Why Big Wealth Flows Straight to the Top

I love when a chart tells a story, and I can't stop thinking about this one from the president's recent report on the economy:

Source: Piketty and Saez, via President's Report of the Economy.

The most common response to this chart is some form of outrage. By and large, it's viewed as either a symbol of destructive wealth inequality or the propaganda of those looking to instigate class warfare.

Both may be true, but forget about that. What I want to know is, what's caused the big shift in the first place?

That's nearly impossible to answer -- it's too complicated a subject to reduce to simple explanations. You can write entire books on the subject. And many have.

But however incomplete, some thoughts and analyses from various commentators make enough sense to merit paying attention to. Let's talk about a few of them.  

Diane Swonk, chief economist of Mesirow Financial, had this to say when I asked her about wealth inequality last year:

We peaked in educational attainment in this country in the 1970s, just at the very moment that we were yielding the industrial age to the information age, and paying a premium for ideas and education and higher levels of education rather than manual labor. As a result, the bottom 50% of wage earners started to stagnate while the top 10%, those with graduate degrees, started to see their wages absolutely skyrocket.

This stretches beyond graduate degrees, actually. Thirty years ago, those with a bachelor's degree earned an average of 40% more than those with only a high school diploma. Today, the difference is more than 80%, according to economist Tyler Cowen. According to James Heckman and Paul LaFontaine of the Bureau of Economic Research, high school graduation rates peaked almost 40 years ago and have since declined by 4% to 5%. Furthermore, "the real wages of high school dropouts have declined since the early 1970s while those of more skilled workers have risen sharply," they write. So there's one reason for growing inequality.

Next comes from an interview I did last year with Reuters editor Chrystia Freeland, who has written extensively on wealth inequality in recent years. When asked about the rise in inequality, she noted:

My personal view is I don't think there is a single cause. I think it's a number of things going on. One is definitely globalization. Another probably more important is the technology revolution. A third, I do think that there are some political and cultural factors going on.

About those cultural factors (emphasis mine):

I think where it has become a kind of cultural factor is when it comes to the compensation of CEOs. Some of that is being driven by companies being bigger, absolutely, with globalization and technology coming into play. But part of it is that it's more socially acceptable to pay CEOs a great deal of money. And in historical periods or in cultures where it wasn't, you didn't see these huge salaries.

That's a big one. Of those classified as the 1% of wage earners, a third are non-entrepreneur business executives, according to data from Williams College, the U.S. Treasury, and Indiana University. And while all business executives aren't CEOs, the trend in CEO pay is clear and staggering: In 1994, the average CEO earned 90 times more than an average worker, and in 2007, 180 times more, according to the Congressional Research Service. Other analysis shows that the trend in exploding CEO pay has been ongoing for decades.

Warren Buffett commented on this in his 2005 letter to shareholders:

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won't change, moreover, because the deck is stacked against investors when it comes to the CEO's pay. The upshot is that a mediocre-or-worse CEO -- aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo -- all too often receives gobs of money from an ill-designed compensation arrangement.

Now back to Freeland, who made this observation about inequality in general:

What's really striking to me is the extent to which this is really a global story. It's happening in the United States, it's happening in Britain. It's also happening in the emerging markets. This is a huge issue in India, in Russia. It's the thing that the communist leaders of China are most concerned about.

That, I think, suggests that growing inequality is more about technology, globalization, and cultural shifts than political policy (though the latter is where most of the blame is targeted).

Finally, we know that the biggest shift in the composition of the 1% over the last 30 years has been a jump in those working in the financial sector. Financial workers made up less than one-tenth of the 1% in 1979, but 14% by 2005. And not only did their ranks grow, but the share of income they took home utterly exploded. Financial workers in the 1% captured 0.8% of national income in 1979, but 2.8% by 2005. That's also consistent with the rise in finance as a share of the economy. Finance made up 8.5% of GDP in 2010, up from 3.5% in the 1960s.

Here's what Berkshire Hathaway (NYSE: BRK-B  ) Vice Chairman Charlie Munger has to say about the incredible rise of finance:

We would be better off if we downsized the whole financial sector by about 80%. I don't think the rest of us have anything to gain having massive trading between computers which try to outwit one another with their algorithms to the extent that when one succeeds, the rest of us are all paying for it. And why should we want to encourage our brightest minds to do what amounts to code-breaking and electronic trading? I think the whole system is stark-raving mad. Why should we want 25% of our graduating engineers going into finance? ... I don't see any social contribution.

Berkshire has investments in Goldman Sachs (NYSE: GS  ) , Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC  ) , so this is mildly hypocritical. But Munger's broader point is no doubt true. As long as finance pays like it does, the best and brightest will flock to it. And as long as the best and brightest flock to it, it will find ways to grow -- whether at someone else's expense or not.

What do you think about income inequality? Sound off in the comments section below.

Fool contributor Morgan Housel owns shares of Berkshire and B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway and Wells Fargo. The Fool owns shares of and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo, The Goldman Sachs Group, and Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 11, 2012, at 2:26 PM, 123spot wrote:

    It looks like the financial industry has been stealing from the rest of with skill and alacrity. Spot

  • Report this Comment On April 11, 2012, at 2:27 PM, 123spot wrote:

    "rest of us "

  • Report this Comment On April 11, 2012, at 2:53 PM, hardrive118 wrote:

    I especially agree with Munger. These days businesses, big and small, and using retained earnings to grow, just cause they don't want to be dependent on bank credit. They realized it in recent years when banks cut their credit when they needed it the most. In the old days, at least I know during Adam Smith time, saving was a common way to invest in "capital stock". Right now banks like USB are extending credit to high quality borrowers but as yet borrowers are still hesitant to use it and are instead strengthening their balance sheets.

  • Report this Comment On April 11, 2012, at 4:16 PM, setht23 wrote:

    I hate when I see charts that are mainpulated to show the data the creator wants. By starting at 6% this chart dramatically exemplifies the change in income. I agree that the change has been significant, but leaving 1/3 of the chart off doubles the visual impact of the change. I'm not blaming the author of this article. I just find these tactics exhausting, and unfortunately they work on the undereducated/ill-informed.

    To anyone shocked by the chart, mentally add the extra 6% to the bottom of the chart and you'll realize the change is large but not completely absurd.

    Overall I like the article, and personally don't find the change that horrifying. Capital wins over labor, always has, always will. It's why we all invest isnt' it?

  • Report this Comment On April 11, 2012, at 4:22 PM, TMFMorgan wrote:

    ^ Understandable. I didn't make the chart, for what it's worth, but I don't think it's misleading either. The axis is labeled for all to see.And sometimes (though not in this case) it's misleading if you *don't change the scale because the scale becomes so large that a series looks flat when there's actually change.

  • Report this Comment On April 11, 2012, at 4:43 PM, slpmn wrote:

    setht23 - What happens in practice is that labor wins out over capital. CEOs are labor. Goldman Sachs traders are labor. Management pays itself first and decides how much to ration out to the shareholders. It's what happens when CEOs are also Chairman of the Board, and the Board is made up of a combination of people who work for the CEO and CEOs from other companies.

    To maintain a facade of independence on CEO compensation, they hire a consultant to tell them that the average CEO of a giant company makes XX million per year, but your CEO works harder and has a tougher job, so he should get XX plus Y. Then his numbers get thrown into the averages for next year, and on and on. It is a racket and the shareholders are worse off because of it.

    The CEO of Wells Fargo has averaged about $20 million per year in each of the last three years, including stock grants. Over that period, the total return to Wells Fargo shareholders was about negative 1%. Wells Fargo is a good bank and the CEO does a good job, but why is he getting that much money when the shareholders have gotten squat? It's as Housel suggests, we have a culture that accepts the CEO as royalty in this country.

  • Report this Comment On April 11, 2012, at 4:49 PM, DJDynamicNC wrote:

    "Capital wins over labor, always has, always will."

    Well, it has so far. Won't necessarily alway be the case. ;)

  • Report this Comment On April 11, 2012, at 4:54 PM, setht23 wrote:

    Morgan,

    I understand the reason for why it's formatted the way it is. But you can't tell me it's coincidence that it happens to help make the Obama administrations point. I'm not bashing Obama in particular, this is just an example of how statistics can be made to say what you want them to.

  • Report this Comment On April 11, 2012, at 5:28 PM, veritasvincit wrote:

    Re: chart - if we look sideways across the surface of the ocean, whether during fair weather or a hurricane, we may forget that it's miles deep in places.

    Aren't many of these statistics culturally reflective? Highly-paid professional athletes don't really make much beyond entertainment. Yes, it's true they 'contribute' to the economy, but primarily via consumption. Cities with big-league teams indeed reap the benefits of such activity, but contrast that with the grumbling that occurs when the local school superintendent negotiates a contract that seems out of proportion to mean incomes. Does the superintendent have more real effect on the productivity and well-being of the community than the guy who hits 40 homers? I think so.

  • Report this Comment On April 11, 2012, at 5:32 PM, TMFMorgan wrote:

    <<But you can't tell me it's coincidence that it happens to help make the Obama administrations point.>>

    FWIW, the Obama administration didn't make the chart either. It's from Piketty and Saez (as noted below the chart).

  • Report this Comment On April 11, 2012, at 6:32 PM, MNGPHR wrote:

    I completely agree with Munger. I don't think the stock market should be set up as a casino where bets are made on which direction a stock goes, the original intent was to provide capital for companies should they wish to expand their operations, and then you own a piece of the company and get to share in their profits or losses. Computerized trading where thousands of trades ar emade per day to capture small percentages of porfit seems ridiculous to me, but they are just gaming the system I can't blame them.

    I feel like an idiot for going to school to get an engineering degree and now a job as an engineer when I should have been applying for jobs on wall street since I have an apptitude for higher level math.

  • Report this Comment On April 12, 2012, at 9:52 AM, deckdawg wrote:

    This chart actually demonstrates the stupidity of the argument that "income equality" will somehow be a panacea for all. That's been the cry of populist demagogues of all stripes (including the Marxists) for the last 150 years. Is the point of this chart that we should be longing for the good old days of the Carter years? After getting out of the Army I struggled to finish college, start a family, pay my 13% mortgage, endure prolonged stagflation, etc. Somehow, I don't remember those as the good old days (economically, at least). Maybe if I had had this chart, I could have rejoiced in the wonderful income equality we had in the country.

    The issue of grossly overpaid executives at publicly traded companies is an entirely different subject. Shareholders are indeed getting ripped off. As a shareholder, I would beg the government to not attempt to fix this. Everything the government does to be seen as fixing this will just cause other problems.

  • Report this Comment On April 12, 2012, at 2:31 PM, DJDynamicNC wrote:

    ^^^ Your argument here is "income inequality was better back then but some things were still imperfect, therefore reduced income inequality has no value."

    There's a logical fallacy there somewhere, if you're willing to look for it.

    Your example is further enhanced by ignoring all of the years which don't fit your preferred claim, which is yet another logical fallacy.

    Finally, I wonder if you would also beg the government to stop prosecuting insider trading, securities fraud, and failure to report fundamental financials. Do you think that would improve the market from a shareholder perspective? If so, in what way?

  • Report this Comment On April 12, 2012, at 3:15 PM, deckdawg wrote:

    DJ, does it make any difference to your life at all if the the top 1% of income earners in the US earn 8% of the total income or 18% of the total income? Do you somehow have less because someone else has more? How would your life be better if income inequality was reduced? Do you think life would be more fair if a law were passed requiring Warren Buffet to mail you a check each month? Are you willing to locate someone who makes less than you, and start mailing them a monthly check that equalizes your incomes? If you think reducing income inequality is a noble goal, that would be a wonderful place to start. It would also demonstrate your commitment to this worthy cause.

  • Report this Comment On April 12, 2012, at 3:44 PM, sheldonross wrote:
  • Report this Comment On April 12, 2012, at 4:03 PM, LynxSS77 wrote:

    I agree with Charlie Munger. We should not be sending 1/4 of our best and brightest into finance to think of bigger and better ways to skim off the top and scam the system to rip the rest of us off. They should be out there developing new technologies, improving old ones and developing products for the betterment of all of us and helping make America great again.

    Instead of generating new income in the economy the finance industry has become a leach weakening those that do by stealing away talent.

    One of my coworkers, the best engineer we had, left us to join a finance startup doing this high speed trading. In more than a year of looking we've still not found a replacement.

  • Report this Comment On April 12, 2012, at 5:37 PM, DJDynamicNC wrote:

    @Sheldon: can't watch videos, I'm afraid, so I apologize for the lack of response.

    @Deckdawg: First, you failed to address the logical fallacies present in your initial claim.

    Ok, point by point:

    ---> "does it make any difference to your life at all if the the top 1% of income earners in the US earn 8% of the total income or 18% of the total income?" <---

    Absolutely. The strength of my nation is determined by the strength of its people, and increasing concentration of wealth in the hands of the few... well, you tell me how it's working out. If the people around me are suffering - and they are - then yes, my life is impacted by that, both materially and emotionally, because I have a nasty case of liberalism which requires me to care, and care a lot, when other people suffer.

    --->"Do you somehow have less because someone else has more?" <---

    It is not necessarily the case that I will have less because others have more, although in a finite economic system there are obviously going to be certain practical limits. However, in practice, it is quite clear that in this nation certain people are doing extremely well and others are literally dying for financial reasons. There tends to be a lot of victim blaming - people should "plan ahead" or "know better" or "get a job" or "get a real job" or "study harder" and so on - all of which distracts from the simple fact that people are, in the very permanent sense, dying for financial reasons. In exchange for our sacrifice of human lives, we give really rich people the opportunity to become even richer. If you feel that's a healthy trade off, then so be it, but I question anybody who believes that incalculable wealth is the primary indicator of a nation's financial freedom, or that such appearance of financial freedom outweighs the human cost.

    ---> "How would your life be better if income inequality was reduced?" <---

    It's hard to argue a counterfactual - I can't in good conscience say "well this would happen if you did this, and this would happen if you did this" with any certainty, and you should beware of people who do - but certainly it is easy to imagine any number of ways in which a more equitable flow of resources through society at large would improve my own personal lot in life as well as the lot of those around me. You might even say it would have a trickle-down effect. ;)

    --->"Do you think life would be more fair if a law were passed requiring Warren Buffet to mail you a check each month?" <---

    In effect, this happens - Warren Buffett pays taxes, and likely makes less use of the services for which taxes are paid than I do, as I use public transit and he probably doesn't.

    ---> "Are you willing to locate someone who makes less than you, and start mailing them a monthly check that equalizes your incomes?" <---

    Again, this is happening right now. When I pay taxes, I put my money into a general pool, and since I make a decent amount of money, I put in quite a bit more than I receive in services. The equalization effect is mild because taxes are too low in this country, so I enhance it in a variety of ways, but yes, that is exactly what is happening and I am happy to be a part of it.

    ---> "If you think reducing income inequality is a noble goal, that would be a wonderful place to start. It would also demonstrate your commitment to this worthy cause." <---

    I agree! That's why I've capped my income; the first 60k is mine to do with as I please, the next 40k must go into savings and investments, and anything I ever earn in any given year beyond 100k, for the rest of my life (indexed to inflation), gets donated to charities, activist causes, and paying off the national debt. Obviously I don't limit my donations to money in excess of the cap - I've made donations to charities, political causes, and paying off the debt since I was making poverty level wages working in retail - but EVERYTHING over the cap will be donated. I've yet to encounter any situation in which 100k wasn't vastly more than I'd ever require and it would be the height of selfishness for me to live so in excess of my needs. It is pleasing to see that you agree.

    Money should serve people. Not the other way around.

  • Report this Comment On April 12, 2012, at 5:55 PM, TomBooker wrote:

    Way too big. But here's plain vanilla Main Street version.

    In the past 20 years, I have watched all legislation impact the earner (wage and salary), and enhance the capital holders.

    In the 70's, people could retire after benefiting from their own work alone. Savings, Bonds, CDs, and only stock in the company for whom they worked.

    Now, a person is forced into the stock market. which has nothing to do with their own work, places risks on savings, and siphons off the financial industry's cut.

    It's a life-long tariff, which did not exist since the prior major event. It can't be said it improves people's wealth universally, because in any year it is a zero-sum game. With Primary Dealer/brokers Hedge Funds, Private equity etc pulling their share, and now $billions to HFT Co.s, there's not much left for the very limited number of MainStreeters who have meaningful equity involvement. With 30% of the population having 0.

    Think about this schismed "Recovery" by Bernanke. If you were in the market, you booked over 100% returns. If you weren't, you got further eroded by the QE inflation across all asset classes (ie commodities) and earned income degradation.

    The most ironic part of this is, in the past 15 years we investors have become so demanding, we trained Corporations to behave so efficiently for the stock investors, that they have negatively impacted the standard of living for the majority of the Nation..

    But here's the most important part.....

    What is the lead-pipe best indicator for trouble ahead?

    The Financial System is over-participating in economic revenues. In a world of risk and reward, you know where you are. Either they are gaming it, or they are risked out the wazoo.

    What comes out of that is The Great Equalizer avoided. The Savings and Loans at least took some decent hits, because Volcker brought the lumber. How about LTCM? The people paid for that, and the whole thing was smoothed over. The big capital creditors got a free spin.

    Everything should have been let fall and a major crisis occur. Who would have gotten the major beating?

    Capital holders.

    In the head-faked Apocalypse of 2008, who got protected from losing huge.

    Capital holders. ie The creditors.

    Letting that fall would have had a leveling effect across the entire Economy and the world.

    Somewhere in the Scripture of the Belief System we have embraced, it says that incredible economic catastrophes have the purpose of passing judgment on the mess and its perpetrators.

    The Capital holders got away again.

    And the Earners are being punished from all sides for it.

    In an entirely unacknowledged concept, ... that which people BELEIVE is the most important component to moving through cycles. You must come to grips with reality, before you will behave in a manner which will move you forward. (there should be credit to someone smart here. I don't have time to look).

    5 stages of a Nation, and this cycle has gone on for millennia.

    The people are poor and they think they are poor.

    The people are rich, but they still think they are poor.

    The people are rich, and they think are rich.

    The people are poor, but they still think they are rich.

    The people are poor and worse, but are taking forever to admit they are poor.

    The key here is the longer a people of a Nation refuses to face the reality, the longer before their thinking adjusts, which then provokes the behaviors necessary to overcome the poor quality of life.

    Globalization. Absolutely.

    First and foremost, our "globalization" was predicated on capital availing cheap labor.

    Globalization then meant garnering foreign profits. Making domestic spending less necessary to corporate survival.

    It's the killer app. Flummoxed education is just a resulting symptom.

    Capital, you win.

    Labor, you lose.

    In this context, the perma-bears would say the field levels and it ends badly for those with the capital, when the people are incontrovertibly faced with their plight. Stop spending, keep the rewards of their work near to them, and save every penny they can scratch out of the dirt without risk.

    The graph above tells me we are already there.

    Everybody else is telling me otherwise.

  • Report this Comment On April 12, 2012, at 6:06 PM, DJDynamicNC wrote:

    ^^ Largely agreed, but with more optimism.

    The graph above also tells me we've been there before - and we won then, too.

  • Report this Comment On April 13, 2012, at 1:05 AM, Sunny7039 wrote:

    Hey, I see this thread got better!

    Bill Moyers' Journal has a host of interviews that explain point by point exactly what happened, from a remarkably objective stance. It's a matter of who bought whom, and how, and why.

    Buying laws that enrich you produces nothing. It is not productive labor. You can believe it is, you can fool other people into believing that it is, but at some point reality will intrude, as the saying goes. We make be closer to that point than we think.

    BTW, a series of articles recently pointed out that we are becoming a society that depends on a servant underclass -- and no, I don't mean conveniently shackled in China. Nope. Right here, living down the street from us:

    http://www.economonitor.com/blog/2012/04/the-us-has-the-high...

    Has anyone verified these figures? I was looking at a couple of OECD websites, but didn't have the time to confirm them. Economonitor is usually very reliable and enlightening. It is worth the time to read what they have to say, and to research it further.

    And at the same time, college administrators who make $500K to $1MM, and who pay their football coaches even more, are looking for "cost-cutting." It's not enough that there are fewer and fewer tenured faculty with doctorates teaching anyone other than a handful of acolytes. Oh no. We are simply going to have to relegate more people to an online "education."

    Regardless of politics, people need to look at what is happening a little more objectively. I teach part-time at a community college in a remarkably affluent area, and if you could see how poor the students' reasoning skills are -- if you could see how they simply do not understand simple fractions, much less anything that resembles quantitative reasoning -- you would know that the jig is up.

    I don't care if you are liberal, conservative, or a Marxist. Regardless of what you may (secretly?) wish to see happen, you have got to realize that this isn't good -- this isn't working. And every so-called "solution" that has been proposed so far is just more of the same. More money shoveled over to FIRE, less real oversight, less respect (and of course less compensation) for real work, and most of all, less access to a real education for the next generation. The entire political class is in on it. No one wants to change anything. They simply want to "manage" the crisis so that it doesn't spin out of control just yet, not until they and their cronies end up with a bigger stash.

    You know, in Athens around 400 B.C.E., nobody believed there was a difference between appearance and reality. Every person was the arbiter of their own "truth," and had a right to persuade others in the agora to join them in their view. The marketplace ruled of course -- that's all there is to this "reality" jazz, after all. Sound familiar?

    Athenians were fabulously wealthy, and the fun lasted for a long time. It seemed more and more impossible that it could ever end.

    Then they, er, lost a war . . .

  • Report this Comment On April 13, 2012, at 1:20 AM, Sunny7039 wrote:

    BTW, if income inequality is due to "education" or some other form of "merit," why the huge spike in inequality in the late 1920s?

    Were the top 1% really, really smart back then, too?

    Was "globalization" forcing down the value of real work?

    Was the entire world interconnected by amazing new technology?

    I love how the shills quoted in the article are trying to explain this, as though in the entire history of humanity nothing like it happened before the 1980s.

    It happened lots of times.

    It never ended well.

  • Report this Comment On April 13, 2012, at 5:46 PM, DJDynamicNC wrote:

    "BTW, a series of articles recently pointed out that we are becoming a society that depends on a servant underclass -- and no, I don't mean conveniently shackled in China. Nope. Right here, living down the street from us."

    That's exactly it.

    Slavery is a state of affairs in which human beings a treated like property and forced to work doing tasks that other people command or risk losing their livelihood and life itself. Bear in mind that the wealthy slaveowners will never have to fear being on the other end of this arrangement.

    Minimum wage labor is a state of affairs in which people have so little influence and money that they are forced to work doing tasks that other people command or risk losing their livelhood and life itself. Bear in mind that the wealthy will never experience being on the other end of this arrangement.

    And oh boy, here comes the Cato institute to us that all human rights flow from the fundamental notion of the self as property.... Can't possibly see that going wrong.

    "While there is a lower class I am in it; while there is a criminal element, I am of it; while there is a soul in prison, I am not free."

  • Report this Comment On April 13, 2012, at 6:12 PM, wolfman225 wrote:

    The cream always rises to the top. Unfortunately, it's not all that does.

  • Report this Comment On April 13, 2012, at 6:19 PM, wolfman225 wrote:

    On another note, real wealth is organic, almost alive.

    Once you have reached a certain level of monetary achievement it almost takes on a life of it's own, getting to the point of almost being self-perpetuating. That, in a nutshell, is why great wealth will always concentrate at the top of any society. The only answer is to learn from those who have managed to become "self-made" men and women and attempt to do what they do.

    If you are successful, and attain significant wealth, you will also have a self-renewing cash machine.

  • Report this Comment On April 14, 2012, at 1:31 AM, DJDynamicNC wrote:

    ^^ I can agree with that. However, I see it as a major problem, rather than a good thing.

    That is the antithesis of the capitalist meritocracy we're told to expect. It's "work hard and succeed," not "work hard and then let other people work for you and never have to work again and then pass your wealth on to your kids and build a dynasty of people who never have to work but own everything."

    Meanwhile, a great quantity of the best "cream" can't afford to get an education, can't get out of poverty, has to work three jobs to support a family, or dies from leaving basic health care untreated due to lack of insurance. We're losing a lot from our refusal to give people a baseline of support.

  • Report this Comment On April 14, 2012, at 10:33 PM, wolfman225 wrote:

    Come on, DJ. It's precisely the capitalist meritocracy we're told to expect. The American Dream isn't only for our personal advancement. What we want most is to provide for our family's security, now and in the future. One of the most reliable ways to do so is to create and build a successful buisness. If we're lucky, it becomes an empire able to provide for not just our children, but our grand-children and theirs.

    I don't agree with the "never have to work again" angle. Most of those who have achieved great wealth aren't the type to rest on their laurels. Many multi-millionairs and billionairs put in 12,14, even 16hr workdays long after they've reached the point of perpetual wealth. It's not the money, that's just a way to keep score, it's the challenge, the game; that's what keeps them interested.

    I don't have the specific stats, but I'm pretty sure that any investigation of the "idle rich" would show that the majority of them sort of fell into it, rather than acquiring the wealth through their own efforts. These are usually the lotto winners and the spoiled offspring of celebrities and professional athletes. The "let other people work for you and never have to work again" argument isn't worthy of you. That's the kind of statement I'd expect of others of lesser quality. It's the argument that says all "rich" exploit their workers and therefore don't deserve what they have.

    Lastly, there is no one who "can't afford to get an eduation, can't get out of poverty". Opportunity, contrary to the popular opinon of some, is available to all, while education is not solely the province of officialdom. Every town has at least one library, and most have free internet access from terminals located in these facilities. All the knowledge of the world is there for the taking. It's not going to be as easy as having some professor lecturing and spoon feeding the information to you, you'll have to dig for it yourself. On the plus side, having gone through the process, you will often have a much firmer grasp of the knowledge than those who spent $10K/yr being lectured to.

    Education is free, all you need is the dedication and drive to seek it. Coincidentally, dedication and drive are the main ingredients in success, also.

  • Report this Comment On April 15, 2012, at 8:45 AM, duuude1 wrote:

    "provide for our family's security, now and in the future" = http://www.youtube.com/watch?v=FYLon-rki10

    Donate your fortune to charity and raise your kids to be strong, resiliant, self-reliant and most of all - happy. Let them know that when you are gone, they are on their own - but give them the skills and self-confidence to make it on their own.

    Duuude1

  • Report this Comment On April 15, 2012, at 11:00 AM, wolfman225 wrote:

    "....raise your kids to be strong, resiliant, self-reliant and most of all - happy....give them the skills and self-confidence to make it on their own."

    Isn't that much better than teaching our children that they are screwed at the outset? That "the man", the "evil, greedy rich" are all out to steal what's rightfully theirs?

    Problem is, too many insist that the rewards that typically come from hard work, persistence, and discipline should come first. THEN, (maybe) they'll apply themselves.

    As for telling your kids they're "on their own", do you mean that someone who spends a lifetime building a family business should be obligated to sell when they retire? Whatever happened to the idea of "carrying on the family business", with multiple generations working with their parents to provide goods and services to their neighbors while creating income for their own families?

    Many of the most successful businesses in America today becan as small "mom & pop" local operations that were built by one person and expanded on by decendents who "worked their way up" under the tutelage of the founder(s).

    I don't really understand the inclusion of the Paris Hilton video. She, like the Kardashian's and many others is famous for nothing more than for being famous. The recipient of monetary gain from a notoriously bad sex tape. Ditto for her BFF, Nicole Ritchie. No skills, just the spoiled offspring of rich parents. Contrast them with Mary-Kate & Ashley Olsen, who educated themselves and used their collective business accumen to leverage the wealth gained during their time as child stars into a billion dollar enterprise covering everything from fashion to perfume to home fashions. They are a perfect example of being self-made. If any of you want to point to the fact that they were "lucky" enough to have the leg up of earning 10's of thousands of dollars per episode and that "anyone could succeed with their advantages", I point you to the many examples of other child stars who also earned similar amounts and ended up basket cases, broke, nothing more than fodder for the weekly tabloids.

    No matter where you start from, success or failure is equally possible. For an example from the other side: Oprah Winfrey. Can anyone REALLY argue that someone else is born with a tougher row to hoe than the black daughter of a share cropper in the 50's deep south?

  • Report this Comment On April 16, 2012, at 11:03 AM, DJDynamicNC wrote:

    ---> "It's not the money, that's just a way to keep score, it's the challenge, the game; that's what keeps them interested." <---

    That's exactly the point that socialists make when they say that people who have food and shelter provided for them by the government would continue to work. It's refreshing to see you concede the point. ;)

    --->"Education is free, all you need is the dedication and drive to seek it. "<---

    I will accept your claim that education is available to all, with the caveat that somebody raised in an environment in which people are shooting at him or her daily, or in an environment in which he or she must begin working at the age of 14 in order to keep the family in food and shelter, is much less able to take advantage of that educational opportunity (and it should be noted that the availability of libraries is one of the most socialist initiatives in which our society is engaged, so I am glad you appreciate the value of government provided educational opportunities).

    ---> "Opportunity, contrary to the popular opinon of some, is available to all, while education is not solely the province of officialdom" <---

    Agreed, but again, the availability of that opportunity is hardly provided on an equal basis. We all have far more opportunity than many people in most other countries, yet it would be laughable to claim,

    ---> "don't agree with the "never have to work again" angle. Most of those who have achieved great wealth aren't the type to rest on their laurels." <---

    To be fair, we're both arguing from perception here, rather than data. I haven't really got a way to prove my claim, and neither do you have a way to prove your counterclaim. There's simply no way to gather data on how useful rich people are, since the proxies we typically use - hours worked, income generated, productivity, etc - are simply too easily foiled by the circumstances of affluence (a rich person could generate great gobs of income without lifting a finger, or may pour vast quantities of time and labour into non-income-generating pursuits because income isn't necessary). I'll withdraw the claim for lack of data; all we can do with it is argue our prejudices. Which can admittedly be a good time once in a while :lol:

  • Report this Comment On April 16, 2012, at 11:15 AM, DJDynamicNC wrote:

    ---> "Problem is, too many insist that the rewards that typically come from hard work, persistence, and discipline should come first." <---

    That may or may not be the case - I don't think either of us have hard data on what people are insisting on, on a national level - but I know that the claim that we socialists are making is that human beings have a right to basic necessities of life. Nobody questions the right to free access to water or oxygen, these being fundamentally essential to continued survival for every human being. We simply believe that all of the fundamental requirements for survival be so considered.

    >--- "No matter where you start from, success or failure is equally possible." <---

    That's not really accurate. I would say that no matter where you start from, success or failure are possible. But they are not equally so. Just because success CAN be achieved by the very best and brightest no matter the circumstances doesn't mean it is equally accessible. There are many good people who simply aren't extremely bright or extremely talented. Such people, born into poverty, will struggle to get a head, and may well simply work minimum wage jobs their entire life until some preventable disease kills them for lack of health insurance. By contrast, such people when born into wealth become Paris Hilton, or writers at Politico, where they question why poor people don't simply pull themselves up by their bootstraps.

    This is not equality of opportunity by any means.

    I came from a family that some months had to choose between paying for heat or paying for food. I have survived and thrived despite that array of difficulties, not because of it. Does that mean success is possible? Absolutely. Does that mean I had an equal shot with the rich folk? Let me tell you, two years of struggling to pay for rent and tuition at university taught me just how much easier it is to study when you aren't starving, because most of my friends had never seen a rent bill and had never seen a paystub and all they had to worry about was getting their homework done and drinking a bunch.

    I had opportunities. They were not equal opportunities. And I don't know how many people like me didn't luck out and survive all that to achieve success in their fields, and I don't know how many people like me didn't escape serious injury or illness while they lacked coverage, and I don't know how many people like me had parents who didn't struggle hard to create what opportunities they could and were instead saddled with alcoholic, or abusive, or simply absent parents.

    But I do know that whatever the number is, it is too high. And I do know that in a society as wealthy as ours, we can do better.

  • Report this Comment On April 16, 2012, at 4:46 PM, wolfman225 wrote:

    The opportunity IS equal for all. Regardless of circumstance. You are mis-apprehending what I mean by that. We all have equal opportunity to make the most of our inherent gifts, talents, and abilities that we can learn to master. However, equality of opportunity to be the best we can be does not, can not, and should never be used to infer we can all reach equal heights.

    Not everyone is going to be a Warren Buffet, or a Bill Gates, or a Steve Jobs. That's fine. Everyone has a purpose, and it's vital that we find that purpose and fulfill it to the best of our ability. THAT is success.

    Again, I can point to several examples of people born into poverty who have gone on to great success. Our system is the best yet designed for giving the common people the greatest CHANCE for advancement. Any attempt to provide equality of outcome will inevitably result in a top-down totalitarian regime where the people are equally miserable. Success can not be guaranteed. Only the opportunity.

    "---> "It's not the money, that's just a way to keep score, it's the challenge, the game; that's what keeps them interested." <---

    That's exactly the point that socialists make when they say that people who have food and shelter provided for them by the government would continue to work. It's refreshing to see you concede the point. ;)"

    I concede nothing of the sort. I know from observation and human nature that once the need to work for their rewards is removed, people quickly grow lazy. No one works without some incentive.

    The successful entrepreneurs, whose example you attempted to twist into validation of your Socialist views, have the pursuit of winning the game and the love of the competition to keep them involved. Those who rely on government will eventually decide that the necessities that are provided by government are no longer adequate to the life they want to lead and will begin to demand that the politicians provide ever greater largesse. If successful, they will have even less incentive to work.

    This is inevitable. Those who work and produce will ALWAYS have a higher standard of living than those who rely on handouts. It is also inevitable that those who benefit from the handouts will come to resent the ones whose taxes fund the programs they rely on. ("It's not fair! That rich guy doesn't need all that!")

    Equality of outcome is impossible, unless the outcome is privation and poverty for all. Utopian systems have never/will never/can never work without imposition of force by some ruling elite or dictator who, by definition, is outside the effect of the decrees he/they impose on the masses.

    Not a trade I'd like to make. I prefer the temporary state of monetary lack with the possibility of being able to advance by my own works as far as I am able.

  • Report this Comment On April 16, 2012, at 4:52 PM, wolfman225 wrote:

    <<"I came from a family that some months had to choose between paying for heat or paying for food. I have survived and thrived despite that array of difficulties, not because of it. Does that mean success is possible? Absolutely. Does that mean I had an equal shot with the rich folk? Let me tell you, two years of struggling to pay for rent and tuition at university taught me just how much easier it is to study when you aren't starving, because most of my friends had never seen a rent bill and had never seen a paystub and all they had to worry about was getting their homework done and drinking a bunch.>>"

    Isn't it time you let go of your envy and resentment of those whom you perceive have it better than you do? Whatever someone else has has zero to do with how much you can have or how far you can go in your field. Envy, jealousy, and resentment of them, and feeling sorry for yourself will do nothing to make your situation better. Let go.

  • Report this Comment On April 16, 2012, at 5:16 PM, DJDynamicNC wrote:

    ---> "The opportunity IS equal for all. Regardless of circumstance. You are mis-apprehending what I mean by that. We all have equal opportunity to make the most of our inherent gifts, talents, and abilities that we can learn to master. However, equality of opportunity to be the best we can be does not, can not, and should never be used to infer we can all reach equal heights." <---

    I think that we need to define what we mean by equality of opportunity. I don't advocate for equality of outcome - for one thing, people don't even WANT the same outcome as other people half the time. For another, as you quite rightly point out, it would be impossible to enforce in any way other than Harrison Bergeron style totalitarian shared misery. Nobody wants that (well, somebody somewhere probably wants that, but not socialists).

    But the ability to point to some exceptions like Operah and say "look! Poor people can succeed!" does not discount my point, nor prove yours. I never denied that the opportunity exists - indeed, modern society holds more opportunity than almost any previous society (see "It's a Wonderful Time to be Alive" on the front page).

    What I would argue, however, is that Operah did NOT have an equal opportunity to, say, Mitt Romney. Operah was able to attain the same results as Mitt Romney (better, really) by working MUCH harder and suffering MUCH more. That's not equal opportunity. That's vastly greater talent showing through.

    The simple fact is that Operah is a rare breed of ultra achiever, and she deserves a great deal of respect. She'd be a success essentially no matter where she was born or when or how. Most people are NOT Operah though. I'm not worried about people like Operah; they're gonna make it. I'm worried about people like my mom, a hard working, smart, dedicated woman who worked her ass off to provide for her kids because she was born into a situation of deep struggle and difficult poverty. To say that she had opportunities is absolutely accurate; she survived, she eventually triumphed, and my sister and I are doing well. But to say she had the same opportunity as Mitt Romney, who has never struggled a day of his life with the notion of whether or not he'd be eating that day, is absolutely ludicrous. I'm not sure how you equate those as equal opportunities.

    ---> "No one works without some incentive." <---

    Agreed - I just find that most people have a great deal of things for which they would work with no monetary incentive whatsoever. There are people who love building houses, and people who love painting, and people who love writing, and people like us who love investing. Ensuring that people's basic needs are met - something we are eminently able to afford - would liberate people to do what they love. I'm sure a fair number of people love doing nothing but screwing around on Xbox (though there is a market for that, even) but that's ok. If my choice is between a system where if you don't work, you're lazy, and a system where if you don't work, you die, well, that's no choice at all. I'm willing to suffer some laziness

    "Those who rely on government will eventually decide that the necessities that are provided by government are no longer adequate to the life they want to lead and will begin to demand that the politicians provide ever greater largesse. If successful, they will have even less incentive to work"

    You say that, but you and I depend on government right now, and here you are actively advocating for a lesser role for that government. Clearly it is possible, then, to depend on government (which you do, to however limited an extent) and yet still desire less of it.

    I believe that the connection between work and survival is understandable in a society of scarcity, but we have so much abundance that we actually have a multi-billion dollar industry designed to convince you to buy more crap. We have a multi-billion dollar industry based solely on getting rid of the crap that you throw out so you can get new crap. Meanwhile, people are still starving. Clearly there is some sort of issue with distribution, not with production.

    Would the imposition of certain guarantees for physical necessities distort the market? Sure. Almost certainly (though we seem to survive just fine with socialized air and water). Will it make some people lazy and unwilling to work? Probably. Again, though, the trade off is people dying, people struggling to make ends meet, children suffering, people starving. If the best argument against that is "some people will probably be lazy," well, that's not much of an argument at all.

    The other argument against that is "well the system will be abused," and sure, no system is perfect. Again, I'm willing to accept that trade off, though I can see why you might not be.

    There are also a great many gains for society associated with not having a perpetually struggling underclass full of desperate, semi-starving people who can't get ahead and don't feel connected to the upper classes, and it's hard to put a price on that.

    What it boils down to is we don't want people to eat who don't "deserve" to eat; we've collectively decided that one's worth is decided by their ability to provide what the market desires, whether that's healthy for the world or for the individual in question, or not. And yes, that's one way to determine the worth of a human being. I choose a less restrictive method whereby all humans are worthy of having enough to eat every day, but that's really the fundamental debate when you strip away all the rest of it - how do you determine who deserves to have a portion of the food we produce, how do you determine who deserves shelter, how do you determine who lives and who dies, and so on. That's the real debate.

    There's also the question of whether, on a world of finite resources, you and I actually have a right to unlimited income, belief in which makes up a foundational cornerstone of capitalism - but this is already far too long a post. :lol:

  • Report this Comment On April 16, 2012, at 5:35 PM, DJDynamicNC wrote:

    "Isn't it time you let go of your envy and resentment of those whom you perceive have it better than you do"

    I had written a nice, explanatory post to respond to this, about how it's not resentment and envy, but you know what? It totally is resentment (not envy, though - the last thing I want is to be wealthy and live that life). And I'm not ashamed of that.

    I resent that affluent people can have the audacity to look down their noses at somebody working at McDonald's for a living and call him or her lazy. I resent that affluent people can get a college education handed to them while much smarter kids have to stay home and take care of their siblings or go work on a farm or join the military and fight wars that rich people get to initiate so their corporations can get whatever resources they need. I resent that people are starving because some rich people somewhere decided that if they let those poor people get food handed to them they might become lazy. I resent destruction, death, and disorder that capitalism has engendered. I resent the fact that it is even a debatable question as to whether or not people need food or health care, and I resent that the reason it's up for debate is because people with millions of dollars don't want to see their tax rate go from the lowest tax rate in American history to the second lowest tax rate in American history. I resent that Ann Romney can go on the air and complain that she should be viewed as working hard because she's a stay at home mom, and her own husband can at the same time say that poor moms who stay at home are lazy and lacking "the dignity of work" and say in his own book that "nonworking parents" raise "indolent and lazy" kids, by which he obviously only means those other nonworking parents who also happen to be poor, and not his hardworking wealthy wife who had to struggle through college living off nothing more than the proceeds of the sale of some of Mitt Romney's stock, the poor dear.

    You know what? Resent isn't even strong enough a word. I loathe it, so much so that now that I'm past the struggling years and doing well for myself, I've capped my own income so that I will NEVER be rich and NEVER be a part of that exclusive, entitled club of elite wankers systematically raping this planet for their own gain.

    Sometimes, outrage is called for. I think when the lives of thousands of human beings are on the line just so happens to be one of those situations, and I am not ashamed to be angry. I have chosen my side, and though I may be wrong, though I may be resentful, though I may be angry, I am NOT ashamed.

  • Report this Comment On April 16, 2012, at 5:36 PM, DJDynamicNC wrote:

    Dear Diary,

    Today I learned that MotleyFool.com has a profanity filter. :lol:

  • Report this Comment On April 16, 2012, at 6:37 PM, whereaminow wrote:

    This post reminds me of one of my favorite lines from Ludwig von Mises, "absent theory, one can assume anything."

    So allow me to play the same game. It appears that under a (pseudo) gold standard, wealth inequality declined. But right as we went to completely unbacked funny money - the Keynesian, Communist, and Chartalist dream come true - wealth inequality exploded in the reverse direction!

    This is a fun game!

    David in Liberty

  • Report this Comment On April 17, 2012, at 5:21 PM, BriAsh wrote:

    "Capital wins over labor." "The rich get richer, and the poor get poorer." These truisms illustrate a market failure that we have seen before. They are not universally true.

    The chart needs a squiggle break between 0 and 6% for clarity, yet zooming in on the clear trend is warranted. Exceeding 18% of all wealth concentrated in the top 1% of income recipients has never helped a nation's economy grow. Extreme wealth disparities cause macro-economic problems as the majority of gifted individuals of successive generations are denied the socio-economic mobility ( access to education and basic tools ) needed to contribute their abilities to society. This results in a 3rd world economy, where crime and nepotism become standard practice for those grasping for and grasping to preserve stagnant wealth. Wealth is stagnates without a profitable place to be invested.

    Wealth inequality may be increasing everywhere in the world, but one needs to look at wealth inequality in the context of objective poverty (access to diet sufficient for brain development, access to education sufficient to serve a community, access to capital and rights necessary to be an entrepreneur.)

    Explosive growth in BRIC developing nations illustrates the economic power unleashed when the fetters of deprivation are reduced.

    The reverse would be true if US policies pushed 80% of Americans into abject poverty. The recession we suffered was relatively mild, but it is a warning. When the common worker suddenly has no way to apply their skills, volunteers can't afford gas money to do what they used to do for free, and parents stop buying basic necessities in an attempt to weather prolonged unemployment this has a domino effect through the economy. Valuable businesses closed because their clients suddenly were no longer worth serving.

    Had the EU, Russia and China not been managed like the EU, Russia and China, the US dollar could have plummeted like a peso. Imagine the USA being micromanaged by the WTO.

    Real wealth can really be destroyed by bad macro-economic circumstance.

  • Report this Comment On April 17, 2012, at 5:30 PM, BriAsh wrote:

    Not all forms of wealth inequality are equal.

    1. A globally connected elite may have sufficient diversity to innovate, and compete while discarding the potential non-labor abilities of the underclass. If the underclass can yet afford access to educate itself via the internet, that may suffice to give rise to slum-dog-millionaires. One needn't join the elite to have a fulfilling life.

    2. If you know how to increase revenue per unit investment by 20%, and I don't, I should gladly let you keep 80% of the net value you make real. Emotionally healthy American's don't hate people for being beautiful, successful, or lucky. We shouldn't hate people for being intellectual geniuses. We revel in such wealth disparity because it raises all boats on an ocean of wealth.

    3. The reason why the political games, cronyism, and institutionalized rewriting of laws to direct tax funds to special interests are intolerable is not that they lead to wealth disparity. These are intolerable because they destroy wealth, exploiting workers for zero net benefit to society, steal wealth from viable enterprises to hand out checks to friends and family of those who focus on extracting wealth from the market as if being a parasite were man's highest calling.

    In short the extreme wealth disparity is not the problem, it is merely symptomatic of a problem.

    In 2008 we don't have hundreds of children running through the industrial looms of US rug factories to be discarded like human waste when injuries make them useless, or sweat-shops of American citizens burned alive because a manager locked all exit doors. Instead we have desperate migrant workers being shot as they cross boarders for work citizens with welfare checks won't touch, and Chinese migrant workers jumping out factory windows at Foxcon because...

    Frankly, I don't get it, but there is a market failure that will not lead us to sustainable prosperity if not addressed. Conservatives and liberals both need to take each others arguments seriously because we all navigate with blind spots.

    There should always be enough bread to pass around. The poverty of this century should always be less severely dis-empowering than the last. There is no excuse for otherwise. I like living in a US city where mike bike is not constantly stolen, and I don’t need iron bars on my windows. That is worth something to me.

  • Report this Comment On April 17, 2012, at 9:15 PM, danalexky wrote:

    I admire the posters, these are some excellent comments. I grew up poor, joined the US Navy at 18 to get out of an abusive home, and me and the GI bill put me through college for a degree in computer science. I've worked for about 40 years. I never had anyone give me much of anything, but I have had and do have multiple people who are willing to live off my labor without going through taxation. I recently told them all that I was tired of supporting them and quit my job. I was enabled by saving and investing, and yes, I am and was able to make 20% per year, then this year have doubled my money a couple times. It helped that I saved 20% for most of those years and lived below my means. I don't want my money taxed away and used to support people in masses who have figured out how to game the system. Wealth that I gain belongs to me, and beyond support of Libraries and other necessary infrastructure of a nation - support for minor life situations, but not support for the terminally worthless - I don't want to support it. Government is self perpetuating, always grows larger, and is largely useless and way too expensive; has a comprehensive lack of morals, and in the US, no accountability. I ramble, sorry. Just my 2 cents. Liberalism to me, for the most part, is excusing people who want to take things from me and mine. I'll stop before I ramble too far.

    Dan

  • Report this Comment On April 17, 2012, at 9:32 PM, brose293 wrote:

    Nice try Seth23 .. but the point of the chart is that we've returned to the good old days when a strict caste system pervaded the U.S. and the robber baron's at the top of the food chain built pyramid-like summer manses on Long Island celebrating their munificence .. does anybody work at an exec level for any F 500 or other large public company? ..seriously .. the exec's are utterly self-serving in their decision-making and sense of entitlement .. they are the last to go in downsizing (firing) people .. their bonus as a percent of base salary fits to a logarithmic power law compared with middle managers - and their mission and motivation is generally some variation of a 5-year scorched earth policy to squeeze a maximum multiple from a possible sale of the company to VC or others .. but.. no, there's nothing wrong here .. let's get back to work ..

  • Report this Comment On April 25, 2012, at 11:31 AM, jdsj wrote:

    setht23 and others commented that the chart is misleading.

    You replied, defensively, that you did not create the chart, nor did the Administration --rather, it was consultant (in the Administration's pay?). You further responded, in effect, that the chart tells no lies.

    Neither of your points addresses setht23's charge. "Misleading" means "misleading", not "untruthful." This particular misleading technique is ages old, of course, which makes it all the more unacceptable.

    That is those who write for publication need to be careful to keep others from being led astray by the charts those writers create -- and, as important, by those that those writers reproduce.

    That aside, I appreciated this article and others you have done. Thanks..

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