am very relaxed about people making their first, say £1 million.Maybe even their first £5 million. It’s at levels above that where I think the clustering of great wealth could truly distort ‘the pot’ for everyone. I agree with you about benefits/welfare and incentives. That said, there have to be decent incentives for working. Nowadays an average 25-year old on an average wage is probably never going to be able to buy even an average starter home anywhere South East of Birmingham. I’m not sure that’s much of an incentive…
@Paul — Spot on. Anyone who looks at the financial system for more than 5 minutes can see the great wealth made by salaried men (bankers etc) on the back of other people’s capital really came after the Big Bang, when a lot more money passed through The City’s hands, and when their opportunities to leverage Other People’s Money to enrich themselves exploded. They didn’t suddenly become brilliant value-adders in 1985. It’s a distortion and it should be dealt with. I don’t resent a hedge fund starting from scratch and growing partner’s money alongside their own, for instance (though I still think extreme wealth (£100m+) needs to be looked at / worried about).
@Alex — Perhaps compulsory pensions coming in over the next few years will help?
@ermine — I partly agree. I think most people now assume they will need to work harder, and that life doesn’t owe them a living (e.g. compare how diligent students are now compared to when they barely showed up in the 1970s) and how competitive the job landscape is, compared to say the 1960s. However I also think welfare has had a demonstrably enfeebling affect on the bottom 20%. The trouble is I’m not sure what the alternative for them is — I agree globalisation (and de-industrialisation) has sucked their ability to add value out of the economy in some cases. In other cases, bright and ambitious Polish people come and serve coffee in Starbucks while we pay our own young unemployed to sit about moaning.
@Semi-Passive — Very good points. Add to that network affects of technology, too. It certainly why I am almost pathologically committed to being a capitalist/investor, not a consumer, and why in my professional life as I suggested to Sarah above I want to make sure I have some business-owning capacity of my own, however modest.
Anyone reading this blog doesn’t have to accept the fate of the masses for themselves, in my opinion. We can succeed, and just showing up here (or at places like The Motley Fool or other financial communities) distinguishes a reader from 90% of the population.
But that doesn’t mean for my part I won’t spare a thought for them…
Well, wealth inequality was also a feature of the Great Depression. As was the extent of ‘Globalisation’ of trade. In fact there are so many features that are similar between that time and ours that it can be no coincidence and is related entirely to how money and unfettered trade works.
There is much you can look into re that issue. However, I just want to bring one small point to your attention. Firstly because of the way credit money works, the huge debts that everyone goes on about in terms of individuals, sovereigns etc. have their mirror image in terms of wealth. You will also have heard stories of huge wealth. When the money supply grows it helps to mask the imbalances in trade between trading entities such as between countries, companies and people, rich and poor.
It is only when the money supply stops growing, the credit taps are turned off does the problem become apparent. There are only a few ways to redress the imbalances that have built up – redress the trade imbalances, transfers of money (e.g. via taxes), default or reflation to reduce the value of money holdings and debts. (aka ‘inflation’).
(I’m coming to my point now…) The chosen method has clearly been ‘inflation’. Unfortunately, whilst this method addresses the money imbalance, it has a pernicious effect in that assets grow in value and the asset holders (aka ‘the rich’) get even richer as their leveraged bets devalue. In the financial crisis, we are seeing a steady decline in demand because the bulk of people are getting steadily poorer. Simply put, we have chosen the long route round. We haven’t got a ‘solution’, we have just chosen who loses as a result of policy.
My opinion is the super-rich have unprecedented access to our politicians and are able to cut deals others don’t get. For example, GE got a bailout, gets lots of government contracts, made billions of dollars in profits, yet paid zero federal income tax in 2010. That doesn’t happen on main street.
Having said all of that, the super-rich do create lots of jobs and useful products and services for our society. It’s important to give some credit for the positive things these wealthy individuals and corporations bring.
Bear in mind that the rich getting (relatively) richer is the mathematical inevitability of compounding, even if earning the same ROI as the poor.
Many of the super rich have made it to the hyperbolic phase of the compounding curve. Perhaps a more imaginative taxation response is required.
@Soicowboy — Agree to some extent. This is what’s so poisonous about the debate in the US, I feel. Most of those on the Democrat side — hardly rabidly socialist by European standards — are pretty much talking about a return to a Clinton-era tax structure, with the expiry of Bush era tax breaks for the wealthier. Yet this is being painted as an attack on the rich. (This is not to suggest US spending doesn’t need reform. I think it does, too).
However I am not sure about the idea that compounding explains all this. Firstly, much of the money is new money, especially in the US. Second there is the phrase “Clogs to Clogs in three generations” which hints at how wealth tends to grow and fall, through business failure / subsequent recklessness. Why isn’t that happening now, I wonder? (Genuine question, I don’t know).
But you certainly raise an important point. Again this line of reasoning brings me as ever back to higher inheritance tax to curb the compounding impact over multiple generations.
> to curb the compounding impact over multiple generations.
Crikey. Although I suspected it would happen as it becomes harder for the proles to accumulate wealth over a working lifetime, I didn’t really think that concept of Old Money was back already 😉
Debtor’s prisons next, perhaps?
@TheInvestor – “Second there is the phrase “Clogs to Clogs in three generations” which hints at how wealth tends to grow and fall, through business failure / subsequent recklessness. Why isn’t that happening now, I wonder? (Genuine question, I don’t know).”
Well much of the money was made in the city. Whilst, some of the old city boys (the low ranking ones) are now out of jobs and populating magazines explaining their current financial woes of having to shop at discount retailers, other old city boys are still minted because they kept their skin out the game and are still paid fabulous bonus / golden handshakes. If those banks were old school partnerships then wealth would have grown and fallen, but I think you’ll find that its pension pots and your common shareholders that have been hit giving a remarkable turn of events involving appropriation from the rich to the ordinary.
If I was one of the ones made super-rich through all the banking activity I would have stayed super-rich. If I was a tycoon I’d have lost a bit of wealth through all this, but nothing I couldn’t recover from if I’d been sensible.
The booms are essentially testosterone creating and boosting winners and then overconfidence, but when you’re betting with money that isn’t yours you know who to call… taxpayers. Nur, nur, nur, nu, nur, na, nur, na, nur,… etc. On a global scale, wealth has grown and fallen, but the places it has fallen in have been quite widespread.
The problem with raising the inheritance taxes is that families tend to lose their farms and businesses, while corporations slide by. I’m not sure it’s fair to take someone’s farm or force them to sell their family business when someone dies. Maybe, there could be some exclusions.
> families tend to lose their farms and businesses
@Bret agricultural land is in fact subject to agricultural relief from IHT for this very reason. There is of course the usual industry trying to suborn this for all sorts of other purposes too 😉
Most of the problems with individual farms being lost is because of the changing business environment, increasing capital intensiveness and the subsidies paid to agribusiness – near me there is a place in Bucklesham that got a EU grant for equipment to irrigate sandy soil!