Part 2 of 2
Continued from Part 1
As one might anticipate, the wealth process is dominated by what we call a winner-take-all effect. In America, going back to our founding, those with money and privileges have tended to try to control the process. Sadly, we should acknowledge that there is a non-insignificant proportion of politicians and bureaucrats who are working in service of those seeking to leverage money as speech to ensure and preserve the entitlements the wealthy enjoy. Ironically, smart sounding regulations put in place and the elimination of large estate taxes are decreasing one of America’s greatest historical strengths: allowing the wealthy to destroy their wealth while others rise to take their place.
Many of my friends report being enamored of the arguably, more equal European economic situation. Interestingly, wealth in Europe is far more static. That is to say, in America only a small percentage of the wealthiest 500 Americans (10%) enjoyed that same level of wealth thirty years ago. By contrast, 1/3 of our richest friends in Europe were also rich a century ago. In France, that number is north of 60% with inheritance being the primary driver. In the worst case (Florence, Italy), the same few families have kept their wealth for 500 years now.
Reviewing, again, static vs. dynamic, this is something we citizens do not consider due to our brain constraints. We do not consider how wealth has historically been squandered by heirs in America. We fail to appreciate that wealth is more transient than we normally think.
Static inequality is by necessity a snapshot view of inequality. It does not reflect what will happen to people over the course of their lives. It is important to recall that no-one, and least of all econometricians, can predict the future.
If you stop and think about inequality from a dynamic point of view, or look at the notion of dynamic equality you start to see things a little differently. Rather than some sort of forced wealth redistribution to deal with the “obscenity” of the long tail of wealth, as seen in the graph below, you see other options. One way to generate more equality is by forcing the wealthy to be subjected to the real world risks of being ejected from the 1 percent by way of their choices and investment strategies.
Look carefully at how the 1% moves up and down relative to the years involved in the graph of US wealth distributions below. Then, go back and look at estate taxes over those same time periods and throw in a few government bailouts for things like the investment and mortgage banks in 2008. Also note that the amounts associated with percentiles move about and that there is no upper limit on total wealth (unbound as we say in mathematics).
What kinds of policies could a government enact and what would the goal be? What kind of unintended consequences would you predict? Huge hint: whatever you think the worst case scenario might be, it will be far worse than that owing to the poverty of our imaginations. Implement any policy idea you like, and you, or someone who implemented your idea, will be forced to scratch their head and say: “gee, that never happened before!” to some unexpected bad, or potentially good, event that will transpire in the future.
Let us return to our friend ergodicity for a minute. If we were to look a cross-sectional picture of the U.S. population, we would see that there are a minority of millionaires in the one percent. Looking at them individually, we would see that some have blue eyes, others brown, and still others have red hair. We would also see a high majority of people in the lower middle class have similar attributes. Take the percentages of each wealth bracket and note that if each one of us, should we live forever, would spend a proportion of time in the economic conditions of the entire cross-section. This perfect ergodicity would mean over a random period of time (say 1000 consecutive years) we would spend an average of 600 years in the lower middle class, 100 years in the upper middle class, 200 years in the blue-collar class, and perhaps 10 years in the one percent. (inferred from: https://www.nytimes.com/2014/04/20/opinion/sunday/from-rags-to-riches-to-rags.html )
Contrast ergodicity with absorbtion. An absorbing state is a sticky trap. Once in, you can’t get out, good or bad. Lately in America, politicians seem to want us to believe that if a person starts out poor they cannot exit this state of poverty. Likewise, if a person gets rich that person always stays rich. Of course, evidence that this is not the case is overlooked or simply discarded.
Economists at Harvard and Berkeley crunched the numbers on 40 million tax returns from 1971-2012 and discovered that mobility is pretty much what The Pew Charitable Trusts reported it was 30 years ago.
Today, 64% of the people born to the poorest fifth of society rise out of that quintile— 11% rise all the way into the top quintile. Meanwhile, 8% of people born to the richest fifth fall all the way to the bottom fifth. Sometimes great wealth makes the next generation lazy and self-indulgent, and wrecks their lives. I suspect without all the rules and regulations around wealth preservation, the number of people sliding would go higher.
Also, the rich don’t get rich at the expense of the poor (unless they steal or collude with government). The poor got richer, too.
If that isn’t enough, there is also this weird love affair with Marx going on in our country right now. Sanders and AOC just love the ideas he cooked up. I find it odd that no one looks at the fundamental problems of the entire notion of a historical dialectic (which Marx borrows from the father of all pseudo thinkers, Hegel) that has economic systems transitioning from state to state in some sort of orderly and explainable manner. As if. Can you imagine going to medical school today and using a textbook that was last updated in the 1870s? Worse: one that didn’t actually have any experimental data to show the veracity of the methods it was advocating?
If one looks at evolutionary biology, and considers organisms with a profound mutant phenotype (hopeful monsters) that have the potential to establish a new evolutionary lineage, one begins to understand both innovation (in technology) and “real world” history. Just as evidence suggests (see: https://link.springer.com/article/10.1016/j.thbio.2005.11.002 ) that hopeful monsters played an important role during the origin of key innovations and novel body plans by saltational rather than gradual evolution, so too did Sir Alexander Fleming’s discovery that mold had started to grow on his petri dishes of Staphylococcus bacteria colonies. Thus, we now have Penicillin. Likewise, in 1536, Henry VIII fell from his horse during a joust and was badly injured. A shocked Anne Boleyn miscarried a male fetus, sealing her fate. The onetime athlete-king would grow crippled, fat, reclusive, tyrannical, and intolerant. How might the Protestant Reformation have ended if he’d remained on that horse?
Once you come to see evolution, technology, and history all subject to randomness as the principal catalyst for progress, it is very hard to un-see that. Indeed, as you will recall from Part 1, the problem with history is that the limit is unbound. We have no way of knowing what can possibly happen in the future. Even worse, our wildest projections are limited to the things we know about today which almost certainly will not cover the unknown unknowns of the future.
So, what to do about wealth inequality? Probably not worry about it too much. However, if one felt compelled to do something about it in terms of Government regulation, I would consider the following:
- Bring back the estate tax levels to 78% of every dollar over $2,000,000 in constant 2020 dollars.
- Pass a constitutional amendment that limits campaign contributions and specifically recognizes that money is not equal to speech.
- Allow the second and third generations of the wealthy to squander their wealth without government sponsored bailouts of their risky (and often greedy) investment strategies. In other words, stop bailing out the wealthy shareholders of business that are “too big to fail” e.g. the banks in 2007/2008
Your mileage may vary …