My Own Writing
Summary
Some wealth inequality is not necessarily a bad thing. Indeed, it may be essential to a just society. If everyone received the same wealth regardless of how much effort or contribution they made, what motivation would they have to work at all? Is it not fair that those who put in the time and effort to improve their knowledge and skills, and then work hard and diligently and are responsible and frugal with their money should be rewarded?
On the other hand, everyone does not have equal opportunity. There are large differences in the quality of education one receives depending on the wealth of one’s family. And even if educational quality were equalized, genetic endowment is not. Some people are simply more intelligent than others, and intelligence can be applied toward developing specialized skills, which are needed by companies and are relatively scarce and thus command higher pay.
The problem, it seems, is that there are positive feedback loops at work that cause the “rich to get richer.” For example, once you have a certain amount of wealth, you can apply or invest it to generate even more wealth. Wealth can also be inherited from one’s parents, giving one an unearned advantage over one’s less fortunate peers.
These processes can create a state where wealth inequality becomes extreme, and a host of other social problems arise: civil unrest, riots, widespread depression and hopelessness, distortion of the democratic process, political polarization, vulnerability to demagoguery, and so on.
Possible Solutions
More progressive taxation. This is when higher tranches of income are taxed at higher rates, with the net result that wealthier individuals pay more taxes, and the tax revenue thus obtained is then directed toward increasing the (eventual) incomes of lower-income individuals, such as by improving access to or quality of education. Often overlooked is the fact that the wealthy are already paying the vast majority of the income tax in the U.S.
Improved Worker Skills. It can be argued that the wealth problem is a result of an income problem which is the result of a [lack of] skill problem. There are plenty of jobs that are very high-paying because they are valuable to the companies offering them and the number of candidates capable of performing them is limited. These skills tend to be complex and require a relatively high level of knowledge and intelligence. But knowledge can be obtained through education.
Excerpted from Wikipedia
Sources:
http://en.wikipedia.org/wiki/Economic_inequality
http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States
Date: 05-Jan-2015
United States
Wealth inequality in the United States (also known as the wealth gap) refers to the unequal distribution of assets among residents of the United States. Wealth includes the values of homes, automobiles, personal valuables, businesses, savings, and investments. Just prior to President Obama’s 2014 State of the Union Address, media reported that the top wealthiest 1% possess 40% of the nation’s wealth; the bottom 80% own 7%; similarly, but later, the media reported, the “richest 1 percent in the United States now own more wealth than the bottom 90 percent”. The gap between the top 10% and the middle class is over 1,000%; that increases another 1000% for the top 1%. The average employee “needs to work more than a month to earn what the CEO earns in one hour.” Although different from income inequality, the two are related. In Inequality for All—a 2013 documentary with Robert Reich in which he argued that income inequality is the defining issue for the United States—Reich states that 95% of economic gains went to the top 1% net worth (HNWI) since 2009 when the recovery allegedly started.
A 2011 study found that US citizens across the political spectrum dramatically underestimate the current US wealth inequality and would prefer a far more egalitarian distribution of wealth.
Wealth is usually not used for daily expenditures or factored into household budgets, but combined with income it comprises the family’s total opportunity “to secure a desired stature and standard of living, or pass their class status along to one’s children”. Moreover, “wealth provides for both short- and long-term financial security, bestows social prestige, and contributes to political power, and can be used to produce more wealth.” Hence, wealth possesses a psychological element that awards people the feeling of agency, or the ability to act. The accumulation of wealth grants more options and eliminates restrictions about how one can live life. Dennis Gilbert asserts that the standard of living of the working and middle classes is dependent upon income and wages, while the rich tend to rely on wealth, distinguishing them from the vast majority of Americans. A September 2014 study by Harvard Business School declared that the growing disparity between the very wealthy and the lower and middle classes is no longer sustainable.
Statistics
The distribution of net wealth in the United States, 2007. The chart in 2007 was divided into the top 20% (blue), upper middle 20% (orange), middle 20% (red), and bottom 40% (green). (The net wealth of many people in the lowest 20% is negative because of debt.) By 2014 the wealth gap deepened.
In 2007, the top 10% wealthiest possessed 80% of all financial assets. In 2007 the richest 1% of the American population owned 34.6% of the country’s total wealth, and the next 19% owned 50.5%. Thus, the top 20% of Americans owned 85% of the country’s wealth and the bottom 80% of the population owned 15%. In 2011, financial inequality was greater than inequality in total wealth, with the top 1% of the population owning 42.7%, the next 19% of Americans owning 50.3%, and the bottom 80% owning 7%. However, after the Great Recession which started in 2007, the share of total wealth owned by the top 1% of the population grew from 34.6% to 37.1%, and that owned by the top 20% of Americans grew from 85% to 87.7%. The Great Recession also caused a drop of 36.1% in median household wealth but a drop of only 11.1% for the top 1%, further widening the gap between the top 1% and the bottom 99%.
According to PolitiFact and others, in 2011 the 400 wealthiest Americans “have more wealth than half of all Americans combined.” Inherited wealth may help explain why many Americans who have become rich may have had a “substantial head start”. In September 2012, according to the Institute for Policy Studies, “over 60 percent” of the Forbes richest 400 Americans “grew up in substantial privilege”.
In 2013 wealth inequality in the U.S. was worse than in most developed countries other than Switzerland and Denmark. In the United States, the use of offshore holdings is exceptionally small compared to Europe, where much of the wealth of the top percentiles is kept in offshore holdings. While the statistical problem is European wide, in Southern Europe statistics become even more unreliable. Less than a thousand people in Italy have declared incomes of more than 1 million euros. Former Prime Minister of Italy described tax evasion as a “national pastime”. According to a 2014 Credit Suisse study, the ratio of wealth to household income is the highest it has been since the Great Depression.
Wealth and Income
There is an important distinction between income and wealth. Income refers to a flow of money over time in the form of a rate (per hour, per week, or per year); wealth is a collection of assets owned. In essence, income is specifically what people receive through work, retirement, or social welfare whereas wealth is what people own. While the two are seemingly related, income inequality alone is insufficient for understanding economic inequality for two reasons:
1. It does not accurately reflect an individual’s economic position
2. Income does not portray the severity of financial inequality in the United States.
The United States Census Bureau formally defines income as “received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc. By this official measure, the wealthiest families have low income but the value of their assets earns enough money to support their lifestyle. Dividends from trusts or gains in the stock market do not fall under the definition of income but are the primary money flows for the wealthy. Retired people also have little income but usually have a higher net worth because of money saved over time.
Artist’s depiction of U.S. wealth inequality in 2013.
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Additionally, income does not capture the extent of wealth inequality. Wealth is derived over time from the collection of income earnings and growth of assets. The income of one year cannot encompass the accumulation over a lifetime. Income statistics view too narrow a time span for it to be an adequate indicator of financial inequality. For example, the Gini coefficient for wealth inequality increased from 0.80 in 1983 to 0.84 in 1989. In the same year, 1989, the Gini coefficient for income was only 0.52. The Gini coefficient is an economic tool on a scale from 0 to 1 that measures the level of inequality. 1 signifies perfect inequality and 0 represents perfect equality. From this data, it is evident that in 1989 there was a discrepancy about the level of economic disparity with the extent of wealth inequality significantly higher than income inequality. Recent research shows that many households, in particular those headed by young parents (younger than 35), minorities, and individuals with low educational attainment, display very little accumulation. Many have no financial assets and their total net worth is also low.
According to the Congressional Budget Office, between 1979 and 2007 incomes of the top 1% of Americans grew by an average of 275%. … (Note: The IRS insists that comparisons of adjusted gross income pre-1987 and post-1987 are complicated by large changes in the definition of AGI In 2009, people in the top 1% of taxpayers made of $343,927 or more. According to US economist Joseph Stiglitz the richest 1% of Americans gained 93% of the additional income created in 2010. People in the top 1% are three times more likely to work more than 50 hours a week, they are more likely to be self-employed, and they earn a fifth of their income as capital income. The top 1% is composed of many professions and has an annual turnover rate of more than 25%. The five most common professions are managers, physicians, administrators, lawyers, and teachers.
Wealth Inequality and Child Poverty
The poor U.S. showing in 2013 UNICEF data on the well-being of children in 35 developed nations—with the United States at 34 out of 35 (Romania is worse)—may reflect growing income inequality.
Causes of Wealth Inequality
Some primary causes contributing to the creation and persistence of wealth inequality include:
- Monetary policy
- Financial resources
- Money allocation
- Higher rate of savings and hence asset accumulation by the wealthy
- Higher net rate of return to assets owned by the rich (the wealthy may have special knowledge, and the level of fees and other charges on their savings will be less than those with small investments)
- Lower credit costs and credit constraints for the wealthy. Access to credit at lower rates enhances the level of profits and scope of investment opportunities
- Inflation
- Tax policy
- Decline in unionization
Essentially, the wealthy possess greater financial opportunities that allow their money to make more money. Earnings from the stock market or mutual funds are reinvested to produce a larger return. Over time, the sum that is invested becomes progressively more substantial. Those who are not wealthy, however, do not have the resources to enhance their opportunities and improve their economic position. Rather, “after debt payments, poor families are constrained to spend the remaining income on items that will not produce wealth and will depreciate over time.” Scholar David B. Grusky notes that “62 percent of households headed by single parents are without savings or other financial assets”. Net indebtedness generally prevents the poor from having any opportunity to accumulate wealth and thereby better their conditions.
Notably, for both the wealthy and not-wealthy, the process of accumulation or debt is cyclical. The rich use their money to earn larger returns and the poor have no savings with which to produce returns or eliminate debt. Unlike income, both facets are generational. Wealthy families pass down their assets allowing future generations to develop even more wealth. The poor, on the other hand, “are less able to leave inheritances to their children leaving the latter with little or no wealth on which to build…This is another reason why wealth inequality is so important- its accumulation has direct implications for economic inequality among the children of today’s families.”
Corresponding to financial resources, the wealthy strategically organize their money so that it will produce profit. Affluent people are more likely to allocate their money to financial assets such as stocks, bonds, and other investments which hold the possibility of capital appreciation. Those who are not wealthy are more likely to have their money in savings accounts and home ownership. This difference comprises the largest reason for the continuation of wealth inequality in America: the rich are accumulating more assets while the middle and working classes are just getting by. Currently, the richest 1% hold about 38% of all privately held wealth in the United States while the bottom 90% held 73% of all debt. According to the New York Times, the “richest 1 percent in the United States now own more wealth than the bottom 90 percent”.
As the price of commodities increases because of inflation, a larger percentage of lower-class people’s money is spent on things they need to survive and go to work, such as food and gasoline. Most of the working poor are paid fixed hourly wages that do not keep up with rises in prices, so every year an increasing percentage of their income is consumed until they have to go into debt just to survive. At this point, their little wealth is owed to lenders and banking institutions.
Main article: Tax Policy and Economic Inequality in the United States
The distributive nature of tax policy has been suggested by some economists and politicians such as Emmanuel Saez, Thomas Piketty, and Barack Obama to perpetuate economic inequality in America by steering large sums of wealth into the hands of the wealthiest Americans. This claim has created much controversy and debate within the academic and political spheres.
Main article: Unions
The economist Joseph Stiglitz argues that “Strong unions have helped to reduce inequality, whereas weaker unions have made it easier for CEOs, sometimes working with market forces that they have helped shape, to increase it.” The long fall in unionization in the U.S. since WWII has seen a corresponding rise in the inequality of wealth and income.
Racial disparities
See also: Racial inequality in the United States
There are vast differences in wealth across racial groups in the United States. The wealth gap between white and black families nearly tripled from $85,000 in 1984 to $236,500 in 2009.
There are many causes, including years of home ownership, household income, unemployment, and education but inheritance might be the most important. Inheritance can directly link the disadvantaged economic position and prospects of today’s blacks to the disadvantaged positions of their parents’ and grandparents’ generations. According to a report done by Robert B. Avery and Michael S. Rendall, one in three white households will receive a substantial inheritance during their lifetime compared to only one in ten black households. This relative lack of inheritance that has been observed among African Americans can be attributed in large part to factors such as- unpaid labor (slavery), violent destruction of personal property in incidents such as Red Summer of 1919, unequal opportunity in education and employment (racial discrimination), and more recent policies such as redlining and planned shrinkage. Other ethnic minorities, particularly those with darker complexions, have at times faced many of these same adversities to various degrees.
In an article on Huffington Post by Antonio Moore “The Decadent Veil: Black America’s Wealth Illusion” the question of inequity is taken another critical step forward and the piece digs into how celebrity is masking this massive inequality. “The decadent veil looks at black Americans through a lens of group theory and seeks to explain an illusion that has taken form over a 30-year span of financial deregulation and new found access to unsecured credit. This veil is trimmed with million-dollar sports contracts, Roc Nation tour deals and designer labels made for heads of state. As black celebrity invited us into their homes through shows like MTV cribs, we forgot the condition of overall African American financial affairs. Despite a large section of the 14 million black households drowning in poverty and debt the stories of a few are told as if they represent those of millions, not thousands. It is this new veil of economics that has allowed for a broad swath of America to become not just desensitized to black poverty, but also hypnotized by black celebrity… The decadent veil not only warps the black community’s vision outward to a larger economic world, but it also distorts outside community’s view of Black America’s actual financial reality.”
Effect on Democracy
A 2014 study by researchers at Princeton and Northwestern concludes that government policies reflect the desires of the wealthy, and that the vast majority of American citizens have “minuscule, near-zero, statistically non-significant impact upon public policy . . . when a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose.” When Fed chair Janet Yellen was questioned by Bernie Sanders about the study at a congressional hearing in May 2014, she responded “There’s no question that we’ve had a trend toward growing inequality” and that this trend “can shape [and] determine the ability of different groups to participate equally in a democracy and have grave effects on social stability over time.”
In Capital in the Twenty-First Century, French economist Thomas Piketty argues that “extremely high levels” of wealth inequality are “incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies” and that “the risk of a drift towards oligarchy is real and gives little reason for optimism about where the United States is headed.
Global
Economic inequality (also described as the gap between rich and poor, income inequality, wealth disparity, wealth and income differences or wealth gap) is the state of affairs in which assets, wealth, or income are distributed unequally among individuals in a group, among groups in a population, or among countries. The issue of economic inequality can implicate notions of equity, equality of outcome, and equality of opportunity.
Opinions differ on the importance of economic inequality and its effects. Some studies have emphasized inequality as a growing social problem. While some inequality may promote investment, too much inequality may be destructive. Income inequality can hinder long term growth, but can also help long term growth. Statistical studies comparing inequality to year-over-year economic growth have been inconclusive; however in 2011, researchers from the International Monetary Fund published work which indicated that income equality increased the duration of countries’ economic growth spells more than free trade, low government corruption, foreign investment, or low foreign debt.
Economic inequality varies between societies, historical periods, economic structures and systems. The term can refer to cross sectional distribution of income or wealth at any particular period, or to the lifetime income and wealth over longer periods of time. There are various numerical indices for measuring economic inequality. A widely used one is the Gini coefficient, but there are also many other methods. Engerman and Sokoloff further explain economic inequality via historical institutions, as demonstrated by European colonial institutions of the Americas. See their “Inequality, institutions, and differential paths of growing among new world economies” ‘Journal of Economic Perspectives’ 14, no. 3 (2000) for further reading.