The Actual U.S. Distribution of Wealth Today
Standard Oil stock certificate from 1896 – A share of wealth
Photo Credit: Wikimedia Commons/Rjensen at English Wikipedia
This is the fourth essay in a series of posts on the effects of Capitalism on the culture of a society. The three previous essays in order are The Cultural Desirability of Capitalism, The Cultural Desirability of Capitalism – 2, and Distribution and Use of Wealth in U.S. Capitalism.  As in the other essays, I will adopt a scheme for labeling the organization of mixed economies that are predominantly Capitalist as ‘capitalism’ with an initial lower case ‘c’, and of those that are predominantly Socialist as ‘socialism’ with an initial lower case ‘s’. The platonic ideals of Socialism and Capitalism will be referenced with names having an initial upper-case letter, as befits a proper name.
In the last post I asked how wealth could be concentrated to provide needed investments, and how wealth was to be distributed. Other vital questions to be answered were how society could determine, in as democratic a way as possible, how much total investment was required, how it was to be allocated, and what should be produced at what price. My answer was that free-market capitalism met all of these requirements. In addition, I concluded free-market capitalism would automatically adjust to a steady-state economy once everyone’s economic needs and desires are more or less satisfied to the level allowed by the constraints of physical reality. On reaching a point of steady-state, the only investments made in the future would be the replacement investments required to maintain the current economic productive capacity. I also asserted at that point natural market and social forces would begin to slowly equilibrate the distribution of wealth.
The main purpose of this essay is to justify this last assertion. This will be done by examining the current U.S. distribution of wealth, and how individuals move in and out of economic classes with great fluidity. Finally, I will speculate on how U.S capitalism might be modified to aid society’s democratic evolution toward a more satisfying state.
Is Wealth Created by the Economy Unduly Concentrated by Unjust Distributions?
The criticism of U.S. capitalism we hear most often is the claim that both income and wealth are unfairly distributed among the population. So what exactly are the distributions? The chart below, taken from a Vox.com post,  shows the distribution of income for households in 2012 using U.S. Census Bureau data. What is graphed is the percent of households in income bands versus median income in the bands.
Although the peak of the distribution is between $10,000 annual income and $35,000 with very roughly 25% of households in that range, the majority of the population has higher income with a median of about $51,000. The very richest with annual incomes of $250,000 and above account for about 2.3% of the households. A different way of visualizing the inequality in income distribution is to graph the income share for the fabled 1% as a percent of GDP versus time. I will comment shortly on why the 1% should be described as ‘fabled’.
The top blue curve is the pre-tax income share taken from a paper by Thomas Piketty and Emmanuel Saez. Piketty however has been greatly criticized for over-estimating returns on capital, a very large part of the incomes of the very rich, so I will concentrate on the two lower curves generated from Congressional Budget Office (CBO) data. The red curve gives the top-one-percent’s income share pre-tax and the green curve gives it after taxes. One striking aspect of these curves is that the income share was trending upwards since at least 1981 with a major interruption due to the recession in the early 2000s. This trend appears to have been ended by the Great Recession. During 2011 the top-one-percent’s income share was 14.6% pre-tax and 12.6% after-tax. By definition this means the bottom 99% received 85.4% pre-tax and 87.4% after-tax.
The inequalities in the distribution of wealth are even more striking as you can see in the three graphs shown below. They show family wealth as a function of percentiles of population in the years 1963, 1983, and 2013. Clearly, the fraction of wealth held by the top 1% (the 99th percentile) has been growing rapidly in time.
Certainly, from what was examined in the last post, we would expect a great deal of inequality in the distribution of both income and wealth in a capitalist society. The concentration of wealth in a fraction of the population is generated by high demand for scarce products causing high prices. These translate into large profits and incomes for those owning the companies creating the wealth of the nation. Understand that I used the word ‘scarce’ in the last sentence in the economic sense. When I use that word I do not mean that the products are hard to find, but that they are hard to obtain without paying a possibly high price.
Also remember that the exceptionally rich consume only a very tiny fraction of their income and wealth on themselves. The vast majority of all that wealth is reinvested back into the economy to create even more wealth as products in which the rich investors believe. Elon Musk of SpaceX and Tesla Motors immediately jumps to mind. If this “excess” wealth were taken from the wealthy, it could not possibly be used to enrich people on the lower rungs of the economic ladder without drastically decreasing total investments and curtailing if not stalling economic growth. Then everyone on all rungs of the ladder would be hurt. A much more accurate view of the wealth gained but not consumed by the rich is as assets given to them in trust. If they employ it to increase the wealth of the world, then they are given even more to invest. This process continues until they make mistakes that cause losses rather than profits, at which time the money they lose is gained by others who have done well in allocating capital. The parallels with the Christian parable of the faithful steward are astonishing.
One seemingly valid objection to the above picture of the rich is there are some who have gained their riches, not by skill in allocating capital to produce more wealth, but by inheritance. If you were to do a google search on the subject (try “number of rich who inherit their wealth” as a search phrase), you would find a multiplicity of views on just how many gain their riches through inheritance. On sampling the search results, I found estimated percentages of how many rich (millionaires and above) gained their fortunes through inheritance to be anywhere from 20% to 50%. The high figure of 50% by the way was calculated by a Leftist organization called United for a Fair Economy in 1997. Even they are admitting, however, that the fraction of rich who are self-made is rising. Nevertheless, all this controversy about what the exact percentage of rich are self-made and what percentage inherited is beside the point. A millionaire who inherits his wealth is subject to the same market discipline as the individuals who earned their wealth. If he/she allocates assets wisely to create even more wealth, that individual gains even more assets to allocate; otherwise, he/she loses the assets to another to allocate. Because the progeny of the self-made rich quite often do not possess the same interest in creating new wealth, more often than not the following generations very quickly dissipate the family fortune. The Williams Group wealth consultancy has estimated 70% of wealthy families squander their wealth by the second generation and 90% by the third.
In fact the very assertion that there are stable 99% and 1% groups is questionable. Memberships in both groups are constantly changing as people move in and out of different economic classes with their changing fortunes. Two sociologists, Thomas Hirschl of Cornell University and Mark Rank of Washington University, published a study demonstrating Americans inhabit many different income levels throughout their lives. For example 70% of the population will be within the top 20th income percentile for at least one year; 53% will be within the top 10th percentile of income; and 11.1% will be in the much-discussed 1% for at least one year of their lives. It has always been the case that some people start poor early in life, but with time and wealth accumulation end up much richer, and this is a wealth gap between young and old that appears to be growing. (Any student debt, anyone?)
If our economy should approach a steady-state, the ability to earn increased profits by increasing investments will progressively decrease. Then the social and economic processes which cause people to move between income levels, particularly the dissipation of family fortunes by later generations, would push both income and wealth distributions toward equilibration.
How Should U.S. Capitalism Change to Aid Society’s Evolution?
How could we change American capitalism in the nation’s mixed economy to allow us to approach a steady-state? Unlike the steady-state of the Keynesians’ secular stagnation, the steady-state I envision is a more blissful condition where everyone more or less has all they need or desire consistent with the constraints of physical reality. This is the same kind of equilibrium as we discussed in terms of the Solow-Swan Development Model in the posts here, here, and here. However, I am thinking of a Solow-Swan equilibrium where there is progressively less motivation to invest and therefore to save because virtually everyone has what they want out of the economy. Market forces would then inevitably force the savings rate to the point where it can support only replacement investments at the Solow-Swan equilibrium. Since there is little motivation to increase savings rates, the economy would probably remain in a steady state until increasing knowledge and technology could generate more economic desires and increase the total factor productivity of the economy. See The Solow-Swan Model and Where We Are Economically (1) for a definition of total factor productivity and The Solow-Swan Model and Where We Are Economically (3) for a discussion on what could change it and what happens when it does change.
Achieving such a steady-state is pretty much the ultimate that an economy can do for a society. How can we change our mixed economy to aid in an evolution toward such a Shangri-La? Since the rapid and efficient approach to equilibrium depends a great deal on the efficient operation of Capitalist mechanisms, an evolution toward a steady-state would be greatly aided by pushing the mix between Capitalism and Socialism as far toward Capitalism as we can safely accomplish. Therefore, reforming federal income taxes to a flat tax with a territorial approach, and changing monetary policy to a monetary rule targeting only a zero inflation rate would give a big boost to the process. So would a replacement of Obamacare with a more market-friendly substitute, the repeal of the Dodd-Frank Act, and the pruning of many federal regulations, especially EPA regulations.
There are also some goals we can push toward on the Socialist side of the mixture, for which I do not know enough to give any real recommendations except for pointing out problems.The biggest of all these problems is our educational systems in the various states, which are mostly a national disgrace. Somehow in this most technologically advanced of all countries, we are not graduating all the programmers, registered nurses, computer systems analysts, engineers, biologists, chemists, and physicists that are needed. For the educational system to become functional enough to provide what the economy needs would not only boost the economy, but also help in reducing poverty. Anti-poverty programs that did not encourage people to stay on government life-support, but instead encouraged people to educate themselves for available jobs would also help. By all accounts, encouraging people not to have children out of wedlock would be a big help. Alas! Beyond pointing to these problems. I do not yet know enough to make coherent suggestions on the Socialist side of our capitalist economy.
But most of all, our capitalism must become more like Capitalism!
Views: 5,299