Aaaaargh!

Twattery in The Guardian again!

We\’re told that it\’s a simple mathematical law, a power distribution, which shows why wealth is so unequally distributed. Tosser of a physics graduate hasn\’t bothered to work out why though. My comment there:

Oh Dear Lord. Can we have Ben back please?

\”The economist Edward N Wolff, of New York University, has pointed out that, as of 2007, the top 1% of households in America owned 34.6% of all privately held wealth, and the next 19% had 50.5% of the wealth. This means that just 20% of the people owned 85% of the wealth, leaving only 15% for the bottom 80% of the people. No one who is interested in an equitable society can fail to be irked by this unfairness.\”

So, let us add the little bit that economists know and physics graduates obviously don\’t.

It is possible to observe that people age, yes? That as they age they accumulate assets? Invest in a pension, pay off the mortgage, stick cash in an ISA, buy a painting perhaps, inherit granny\’s Chinese vase that turns out to be worth a fortune on Antiques Roadshow?

Just in general: we expect households headed by a 25 year old to have no wealth at all in fact. Almost certainly in fact negative wealth. Student loans, maybe a mortgage with no or little equity, only just started working perhaps. No assets, possibly negative assets.

We also expect a household headed by a 60 or 65 year old to have assets. That lifetime\’s accumulation of possessions, whatever investments, savings have been made, household equity, pension, whatever.

This is sometimes known as the \”lifetime savings hypothesis\”. Modigliani got his Nobel in part for explaining it.

So, now let\’s take all the housholds in the country and split them into quinitles, 20% of households to each. But instead of doing it by wealth we\’ll do it by age group.

Head of household is 20-30, 30-40, 40-50, 50-60, 60-70. We would expect there to be an unequal distribution of wealth here. In fact, we would insist that there\’s going to be an unequal distribution of wealth here. Some chunk of the wealth is going to be owned by those older households and some chunk isn\’t: that bottom quintile we\’d expect (absent inheritances of course) to own nothing, even be in negative territory. The next quintile possibly still negative but possibly marginally positive. And so on. We actually expect there to be inequality of wealth precisely because people a) age and b) save.

Now, does this explain all of the inequality of wealth that we currently see? I\’m sure it doesn\’t. I\’m sure there is also inequality within those age groups. But saying \”see, wealth inequality, awful!\” is ignorant.

What we want to know is how much of it is because we are human beings who, because we age and retire, save, and how much of it is due to the structure of the economy.

As I say, can we have Ben back from his book leave please?

 

10 comments on “Aaaaargh!

  1. Thomas Sowell beautifully illustrates this point in “Visions of the Annointed” by assuming that everybody earns the same and saves the same amount. Result? Wealth inequality, of course – with the upper age portion owning far more wealth than the lower age portion, for mathematically obvious reasons, irrespective of debt, salary differentials etc.

    I get the feeling that lefties just don’t *get* arithmetic…

  2. Also it depends how they count pensions and pension funds.

    Two things:

    1) Private pensions are even more age-weighted, because you build up a pension pot, but then on retirement use all the money to buy an annuity.

    I’d guess that your pension fund before you retire is counted as your assets, but once you’ve retired the annuity is classed as an income stream.

    Nothing’s really changed, but on retirement suddenly your largest asset disappears.

    2) I bet they don’t include the capital value of public sector and other final-salary schemes. So that weights the “assets” even more.

    Two people, one with a final salary pension, the other with a private pension fund. Both could get the same pension on retirement, but the private sector man is counted as having all the assets.

  3. > We actually expect there to be inequality of wealth precisely because people a) age and b) save.

    I agree this is how the world works. But does it actually make sense? In an “ideal” world (where you trust your infants to make their own way, etc etc) wouldn’t the ideal be to die with zero wealth, having spent it all?

    One might hypothesise that in a society like th UK, or the US, where you face penury in old age unless you have savings (and are thus forced to die with savings), you’d have one distribution. But in a more heavily socialised state where you can trust the state pension (Sweden? I dunno) you might expect people to die with lower savings, and hence less inequality.

    Tim adds: The lifetime savings hypothesis does in fact say this: that when you retire you dissave. That’s getting a tad complex for Guardian readers of course: for it’s the explanation of why we have annuities or lifetime pensions. No one actually know how long they’re going to live so how long do you have to make your money last?

    Am,usingly, you might in fact get the opposite result UK/Swede3n that you postulate. For Sweden has no inheritance tax, meaning that whatever you have left goes to hte kidies, while the UK has IHT and you might want to blow it before the govt gets its hands on it.

    Maybe, of course, only maybe.

  4. You could make the inequality look even more unfair if you compared individuals rather than households. In a way, surprising the Graun hasn’t done this. But then that would take pressing buttons on a pocket calculator.

  5. Seems to be part of a general trend to regard any success, private or corporate, as bad or “unfair”. Look at the furore every time a company announces good profits. How dare they make money when the economy is in the doldrums.

  6. Is this in any way related to the Tox-Dadger’s tox dadging? I think we should be told.

    Anyway, while we await an explication, why don’t we just confiscate the obscene wealth of Toynbee and Rusbridger?

  7. There is also the Bible : To him that hath, shall be given.

    The concept of “Havingness”, ie the ABILITY to have, is very important.

    Give £ 100 each to 100 people. Some will celebrate, and lo, their portion declineth.

    Some will bank, their portion gradually decreaseth because of inflation etc.

    Some will use their portion to invest in a productive enterprise, perhaps selling intoxicating liquor to the celebrants, their portion increaseth substantially.

    Thus you have, say, Roman Abramovich,

    Roman Abramovich has very high havingness, yet he started with the same amount of shares as the others, no ?

    Maybe not the best example, but it will do.

    Thus you have income inequality, entirely based on human nature ….

    Alan Douglas

  8. To make this understandable to idiots, I use my extended family as a comparison. We have 4 grandparents (all retired), 9 adults (all working) and 10 kids (eldest has just turned 18 and is starting work).

    The wealth is concentrated with our grandparents, who have paid off their homes and accumulated other assets during their lifetime.

    The adults in the middle are a mixed bag – some have accumulated quite a bit of wealth, others are still in negative territory (due to poor savings habits). However, most of us are steadily putting it away, and will do so until retirement.

    The kids, who range from 3 to 18, have some savings (cash from birthday presents etc) but no real wealth.

    So out of 23 family members, 4 of them (16%) have at least 50% of the wealth. The 6 adults (25%) who have saved have about 48% of the wealth and the 3 adults and 10 kids (59%) have 2% of the wealth.

    Is that unfair? Should we force the grandparents to sell their houses and trade in their shares and give money to their impecunious children?

    No way.

  9. If you make a model in which everyone is paid the same and saves the same and assume a reasonable real return you find the richest 1% have about 2% of the wealth, not 34%. Now people earn more as they age but the distribution shifts up as well

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