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Income Inequality in America: Is It as Bad as We Think?

By Brian Stoffel - Sep 5, 2015 at 8:08AM

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Things are a lot more fluid than we may realize.

Protests that started in 2011 focused on the growing income disparity in America. Photo: Brian Sims, via Wikimedia Commons.

If there's one lasting meme from the Occupy Wall Street movement, it's the demarcation between the wealth and influence of the nation's 1% and the relative powerlessness of the bottom 99%. Because of this, many Americans (myself included) developed a rigid concept of the 1%, according to which the nation's upper crust cling to their riches and perpetuate income inequality through outsize influence and dynastic family wealth.

Yet risk expert and philosopher Nassim Taleb recently brought some data to the public's attention that pokes holes in that idea.

Pointing to a study done by professors at Cornell and Washington University, Taleb questions our beliefs about wealth inequality. He states:

A well functioning society isn't one in which people are equal but one in which people have equal *probability.* So measuring static inequality is severely flawed. ... A good society is one in which people at the top have *skin in the game* hence can lose their money. 

Taleb isn't so much saying that wealth inequality isn't a problem. Instead, he's pointing out that because the wealthy can fall from their perch (they have "skin in the game"), the balance of wealth in America is more fluid than we realize.

A look at the actual numbers
To get an idea of why Taleb would make this assertion, let's peek at the data he was referring to. The professors who conducted the study used longitudinal data from households with individuals between the ages of 25 and 60.

With each person representing 1% of all U.S. households, here's what they found.

This challenges much of what we've come to believe about income inequality in America. Well over half of all households will experience a year in the top 10% of all earners, and an astounding three-quarters will be in the top 20% for at least a year.

When you consider that multi-generational living is becoming more common (and inflating household incomes), and the fact that we're talking about only one year (out of many working years) to qualify, these numbers might become a little more believable.

What kind of income do you need to make it into certain income categories? Using data from CNNMoney,  here's how household incomes are distributed.

  • To be in the top 20%, you need household income of $106,000 (in today's dollars).
  • To be in the top 10%, you need household income of $145,000.
  • To be in the top 5%, you need household income of $210,000.
  • To be in the top 1%, you need household income of $400,000.

Taleb goes on to talk about how such income parity is in stark contrast to other countries, particularly Europe, where "a civil servant from the 'mandarin class' is safe for life as they extract rent from the system." 

It's also crucial to point out that the researchers stated that the vast majority of households were likely to experience both relative wealth and relative poverty. Indeed, 62% of the households could also be expected to spend at least a year living in the bottom 20% of all income earners.

What this does and doesn't mean
I'm not going to argue that there aren't structural inequalities that help some people excel while holding others down. The crushing burden of student debt and the vicious cycle of poverty, for example, are very real.

But Taleb's point is worth considering: Our station in society is in continual flux. I'm not saying that this is, by definition, a good or bad thing. But it's worth acknowledging as we try to figure out what we want the world to look like for our children.

That being said, there are two major flaws with the data. First, it covers a time period spanning from the late 1960s to 2011. Income inequality has become a bigger problem as time has gone on, and the early data included in the study may not be representative of the current reality.

Furthermore, this data reflects income, not wealth. If a family spends just one year in the top 20% and the rest of their lives well below it, it's unlikely that one year in the upper fifth would have a significant effect on their overall wealth. Likewise, a husband and wife who have lots of money in the bank and retire early, despite an unimpressive annual income, could show up in the bottom percentiles while living a "rich" life.

At the end of the day, it's wealth (your "money in the bank") that helps determine whether you can sleep at night. Your goal should not be to focus on relative wealth; if you're always comparing yourself with others, it will largely be a losing and unsatisfying battle.

Instead, focus on your absolute wealth -- the amount of money you need to achieve financial independence and lead the sort of lifestyle that makes you happy.

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