Updated: "Who Rules America - An Investment Manager's 2014 Update on the Top 1%"

[daylatedollarshort]

And on a related note,

"The rich are going to keep getting richer all over the world, pretty much just as French economist Thomas Piketty describes in his bestselling book Capital In The Twenty-First Century, stock market strategists at Bank of America Merrill Lynch wrote in a new report. But don't despair, the bank added, there are several ways for investors to profit from the trend."

"The U.S. has some of the highest inequality in the world, and it's rising."

Big Bank Explains To Rich People How To Profit Off Inequality

(I added the bolded part. This isn't socialist envy and bitterness towards the wealthy from Occupy Wall Street types. This is simply the reality according to Bank of America Merrill Lynch analysts.)

I think the current issue isn't so much wealth inequality, but the degree of it. We're reverting back to pre-1930s depression levels, like in the chart on the top right of this page -

http://robertreich.org/post/82938136466

 

[GrayHare]

There's lots of bad math in that Who Rules America link. The Soviets tried forced economic equality, how well did that work out?

 

[explanade]

Been on vacation the past two weeks and my portfolio has risen about 17x the amount I'll probably end up spending on this trip, not counting the business class award ticket that I redeemed. (yet I get slightly perturbed when I think the taxi driver may be padding the fare for a short ride by 1 or 2€ and I wait to get bottled water at the supermarket rather than pay 1 or 2€ at some cafe)

So while I've been more fortunate than many, there's no denying the real rich have way more money than they know what to do with. When they throw $19 billion at whatsapp, $2 billion at the LA Clippers, these transactions have no relationship to the expected returns on that capital.

They are figuratively burning that money.

Doesn't make me mad, just makes my jaw drop. Don't think there will be a storming of the Bastille, even if the billionaires become even more tone-deaf or stupidly taunting like Marie Antoinette.

 

[razztazz]

There's lots of bad math in that Who Rules America link. The Soviets tried forced economic equality, how well did that work out?

Nobody says we have to try that. Try something else. Feudalism was tried before and that sucked too. That's where all this "Propertarianism" is going. Only without any "Noblesse Oblige". And all the hand-wringing about how we shouldn't do anything about maldistributed wealth because it's "communist" or that's how the System works, or somehow All Natural and we have to be "forced" to accept it is just cheer leading for the Feudalists.

 

[Chuckanut]

The Soviets tried forced economic equality, how well did that work out?

The Soviet comment is straw man, IMHO. Far more relative to the discussion would be look at modern democracies such Germany, the Netherlands, or Sweden. I am not suggesting that we duplicate their systems, just that they are a more realistic comparison. After all, we could just as easily look at older versions of England which had child labor, debtor's prisons, and work houses. Or, we could look at our own country (USA) and see unsafe working conditions, child labor, company stores and company housing, just to name a few injustices.

I am a free market, capitalist at heart. But, for that to work we must have a level playing field. The current situation with the FCC's leadership is one example of how the playing field has been tilted in favor of the big business interests.

One last thing, while we may be a free market economy, we are not a free market society. Everything is not measured in dollars.

 

[NW-Bound]

I do think that wealth inequality is higher in the US than elsewhere. However, that is not because the 1% blocks the lower group from entering their rank. In fact, I think opportunity to get well is better in the US than in many other countries. Please let me explain further.

Taleb in his books explains the phenomenon of "Winner Takes All" in the modern age economy. Apple invented the smartphone, and cornered the market for a while. That gave Apple management and its employee share holders great wealth in a much shorter time than a typical employee at a typical tech company to accumulate. The same thing happens with sports players and entertainers. The winner takes all. Who gives them that money but the world-wide consumers?

Yes, wealth is concentrated, but a big part is because we as consumers allow it. We give them our money, in exchange for that hot iSomething, a movie or a ball game ticket out of our free will.

The wealth inequality is higher in the US than in other developed countries because we so far have the lead in innovation to crank out products, entertainment, gadgets for the gullible mass market. As much as I do not care for some industries that turn out products that I personally do not spend money on, I would rather see a US company doing that than a European, Japanese, or Chinese one. It's just for selfish reasons, as I live here.

 

[Chuckanut]

I do think that wealth inequality is higher than in the US than elsewhere. However, that is not because the 1% blocks the lower group from entering their rank.

The 1% may not be deliberately blocking others from succeeding, but the barriers to success are more difficult to overcome, IMHO. One good reason is that higher education has become a financial burden for many students and their parents.

When I was a young man I could get a very good college education at the local state university. All I had to do to afford it was live at home (thanks mom and dad!) and work part time for a bit above the minimum wage at that time. I was able to pay for my car, my college fees and books, and have some spending cash to take a young lady on a date. I graduated with NO COLLEGE LOANS TO PAY BACK.

Today, that same education would cost about $14,000 a year at the local state university. Even working full time during the summer and part time during the school year (15-20 hours a week) I could not earn that kind of money. And then, I have the car and the girls on top of that!!

IMHO, the high cost of post high school education has tilted the playing field and made it more difficult for young people to work themselves into a better position. Not that it can't be done, but it is much more difficult.

At the same time that the state has cut back on funding for the state universities, a certain MegaCorp has extracted 8 billion dollars in tax concessions to keep it's business in the state. So, maybe the 1% is at least partly responsible.

 

[NW-Bound]

I agree with you about the ridiculous cost of higher education today. My children went to my alma mater, and when I took them to visit the school before their attendance, I could barely recognize it. There were so many new buildings. What were all those for? And when I went to school, classes were small and were taught by professors. Now, students were taught by graduate assistants, by watching TV, or on the Web. What's the higher tuition money for? My sister teaches at the same university. I can say that the higher tuition does not translate into higher pays for the instructors.

Some blame the excess money available for tuition pumps up the price, and I think there's quite a bit of truth to that. But putting the cost aside, it is harder now for college graduates to get good jobs. Again, it's the phenomenon of "winner takes all". Apple, Google, and the like can only hire so many employees, so many good programmers or engineers may not get their chance. Well, they may make a good living as my son does now (a ME), but he is not going to get to the 1% with his current job at a smaller engineering corporation.

 

[Fred123]

Some data that might be of interest on this topic:

Piketty's data comparing wealth inequality in the US and Europe is here (pdf). It clearly shows that the US has, since about 1960, become much less egalitarian than Europe.

As for social mobility in the US (NY Times link), it appears it isn't getting worse but it's also not improving. An interesting factoid: the odds of escaping poverty in the most mobile European countries are twice as high as those in the US.

 

[M Paquette]

One of the most interesting breakdowns I've seen used "econophysics", what one gets when physicists used to looking at large systems (trillions of vibrating molecules, for example) look at an economy.

It turns out that for most folks, living more or less paycheck to paycheck, perhaps saving for and then spending that savings in retirement, the distribution of economic activity looks like a thermal system's distribution of molecular thermal energy, with people and income replacing molecules and energy. For these folks, some 97% of the population, there is a Boltzmann-Gibbs probability distribution of money and income.

What about that other 3% or thereabouts? Income there follows a Pareto power law, which in turn appears to be associated with spending only a portion of income and investing the rest, removing that portion of income from the 'thermal equilibrium' economic activity represented by the Boltzmann-Gibbs distribution.

The dividing line may be where the industrial strength savers live, accumulating more than they will reasonably spend over their lifetimes.

http://online.kitp.ucsb.edu/online/colloq/yakovenko1/pdf/Yakovenko.pdf

 

[Independent]

Taleb in his books explains the phenomenon of "Winner Takes All" in the modern age economy. Apple invented the smartphone, and cornered the market for a while. That gave Apple management and its employee share holders great wealth in a much shorter time than a typical employee at a typical tech company to accumulate. The same thing happens with sports players and entertainers. The winner takes all. Who gives them that money but the world-wide consumers?

The wealth inequality is higher in the US than in other developed countries because we so far have the lead in innovation to crank out products, entertainment, gadgets for the gullible mass market.

If all the top 0.1% were smartphone inventors or entertainers, that would make sense. But the data I've seen says that most of them are people who control capital. They either work in finance or they are CEOs or other top execs.

The finance people didn't give us smartphones. They gave us mortgage backed securities that gullible investors bought, and that brought the economy down when the truth came out.

The CEOs get paid to make the big decisions, but it seems they get paid the big bucks whether or not their decisions work out.

Yeah, there are some people in that high bracket who somehow made our lives better. But, I have a sense that too many of them are just skimming.

 

[NW-Bound]

The finance people didn't give us smartphones. They gave us mortgage backed securities that gullible investors bought, and that brought the economy down when the truth came out.

Yes. I am not well versed in this area, but would think better laws can protect us here.

The CEOs get paid to make the big decisions, but it seems they get paid the big bucks whether or not their decisions work out.

Yeah, there are some people in that high bracket who somehow made our lives better. But, I have a sense that too many of them are just skimming.

Yes. I agree on both points, but wonder if any has suggested a feasible solution. I do not think heavy taxes on all high earners to "punish them" equally will work well.

 

[daylatedollarshort]

If all the top 0.1% were smartphone inventors or entertainers, that would make sense. But the data I've seen says that most of them are people who control capital. They either work in finance or they are CEOs or other top execs.

The finance people didn't give us smartphones. They gave us mortgage backed securities that gullible investors bought, and that brought the economy down when the truth came out.

The CEOs get paid to make the big decisions, but it seems they get paid the big bucks whether or not their decisions work out.

Yeah, there are some people in that high bracket who somehow made our lives better. But, I have a sense that too many of them are just skimming.

Robert Shiller has some good thoughts on this -

"Are too many of our most talented people choosing careers in finance – and, more specifically, in trading, speculating, and other allegedly “unproductive” activities?

In the United States, 7.4% of total compensation of employees in 2012 went to people working in the finance and insurance industries. Whether or not that percentage is too high, the real issue is that the share is even higher among the most educated and accomplished people, whose activities may be economically and socially useless, if not harmful."

Read more at Robert J. Shiller on the unproductive financial workforce. - Project Syndicate

 

[Gunny]

This is an interesting debate we have going on here. Allow me to make an observation; regardless of the side one takes in this debate, most of us are members of the ER community. That most likely is due to us being able to work and succeed in this economy. I'm not sure how many total members there are on ER, but I am sure we come from all walks of life and economic situations. I for one am a pick myself up by my boot straps guy. I do not think I could be where I am if I didn't live in this country, working and succeeding in this economy.

 

[Texas Proud]

This is an interesting debate we have going on here. Allow me to make an observation; regardless of the side one takes in this debate, most of us are members of the ER community. That most likely is due to us being able to work and succeed in this economy. I'm not sure how many total members there are on ER, but I am sure we come from all walks of life and economic situations. I for one am a pick myself up by my boot straps guy. I do not think I could be where I am if I didn't live in this country, working and succeeding in this economy.

I will disagree to a bit on this... I worked in the UK for a little over a year and I would say that you can do the same thing there.... and I met people from NZ and Australia who said you could do it there... I have also met people from Canada who have made it on their own... by 'their bootstraps' if you will...

I suspect that it is the same in a number of other EU countries... think Germany, Norway, Sweden...

Sure, we have a big economy which give more chances to more people... but we are not the only place where you can make it....

 

[photoguy]

Allow me to make an observation; regardless of the side one takes in this debate, most of us are members of the ER community.

I'm not even sure exactly what the sides are in this discussion.

 

[Letj]

That may well be true; I don't know. But what I do know, from long observation, is that for most people what they believe to be true is more important than what is really true. That is why my post said ". . . the increasing appearance that . . ." It actually may be the case that most people who work hard enough and make wise choices can "overcome and succeed" (as you put it). I have serious doubts about that theory, but I'm sure you sincerely believe it. But knowing that you were right will be scant solace when the castle is going up in flames with you inside.

Let me give you some context for my remarks. The young wife and I have for a number of years now enjoyed a place among the top 1% in income and, more recently, in wealth.* Yet I was born to teenaged high school dropouts and grew up in poverty, living in a variety of trailer parks and cheap, often dilapidated apartments. I went to generally crappy public schools, sometimes several different ones in a single year, and was sometimes out of school for extended periods of time when my family moved around. I am the first in my family to go to college, and that was only possible because I joined the military. It has taken long years of very hard work, self-deprivation and wise choices to get where I am now. I am the example that validates your own belief, if you will.

At this point, I could easily sit back and condemn those who complain about rising inequality as whiners with a "victim mentality". After all, I made it here, why can't they? Yet I never forget that I have been incredibly fortunate along the way. I was born with abilities and interests that society values. People have helped me when they didn't need to. Opportunities have arisen at precisely the right time. Yes, I have made the most of them, but most people will never see those opportunities. For a poor kid, the path to success is a walk along a knife edge - one slip and it's all over. Kids born to wealthy families get many more opportunities to fail. There is a built in safety-net that catches them and sets them back on the path to a successful life.

I may be wrong, but I do see an increasingly self-contained world of the elite. They live separately, they work separately, they play separately, and they educate their children separately. It is an entirely separate reality, a gilded life where it is possible for a child to grow up and never know that poverty, illiteracy, hopelessness and despair are the norm for all too many people. Growing up like that, how could they not come to see themselves as normal, not privileged. And how could they not simply assume that if you don't have what they have, it must be because you are lazy, stupid or criminal. The better parents will ensure that their children see life outside the bubble and develop an appropriate appreciation for their own good fortune. But I have spent much time among them and have seen that all too many of those parents do not.

You don't have to apologize for being rich, Marko. I don't. But I do believe that mine is a path that most cannot follow. Looking around at our society today, it is my impression that social mobility is in fact dropping in the US, that more and more people are being squeezed out of the middle class, that the elite are becoming more and more distant, and that our government and our financial system are directly contributing factors. I think it is unhealthy for the economy and our democracy. Even setting aside any moral considerations, I care about inequality because when the flames come, they will burn the just and the unjust alike.

* Probably. There is some debate about the proper "entry point" for the 1%. This is an interesting discussion about that issue. How Much Money Does It Take To Be In The Top 1% of Wealth and Net Worth in the United States

Excellent post! In some ways you and I have had a very similar path and I do consider myself very fortunate. Even I couldn't not predict where I am today and the good fortune I would have along the way. My earlier life have certainly help me to empathize with the struggles of the poor and understand the obstacles that can keep one in poverty.

 

[Chuckanut]

I may be wrong, but I do see an increasingly self-contained world of the elite. They live separately, they work separately, they play separately, and they educate their children separately. It is an entirely separate reality, a gilded life where it is possible for a child to grow up and never know that poverty, illiteracy, hopelessness and despair are the norm for all too many people. Growing up like that, how could they not come to see themselves as normal, not privileged. And how could they not simply assume that if you don't have what they have, it must be because you are lazy, stupid or criminal.

Good Point. I grew up in an upper middle class neighborhood filled with engineers, scientists, doctors, electricians, teachers, accountants, plumbers, store keepers, AND several TV stars and sports team heroes.

Today, the TV stars and sports team heroes would not live in that neighborhood. Not because the neighborhood has gone down hill (it is actually nicer than when I grew up there) but because they live in more exclusive places, often with walled access.

They don't live in our world, just as I do not live in the world of people who have to decide if they will get the car's brakes serviced or pay the medical bills this month. It's hard to relate to those poorer than us.

 

[Gunny]

@Texasproud. Thanks for calling me out on this. My intention was not to single out the US as the sole "land of opportunity". My intention was to give credit to hard work and responsible financial decisions making it possible for most to succeed in the economy referenced in the article, regardless of initial circumstances. My apologies to my non-American ER colleagues.

 

[frayne]

Excellent post! In some ways you and I have had a very similar path and I do consider myself very fortunate. Even I couldn't not predict where I am today and the good fortune I would have along the way. My earlier life have certainly help me to empathize with the struggles of the poor and understand the obstacles that can keep one in poverty.

Similar experience here and agree 100% with Gumby.

 

[Travelwanted]

Sorry, I just have a hard time buying into the "you can't win", the-system-is-against-you, victim mentality. Life isn't fair but it's not a zero-sum game, and I do believe that many (not all) can overcome and succeed.

+1

I grew up in a lower, lower middle family. I'm now a "1%"er because I went to school, worked my arse off and lbym. The opportunities are there for most (I admit not all) who are willing seek better.

 

[Independent]

Yes. I am not well versed in this area, but would think better laws can protect us here.


Yes. I agree on both points, but wonder if any has suggested a feasible solution. I do not think heavy taxes on all high earners to "punish them" equally will work well.

I don't think taxes should be used to "punish" anyone. Taxes are just the cost of gov't. But, we have such a huge range in financial results, that it seems to me that the practical result is that we should collect more taxes from the people who did better financially.

Right now, it's more a matter of closing "loopholes" than of raising rates. Hedge fund managers pay the capital gains rate on their bonuses, while the rest of us pay the ordinary income rate. Wealthy families never pay the capital gains tax on unrealized gains that change hands at death, due to step-up-in-basis. We could change those two rules.

 

[Spanky]

What's the entry point of top 1% defined as net worth? Is it $9 million according to New York University Economics professor Edward N. Wolff?

Why is it important to be the top 1%? Is it a game?

 

[Spanky]

+1

I grew up in a lower, lower middle family. I'm now a "1%"er because I went to school, worked my arse off and lbym. The opportunities are there for most (I admit not all) who are willing seek better.

Unfortunately, this does not remotely guarantee success to be the top 1%.

 

[razztazz]

Originally Posted by Travelwanted View Post
+1

I grew up in a lower, lower middle family. I'm now a "1%"er because I went to school, worked my arse off and lbym. The opportunities are there for most (I admit not all) who are willing seek better.

Unfortunately, this does not remotely guarantee success to be the top 1%.

It really doesn't even guarantee a decent living or "success" at any level.