This is written more like a speech by a politician than as an attempt at analysis. The type of economic inequality that successful startups yield, and which accounts for a lot of the entries in the Forbes 400, is described merely as a theory cherished by the rich, and dismissed with evidence it would be a compliment to call anecdotal. And while there's a lot of talk about how the rich own the government, he doesn't even attempt to analyze whether this is more or less true now than it was 50 years ago, when there was less economic inequality (on paper).
The Forbes 400 contains a mix of entrepreneurs and inherited wealth, and tends to describe people as self-made if there is _any_ way of justifying that at all. For example, you typically might raise an eyebrow at the description of Philip Anschutz as 'self-made'... from Anschutz's wikipedia page:
"Anschutz bought out his father's drilling company in 1961" (age 22)
... as you do.
Paging down the list shows a quite interesting mix of self-made to lesser or greater extents, but a lot of Waltons and Rockerfellers... still.
More broadly, the emphasis on the ultra-rich isn't enormously illuminating either way, although it's worth noting that a lot of the 'entirely self-made' ultra-rich come from extremely comfortable upper-middle-class backgrounds, most obviously Bill Gates.
I would be suprised to hear any evidence supporting your "Forbes 40,000" line - got any, or are you just making it up?
I don't see any reason to assume the distribution of outcomes for financiers is flatter than that for entrepreneurs. Is there something about finance that should make that so?
No source since the "Forbes 40,000" doesn't exist but I can assure you that it's much more common to make $100m on Wall Street than in entrepreneurship. My direct manager when I interned at Lehman Brothers had probably socked away $50m himself.
I like the use of the phrases "economic inequality that successful startups yield, and which accounts for a lot of the entries in the Forbes 400" and "evidence that it would be a complement to call ancedotal" in the same sentence.
Despite the very visible presence of Gates, Buffer, Ellison, etc at the top of the list the Forbes 400 isn't exactly a startup playground (a lot of mineral wealth, the Waltons, a still-pretty decent whack of inherited $$$). The idea that American inequality en masse has much to do with startups is an idea that, well... let's just say it would be a compliment to call it sensible.
I'm sure that the American environment has resulted in great inequalities of outcome among, say, _tech_ firms (e.g. big winners and losers rather than having IBM and the seven dwarves pootle along for decades) but this doesn't translate to a fraction of the effect of, say, big declines in the tax rate paid by the very rich, or changes in the USA's blend of manufacturing or service jobs.
Not staking a position here either way, just saying that bringing startups into this is absurd navel-gazing.
It's hard to see what you're achieving trying to undermine specific points in an opinion piece ("You didn't show evidence that X" looks a lot like "I think you're wrong about X but am trying to look like the bigger man here") with this rather pointless bit of drive-by snark.
There is a lot of empirical evidence supporting the fact that the rich "own" government, or, more precisely, that politicians vote in ways that are more correlated with beliefs of high income voters than other voters, and that politicians are responsive to contributions. See, for example, the references herein:
Stiglitz is a serious economist and a Nobel laureate, there is data behind what he says, but bear in mind that he's writing this for Vanity Fair and not the American Economic Review.
It lacks in analysis because it's an opinion piece for a general audience, hence the use of anecdotes. Its not an academic article. No offense, but your articles often use anecdotes to make a point.
For example, you write:
"As anyone who has worked for the government knows, the important thing is not to make the right choices, but to make choices that can be justified later if they fail."
What evidence do you have of this? What about agencies like DARPA? Your statement could also apply to employees of large corporations.
You are doing the same thing that Joe Stigliz did in the article (without his academic ethos)
I'm not complaining about the fact that this is, like my essays, in the form of an essay rather than an academic paper. I'm saying that it's a piece of advocacy rather than an attempt to figure out the truth.
That's an important distinction. In advocacy, you start already knowing the conclusion you want to reach, and you try as hard as you can to convince the audience of it, the way a lawyer or a politician would. Whereas an essay, as the name implies, starts with a question, and from there you try to follow the truth wherever it leads.
There is not a mathematically sharp distinction between the two approaches, of course. A lawyer or politician will use the truth when it suits his purpose. And an essayist trying to follow the truth will inevitably have biases that cause him not to follow the truth as far down some roads as others.
But though the two approaches form a continuum, and writers sometimes drift along it in the middle of a given piece, the distinction is a meaningful one.
The hardest thing for me going from studying physics and astronomy to law school was getting used to the idea of a form of learning that had little to do with figuring out truth.
Top 1% in income is, hmm, $500kish? I hate to break it to you, but that isn't a CEO of a Fortune 500 company (that would imply the had 99 employees apiece, right?) or a hedge fund owner. That's like a couple dozen people who post to HN, or someone with a successful medical practice, or a well-rewarded peon who has leverage in an industry made of money. (A quant, for example.)
$500k is a lot of money, but it isn't "senators are at your beck and call, own houses in six countries" money.
[Edit to add: guesstimate based on misremembered data. Real number closer to 400k.]
250k of household income puts you at the 98.3 percentile, so any two married valley engineers probably qualify, and they probably can't afford a house.
Same situation here in the UK - you become one of the hated "rich" at about GBP 37k where income tax goes up to 40%. Nowhere in the Home Counties is that enough to get a mortgage even on a 1-bedroom flat, let alone a house. A super-tax of 50% kicks in at GBP 150k - but an ordinary family home costs around GBP 500k.
As normal in politics, the middle classes are being raped for the benefit of those at the top and at the bottom.
As an American, I am perpetually shocked at how low UK salaries sound when I hear them, especially given that I know consumer goods are more expensive on your side of the pond. Is it made up for by comparatively lower cost of housing or other essential items or what? Or is there a huge transatlantic income gap that I never really hear about (mostly it's cost of living differences that seem to draw attention)?
I don't know for sure but I suspect that people in the UK paid more attention to total personal wealth including property asset values, which were rising at a pretty ridiculous rate.
To put this into perspective with an anecdote, I know a family who bought a house about 10 years ago to rent out in an up and coming area for £60k. Two years later they bought the house next door for 220k. Now each house is worth around £400-500k. This isn't even in London/the South where the rises were even greater.
So property assets perhaps made up for relatively low income, and I feel that the government at the time played up to this. I also know a lot of people who took debts against their homes to increase their cash flow and buy cars, kitchens, etc with it.
EDIT: Of course, now the situation is different, with the property market being flat. Who knows what will happen from now on, but our new government has made noises about making sure the property market less important to the economy.
Well it's definitely not cost of housing, which is very expensive here. For the most part you can expect to pay a lot more for a much smaller house in the UK compared to the US.
I'm not sure where it is that we make up the difference in costs, or if indeed we do.
As a guess: Healthcare. My understanding is that it is largely covered by the government in the UK but consumes somewhere in the neighborhood of 20% of US incomes (figure remembered off the top of my head -- I really want to say about 22% but that implies more accuracy than I feel confident implying). So that one item alone should make a quite large impact on actual outcomes.
But, assuming we've been talking about before tax incomes, the mechanism by which you pay for your health care doesn't matter for the purposes of this discussion, does it? I.e. the U.K. has higher individual tax rates in part to cover the NHS's expenses.
That said, the U.K. spends a lot less as a percentage of GDP on health care, but then they have a substantially lower per capita GDP.
ADDED: off the top of my head, U.K. health care spending is 6-7% of GDP, US is 17%.
Note that UK healthcare costs are lower than US healthcare expenditure in part because there's no parasitic insurance industry. (Or rather, there is, but it's tiny: private healthcare accounts for <10% of UK healthcare expenditure). Instead, there's a single payer that funds everything and doesn't bother with assessing individual eligibility for treatment except in edge cases (foreign visitors, or rare and horrendously expensive cancer cases, mostly).
Are you asserting that the US system spends more effort "assessing individual eligibility for treatment" than the U.K.'s?
Well, I suppose so, the UK's NICE (http://en.wikipedia.org/wiki/National_Institute_for_Health_a...), much like our CMS (http://en.wikipedia.org/wiki/Centers_for_Medicare_and_Medica...), establishes the impersonal guidelines, but in the US only those over 64 or on Medicaid are impersonally bound by them. In practice when our "parasitic insurance industry" addresses this it's about providing coverage beyond the CMS guidelines, since the latter are a floor which our legal system won't let the "parasitic insurance industry" go below.
That legal system and most especially its lack of the English "loser pays" Rule is probably a greater influence on costs, especially since the NHS has got to have some level of sovereign immunity.
the NHS has got to have some level of sovereign immunity.
Does it? (I don't know of anyone suing NICE, but they've certainly brought lawsuits against GP practices and hospital trusts, and won substantial damages for malpractice and/or judgements requiring the provision of treatment that was at first denied on various grounds.)
Meanwhile, the NHS bodies that deliver healthcare -- be they PCTs or fundholding GP practices -- don't have a profit incentive for excluding people with pre-existing medical conditions from receiving treatment. (They may have a cost control incentive to for denying anomalously expensive treatments, but that kicks in at the opposite end of the supply-and-demand chain: and it's defended by reference to metrics like quality-adjusted life-years per unit expenditure rather than the requirement to show a profit.)
Finally, the "loser pays" rule has been greatly undermined by the widespread adoption of conditional-fee lawsuits for civil damages in the UK over the past decade.
That said, the U.K. spends a lot less as a percentage of GDP on health care, but then they have a substantially lower per capita GDP.
As someone who has a life-threatening medical condition (and also spends a lot of time talking to others with serious conditions), I will note that being unhealthy has a great many costs involved that go far beyond whatever is spent on doctors and drugs. The very high healthcare costs in the US are not merely a financial cost. They are an indicator of general poor health in the US: High levels of obesity, high blood pressure, heart disease, diabetes and on and on. People who are ill have less energy and mental focus for the tasks of day-to-day living and often spend more money on lower quality products, like eating microwave meals and fast food instead of cooking from scratch.
In fact, the degree to which my local grocery store is an utter madhouse right before American holidays that revolve around a big meal where extended family is typically invited suggests to me and others that I have spoken with that most Americans just don't much cook. I was a homemaker for 2 decades and the degree to which I shopped daily for fresh meats and produce and cooked for dinner what I had bought fresh earlier that afternoon drew frequent remarks from people who worked at the grocery store and who wished their wife would cook like I did. I have gotten myself a great deal healthier than doctors think is possible for my condition and dietary changes are a big part of how I accomplished that. It is well known that Europe has a food culture in a way that is unknown here in the US. I strongly suspect that the emphasis on eating well in Europe is linked both to having a high quality of life without a very high salary and to lower overall healthcare costs.
If you are chronically ill, you are going to have "costs" beyond whatever such studies measure as 'healthcare costs'. I was unemployable for year and years until I finally got a proper diagnosis and began getting my condition under control. The single biggest cost savings I have experienced with getting well is that my food budget has shrunk dramatically. My ex was career military. I had very few out-of-pocket "medical" expenses (co-pays for doctor's visits or for prescription drugs). My health problems did enormous damage to our budget anyway. Anyone spending in the neighborhood of 20% of their income on medical care is not healthy. Please see my other reply if you really want to read more of my rant on the topic.
I know in some European countries (I'm thinking specifically of Germany) it's much more common for employees to be issued a company car than it is in the US. Is that true in the UK as well? Or are there other things commonly provided as in-kind employment benefits that would otherwise cost a lot of money?
Firstly, the average London salary is £33,187; in Birmingham it's £25,273. An average middle-class household income should therefore be somewhere in the £30K-£60K range.
The 40% marginal income tax rate does indeed kick in at a very low level compared to the USA -- at £37K -- because it has barely risen for about 20 years. But inflation has pushed a lot of regular workers into that territory, and far from a high tax payer being one of the "hated rich", it's just another burden born by the middle class. (For "hated rich" status you need to aspire to the 50% marginal rate, which kicks in on income over £150,000 a year.)
Meanwhile, the average home in the UK costs £232,628, but that's heavily skewed by London and the South-East -- in the West Midlands (Birmingham) for example, it's £177,690.
What we've got is a situation where the marginal rate of income tax rises steeply much earlier than in, say, the USA -- but there is (or was) a much higher level of social services. For example, that tax rate includes free healthcare and primary/secondary education. And property taxes are much lower than in the USA, because education comes out of central government funds.
Although those numbers only really apply to London. Average property prices are much lower elsewhere. Average detached house in the north of England is £249,382, Wales is £220,330... (source http://news.bbc.co.uk/1/shared/spl/hi/in_depth/uk_house_pric...)
not sure what your definition of ordinary family home is but i recently bought one for less than half the price you quote in zone 2 of london. a similar place would be much cheaper anywhere else further out in london and the country.
Those figures are from 2005. Does anyone have more recent numbers? (a quick Google search doesn't turn up anything in the same format. Going to bed now, I'll search again in the morning).
I moved to the bay area recently, and I'm an engineer. I was kind of wondering how people actually live out here. I came here from New York, so I get how people can rent for their whole lives, but I had thought that there'd be more reasonable home ownership in the bay area.
I'm thinking of the rent control, the seemingly extreme (compared to anywhere else I've experienced) adversity toward any kind of building or redevelopment, the ongoing Twitter dustup, and so forth.
A more precise title would be "Of the 0.1% By the 0.1% and For the 0.1%" but perhaps that would be too wonkish for vanity fair. It's an opinion piece for a general audience not an academic journal article.
It's really difficult to take this sort of article seriously. Whether it's the talk of the top 1% "taking" (which is strange, because everything else in the article is trying to demonstrate ther undeservingness) or this:
> While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.
Wait, is the problem poverty or inequality? If "the plight of the poor" is simply that they're not as comfortable as those in the top 1%, but they still have cars, and TVs, ad microwaves, I'm never going to be impressed by this sort of article.
We all agree the article's dumb and pretty poorly written. Many lower income people pay no income taxes at all. I think that's rightly so, but it seems silly to write about a lack of redistribution in the US. In fact, the top 50% of households in income paid 97% of income taxes in 2008.
What is troubling, and what the author ignores, is the changing distribution of returns in our economy. There's no point in trying to legislate it away, but more and more work is becoming automated. We're in the middle of a second industrial revolution, and many kinds of work that people rely on for income and identity will go away over time. Will we end up in a society where 90% of us, who don't have the skills to be productive, are subsidized by the remaining 10%? That seems like an awful outcome from a social perspective, but I'm not sure how we should respond to it.
From a policy perspective, I would like to see a higher short-term capital gains rate to limit the attractiveness of financial instrument trading, and I think carry income (on VC and private equity) should be taxed as income, not at the lower rate for capital gains. But apart from those areas, we need to address the long-term trend of growing income inequality as a society, not with legislation.
Tax all financial transactions: a very small tax, but just enough to keep trading systems that do many transactions quickly become less attractive. I believe that this type of high speed trading does not generate value for society. I am thinking of something similar to proposals that would make people pay $0.000001 per email to make spamming none cost effective.
The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.
Not only is this paragraph entirely unsubstantiated in the essay, but I doubt that it's even true. Perhaps the author could have interviewed people in this top 1% or cited polling data or something. Instead they went with caricature.
This article makes one logical fallacy after another, offhandedly referring to "economists" as an appeal to authority without providing any reference, proclaiming numbers and statistics without any evidence, making bias slurs and assumptions without giving any warrant or citation. It spews Keynesian Economics and a Communistic regard everywhere while blaming Capitalism for the consequences of Progressivism in the last century. That somehow the Recession is the fault of a rich CEO and not hyperinflation and credit expansion. And provides no accountable cross reference to other time periods or governments.
It is a great relief to see that this was not upvoted by HN for its content but rather to demystify its preposterous pontification. Worst of all, the author tagged himself in the keywords, now talk about vanity.
The key section of the article is the last one, about "the erosion of our sense of [national] identity, in which fair play, equality of opportunity, and a sense of community are so important."
The author, Joseph Stiglitz [1], doesn't explain how inequality of wealth alone causes such erosion. On its own, inequality very well might not.
But other factors might be at work as well. Consider the effects of envy, or more precisely, "relative deprivation" [2]. There's been research indicating that no matter how well off humans are on an absolute scale, we tend to become dissatisfied when we perceive that we're worse off than our neighbors; we tend to believe we're somehow entitled to do at least as well, or even better, than they. (See also "keeping up with the Joneses.")
Envy is probably a product of natural selection; it can be a useful motivator, at least when properly channeled.
On the other hand, envy might be less adaptive in an era of global mass communications. It's certainly easier today for millions of people to become aware of, and then (perhaps subconsciously) resentful of, others who seem better off than they.
So it could be that we have a combination of causes at work: Increasing public awareness of wealth inequality leads to increased envy, which might indeed start to erode the social fabric.
If this turns out to be the case, what could we do about it?
Some might say humanity should be less envious, that people should just accept inequalities of wealth as natural consequences of their own limitations. History suggests that they -- or should I say, we -- probably won't.
The last tsar of Russia and his lot also practiced denial. The ensuing tragedy not only wiped them out, but also caused misery to countless people for almost a 100 years. Lets hope history won't repeat itself.
The top 1 percent of American income-earners account for ~25% of the nation’s total income every year. The top 1 percent of American wealth-holders account for ~40% of the total wealth. I hear statistics like this all the time but I never understand... What is the "correct" amount? The top 1 percent of anything by definition are going to hold some larger share. There are compelling theoretical reasons for wealth and income distribution to follow a power law (ie. Pareto distribution). Why should these numbers be as they were 25 years ago, or as they are in other countries now?
A recent survey found rather surprising consensus between people on different part of the political spectrum if you asked them what an ideal wealth distribution would be. Overall, people thought the top 20% should ideally own about 32% of the wealth; liberals preferred 30%, while conservatives preferred 35%. People making over $100k/year were slightly more pro-inequality, but still only gave 40% as their ideal target. No demographic group gave anything close to the current proportion, which is around 83%, as their ideal target.
So it seems like "top 20% should own 35% of the wealth" is roughly the consensus of the vast majority of Americans, give or take 5%, across many demographic and political groups. Where they differ is what, if anything, we should do to make that happen.
So what would that actually mean? If you put everyone on the X axis in order of their income, with the Y axis representing income, what would the curve look like in order for the top 20% to own 30% of the wealth? And if you left this running, what would the total wealth graph look like after say 50 years?
The most conservative proposal from the survey splits the wealth at roughly 40:20:20:10:10. That means if we had an average representative of each of the 5 groups, they would each be worth 5* $175* (that group's percentage) = $350k : $175k : $175k : $87.5k : $87.5k
Meanwhile, the most liberal proposal was roughly 30:20:20:15:15 giving $262K : $175k : $175k : $131k : $131k
Heh, the fringe Scottish Socialist Party had a much maligned proposal to instate a wage cap of £250k (approximately $350k), which according to this study actually aligns with the conservative ideal. Just shows how firm a grasp of the statistics people have when it comes to this sort of thing.
The main criticism isn't that "the rich" have a lot of the income and assets, or that their share is increasing, it's that the rest of the people are getting less. The american society as a whole is getting richer, but the majority of the members of that society are getting poorer. Is that really the way things should be?
On the other hand, this piece only talks about inflation-adjusted net income. If you compare the quality of life or purchasing power I think that everyone is still better off with each year. Even though a typical middle-class family has less money now than 30 years ago, they can have mobile phones and a flat-screen TV and a computer and internet and one or two fuel-efficient comfortable cars, and none of those things existed 30 years ago.
Nor is that what henrikschroder is claiming. I understand him to be saying that the majority of Americans have declining incomes, adjusted for inflation, over some recent period of time. Could be true, but I'd like to see numbers.
Exactly, I've even seen some articles here on HN that were about this, but a quick googling seems to say that the jury is kinda out on that one. If you look at wikipedia the incomes for the lower percentiles are pretty flat, but not really declining.
Yes, I apologize. There are a few things that raise my hackles when it comes to discussions of "income inequality" and "rich people".
1) The presumption that wealth is gained at the expense of someone else.
2) That wealth is always given and not earned.
3) That being "rich" is the result of some sort of criminal behavior.
4) Phrases like "doesn't need that much money" or "has too much money" and the like.
5) The idea that a job belongs to anyone other than the person providing it.
True. Obviously if we both work for the same company, there's a fixed set of money they pay for our two salaries (generally speaking). Should I perform better, My salary might go up at the expense of yours going down but alternately your salary could stay the same while mine goes up.
Some people work very hard and are very creative. Those who produce more should get more. That isn't the entire picture of how people get wealthy in America, but it is the gist of it.
Of course, America has an increasingly corrupt government and a great many people acquiring wealth by using government to scam the rest of us. And we should be railing against that.
But the fact that wealth is distributed unevenly is inevitable. Not only are the productive wildly different in their abilities to produce, the ability of the corrupt to steal varies greatly as well.
This article is fodder for those 1000 Thoreau is talking about -- "There are a thousand hacking at the branches of evil to one who is striking at the root."
Not once did the author submit forth anything of value. I kept thinking I wish I wrote this article and instead of complaining about the troubles focus on WHY? WHY is this happening? I've always come to the same answer: give kids the opportunity to find what they love (or who they are) through education.
I dislike the PIE analogy! Anytime they mention pie and those greedy few it gives the wrong idea about wealth generation.
I think a growing trend of more educated peoples will fix this inequality over time -- wealth distribution will be more sparse.
Just consider this. Most tax money goes toward providing defense, Which is just a nice word for protecting the property of the wealthy. The more property you have, then the more value you receive, thus the more, not less, you should pay. Its called welfare for the rich. Our taxes go towards securing their position and goods. Say hello to that boot rushing down on you.
It seems like (FY2010) 20% of Federal expenditures go toward defense, and 58% go to entitlement programs (which (I speculate) the 1% wealthiest do NOT receive disproportionate benefit from).
From that chart, it appears the problem is the healthcare industry is getting too much money. Medicare is expensive along with the tax deduction for health insurance. If we could get down healthcare costs, it would solve the problem.
