Part 1 of 2
Last night (February 20, 2020) at the Democratic presidential debate in Las Vegas, NBC News’ Chuck Todd asked 2020 candidate former New York City Mayor Michael Bloomberg if he should exist right after Bernie spouted off on some drivel about the average American and their economic plight.
SANDERS: We have a grotesque and immoral distribution of wealth and income. Mike Bloomberg owns more wealth than the bottom 125 million Americans. That’s wrong. That’s immoral. That should not be the case when we got a half a million people sleeping out on the street, where we have kids who cannot afford to go to college, when we have 45 million people dealing with student debt.source: https://www.nbcnews.com/politics/2020-election/full-transcript-ninth-democratic-debate-las-vegas-n1139546
We have enormous problems facing this country, and we cannot continue seeing a situation where, in the last three years, billionaires in this country saw an $850 billion increase in their wealth — congratulations, Mr. Bloomberg — but the average American last year saw less than a 1 percent increase in his or her income. That’s wrong.
TODD: Mayor Bloomberg, should you exist?
BLOOMBERG: I can’t speak for all billionaires. All I know is I’ve been very lucky, made a lot of money, and I’m giving it all away to make this country better. And a good chunk of it goes to the Democratic Party, as well.
TODD: Is it too much? Have you earned too much — has it been an obscene amount of — should you have earned that much money?
BLOOMBERG: Yes. I worked very hard for it. And I’m giving it away.
Before we deal with the existence of Mayor Bloomberg, which I have a hard time imagining why this is even a question (clearly he exists), let’s consider what Bernie is saying.
Bernie’s money quote for the kids today was clearly the line that “We have a grotesque and immoral distribution of wealth and income” with the follow on that “but the average American last year saw less than a 1 percent increase in his or her income.” I always find it interesting that people without any skin in the game (like Sanders who’s entire existence is paid for by we the taxpayers while he enjoys the trappings of power and stature that come with being a United States Senator) are so quick to exercise their sense of morality on behalf of the rest of us. However, that’s not what really bothers me about statements like that.
What bothers me is that my fellow citizens seemingly agree out of a sense of fairness. I mean really, what kind of asshole are you if can look at the large numbers of homeless and other working-poor juxtaposed to the Sheldon Adelsons, Koch Brothers, and Mike Bloombergs of the world, and not think there might be something wrong with how our economic relationships are structured? Afterall, we are human. Yet, therein lies the trap.
Humans are very poor thinkers when it comes to distributions, probabilities, statistics, and biases.
Let’s start with inequality first. I think the first step is not to conflate income inequality with wealth inequality. The second step is to try to spell out what the issue is actually. Why does inequality upset us so much?
Well, first let’s consider the type of inequality that seems to upset people the most. It is not the celebrities, the heroes, the famous authors, musicians, high paid athletes, and the like. Nope. The inequalities we vilify, cannot stand, and indulge deep visceral reactions to are those inequalities where the person seems to us to be just like we. I suspect it is because we are unable to use our mental back-fitting to explain why they are somehow deserving of their wealth more than we are. And, that, my friends, just makes us feel small. Which sucks.
Income in the United States has a long tail to the right (where the very high income earners are) see graph below.
When we, and sadly most economists, look at such a graph, we insert ourselves in as an anchor point. Having done so, we consider how hard a time we personally have had moving from left to right on the graph and then extrapolate how this is very unfair and there must be rules that favor the people on the right, and keep them there. We on the other hand, are working like crazy to better ourselves against the odds that favor “the rich.”
Individual income moves. We can see that in the next graph, it moves with our age. On average, it moves up and then down based on our ability to work. Things that move have different attributes from things that don’t. The rate at which any one person’s income will change by some amount year over year is a non-zero probability for each potential available amount. For any of us, the odds that our income increases by 10’s of millions of dollars next year is very small, but it does happen to some.
It is worth noting at this point that income is ergodic. Here I mean to say given sufficient time, an individual can expect to enjoy an annual income at all different levels from $0 to “the most money ever earned in a year” and this can be represented statistically by a reasonably large selection of points. The big problem is, we only live 74.5 years on average so we have a low probability of visiting all the available income levels. Also note that we cannot predict what “the most money ever earned in a year” (even normalizing income in xyz year dollars) will be. Therefore, there is no upper bound to income and correspondingly the fat tail is said to be unbound to the right (applying limit theory here).
It shouldn’t surprise anyone that 39% percent of Americans will spend a year in the top 5 percent of the income distribution. A little more than half of all Americans (56%) will find themselves in the top 10 percent for a year. And almost three quarters (73%) will spend a year in the top 20 percent of all income distributions. Keep in mind these are dynamic distirbutions which means the same individual could find themselves in any or all of these segments over their lifetime.
So, I now ask, some honest questions: What do you want to do about the issue of income from the point of view of government intervention? What consequences will that have? Who do you trust to make such decisions?
I myself often wonder about those overly worried about income inequality. It seems to me, they worry about it because they have come to view themselves in hierarchical terms, and thus project that others do too. To make matters worse, discussions in “competitive” universities tend to be all about hierarchy. While the average person would seemingly always welcome a boost in income, they don’t seem to obsess about it the way the “intellectuals” do. Aristotle, once postulated that envy is something you are more likely to encounter in your own kin: lower classes are more likely to experience envy toward their cousins or the middle class than toward the very rich.