Inequality and Unfuzzy Math


Posted by Bob Lord

We all remember W's "fuzzy math" line. When you're analyzing the distribution of wealth in America, the math is anything but fuzzy. It may be disturbing. It may be scary. But it's not fuzzy.

I read an old post today by Chuck Collins, who is one of the best writers on the subject of inequality. In that post from about a year ago, Collins noted that the top one percent has pocketed almost all of the wealth gains of the last decade. That little factoid should not be surprising, but it should be alarming, if you do the math.

For at least three decades, the very wealthy's share of American wealth has been increasing. At the very top, the share of the Forbes 400 of our aggregate wealth has increased four-fold over those three decades. The unavoidable mathematical explanation for this is that the wealth of the very wealthy is growing at a faster rate than America's aggregate wealth.

Here's where the math gets scary: If the wealth of one group (the top one percent, for example) grows at a rate faster than aggregate wealth, the wealth of that group ultimately will reach 100% of aggregate wealth. Yes, the economy may crash in the process, but there is no upper limit, short of 100%, to the share of one group in our aggregate wealth if that group's wealth grows more quickly than the wealth of the country.

When you think about it, then, Chuck Collins' observation about virtually all the wealth in the past decade flowing to the top one percent is entirely to be expected. Suppose the top one percent owns 20% of America's aggregate wealth and a change is made in the tax laws to allow it to accumulate wealth at a rate double that of the country as a whole. For example, say the wealth of the top one percent is allowed to grow, indefinitely, at 6% per year, while the country's aggregate wealth grows at 3% per year. In the first year, of the three percentage points by which the country's wealth increased, 1.2 percentage points go to the top one percent and the other 1.8 percentage points go to the bottom 99%. That's a pretty crappy deal for the bottom 99, but at least their wealth is growing, with 60% of the total wealth increase flowing to them.

Now, using the same example, consider what is happening at the point where the top one percent already has reached 50% of total wealth. At that point, a 6% increase in the wealth of the top one percent is the same number as a 3% increase in the entire country's wealth. The wealth of the rest of the country is not growing at all. According to the data that Collins referred to, we've reached that point. Worse yet, we've reached it before the share of the top 1% in total wealth reached 50%, which means that the wealth of the top 1% has been growing more than twice as fast as America's aggregate wealth.

Unfortunately, it gets uglier once the wealth of the top 1% reaches this threshold. Going back to our example, say the wealth of the top 1% has reached 60% of total wealth. At that point, the wealth of the top 1% is growing faster, not just in rate but in total, than our aggregate wealth. At that point, the bottom 99% actually is transferring wealth to the top 1%.

Have we reached that point where the top one percent is adding wealth at the expense of the bottom 99%? I couldn't find an answer. But there is recent data out showing that the top one percent's income increase is now coming in part at the expense of the the bottom 99%. There obviously is a connection between wealth and income. If the income of the top 1% is now driving down the income of the bottom 99%, the loss of wealth by the bottom 99% to the top 1% cannot be far behind. Salvatore Babones explains:

As the economy as a whole has remained flat, the plutonomy — the economy of the super-wealthy — has continued to rise. Executive pay continues to rise. Bankers’ bonuses continue to rise. Corporate profits continue to rise.

The only way the plutonomy can rise while the economy remains flat is for the realonomy — the economy of ordinary people — to decline. Your eroding pay, your lost benefits, and (God forbid) your lost job have paid to keep the party going in the plutonomy.

It’s not advanced statistics. It’s simple arithmetic. We have the same real national income per capita as we did in 2006. If we had the same income distribution as we did in 2006, everyone would be living just as well as they did in 2006.

Rising inequality since 2006 has meant that the rich are getting bigger and bigger slices of the same pie, leaving less and less for the rest of us.

Here's the connection between income and wealth: Over the long haul, the ratio of wealth to the size of the economy (i.e., total income), is constant. The ratio will go up during a bubble, but it ultimately will return to normal. So, if the economy is not growing on a per capita basis, our wealth per capita ultimately is not growing on a per capita basis. In order for the wealth of the super-rich to continue growing, then, the wealth of the rest of us must shrink.

So, yes, we've likely reached the point where the wealth of ordinary Americans is being transferred to the super-rich. If that continues, the majority of us will be poor at some point, as is the case in Mexico, where over 50% of the population lives in poverty.

It's just math.