The Incredibly Wealthy Aren't Quite So Incredibly Wealthy As You Think
This is a just lovely observation from the Federal Reserve. Sure, the rich are different from you and I, as Fitzgerald pointed out, but they’re not quite so different as we’ve been told they are. For while they’re different just because they’re rich they’re not actually as rich as we’ve been told they are. The great joy of this observation is that it’s something inherent in the calculations that have been used to show us all how heinous this wealth inequality is. That is, we can take what we’re being told by Thomas Piketty and his sometime collaborators Gabriel Zucman and Emmanuel Saez and see that there’s a contradiction inherent in the way they are calculating things. It’s just not possible therefore for all that they tell us to be true.
Please do note this doesn’t depend upon using some other method of calculation, not do we have to be apologists for the capitalist plutocrats (and thus become running dog lackeys ourselves). It really is that there’s a problem inside the manner that they’ve calculated things.
Now, the Fed does look at other data sources, does indeed try different methods and does come to different conclusions. But the key line is this:
Note that a small change in the rate of return can have a large impact on these capitalization factors: a roughly 1 percent rate of return in the ratio generates the capitalization factor of 97, while a roughly 2 percent return on the 10-year Treasury generates the factor of 56. One capitalization factor is applied to all families in the gross capitalization model. Top wealth shares, though, will be smaller if the top wealth families get a higher-than-average rate of return.
To understand this we need only two things.
The first is from Piketty. He insists not only that r>g, that is that returns to investment are greater than economic growth, but also that rich people are going to have better returns on r than everyone else is. Because they can afford all the best advice, lock themselves into long term investments that pay better returns as they’ve no liquidity worries and so on. OK, seems reasonable enough: although we might remind ourselves that on average those expensive to be in hedge funds and actively managed stock funds have worse returns than simple index funds. So it’s not actually obvious that more expensive advice does pay. Still, let us accept Piketty’s point for the moment.
Our other point comes from Saez and Zucman. They went out to calculate, well, just how much wealth does the top have? The top 0.1%, and the top 0.01%? Given that no one actually has to tell anyone what they own (certainly not in any centralised manner) they looked at the income that people got from their investments on their tax returns. Sure, OK, that’s a reasonable proxy and might even be the best one (the Fed disagrees but so what?). They also assumed that everyone, rich and poor, was making the same return on their investments. At which point you can say, well, OK, so they got $5k in dividends and she got $50k in dividends so she must have 10 times the wealth in stocks that they do. We can do the same with interest from bonds and so on. Which is great.
But look what happens if we add the two together. If the rich get higher returns than us proles do then a $50k dividend income doesn’t mean they’ve got 10x the wealth that we do with our $5k income from dividends. They’re getting higher returns, recall? So, their multiple is different. If they’re getting twice the returns we are then their wealth, in this example, is only 5x ours. And this will obviously be true across all the assets that the rich own where they get better returns than the rest of us.
Note that we cannot just say that something that produces $50k income is worth 10x something that produces $5k. Because in the end we want to come to portions of the wealth that are owned. So we must be looking at market prices to provide our estimates of the value of wealth.
The end result of this is that we can either believe Piketty in that the rich get better returns and so keep getting richer no matter what, or we can belive Saez and Zucman on the level of wealth inequality. But what we cannot do is believe both Piketty and Saez, Zucman.
Which is a bit of a problem for the whole thesis for the thesis is that the rich are, currently uniquely richer than the rest of us and also that this is going to continue to get worse, inevitably. But it can only get worse inevitably if the rich aren’t as rich as we’re being told they are already.
Quite a conundrum. The answer to which is, according to the Fed at least:
When Emmanuel Saez and Gabriel Zucman did this for the US, they concluded that the share of wealth held by the top 0.1 per cent of Americans had increased by about 13 percentage points from its 1950-1980 average by 2013, with most of that increase due to the exceptional rise of the top 0.01 per cent
A new paper from economists at the Federal Reserve argues that this is an overestimate. According to them, the share of wealth held by the richest one-thousandth of the population increased by less than half as much.
Those absurdly wealthy people just aren’t as wealthy as we keep being told they are. Which, of course, means that wealth inequality is rather less than we’re being told. And that in turn means that if inequality is lower than we thought then public policy to reduce inequality is also less important. But let’s not get our hopes up. None of us actually believes that the equality warriors are going to take any note of reality, do we?
forbes.com |
