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Wealth Inequality - Perceptions vs Reality

Common sense has told us for a while now that there’s something wrong with the kind of glaring wealth disparity that we have today. A hint showed up in Janet Yellen’s recent press interview, in which she announced that the Fed would not follow a rigid rule regarding the unemployment rate. Basically, the plan had been to start raising interest rates when unemployment reached 6.5%. But, as she stated, all is not well in our economy, and it’s hard to claim that the Fed needs to clamp down by raising interest rates and presumably slowing activity. Yellen didn’t say it publicly, but it seems obvious to me and others—there are other problems with our economy that are not reflected in the average unemployment rate. We need to go deeper and look differently.

One way to start is to study the extremes. We tend to think and talk about the economy in averages and medians, forgetting that these numbers say nothing about distribution. The average of 100 and 100 is 100, as is the average of 1 and 199, but what different stories they tell! In the United States, a recent study by Credit Suisse found that the average wealth per adult had reached an all-time high of $51,600. Yet the richest 400 people in our country own 62% of the total wealth while the poorest 47% own zero. The average is irrelevant.

Unfortunately, politicians and government are extremely hesitant to address the issue of wealth inequality. We are now seeing a push for raising the minimum wage, but even that tiny nod toward addressing income disparity (which is but one contributor to wealth inequality) arouses vicious debates, blaming the poor and glorifying the “job creators”. Wealth buys power and influence, which translates into some very tangible results, for example longer life expectancy and greater political influence. The concentration of wealth in fewer and fewer hands has serious implications for the future of our economy, our system of government, and our civilization.

These issues are gaining traction in academia, popular publications, and the press. The long term risks associated with wealth inequality are being identified and getting the close attention they deserve. The discussion is beginning to move beyond inane and shortsighted rants about fostering job creation and preserving economic growth, to considerations of long-term well-being and survival of our civilization.

I highlight below three significant publications:

1. In 2009 I read a book called Spirit Level: Why Equality is Better for Everyone. An odd name, I thought, for a book about inequality and its effects on humans, until I actually checked the definition of "spirit level". The authors, medical researchers and epidemiologists, Richard Wilkinson and Kate Pickett initially set out to try to understand the causes of big differences in life expectancy among people at different levels of society. What they discovered is remarkable. They found that differences in average income from one “developed” country to another did not matter in terms of life expectancy but that inequality within countries was highly significant. In case after case, they found that income and/or wealth inequality was highly correlated not only with life expectancy but with levels of trust, mental illness and addiction, obesity, children’s educational performance, teenage births. homicides, imprisonment rates, and social mobility. Their findings in a nutshell: “Health and social problems are more common in more unequal countries.” Among “developed” countries, the US stands out as the most unequal and the least healthy.

2. John Fullerton noted in his most recent Capital Institute bulletin an article about a new model developed by Safa Motesharrei et al and published as “Human and Nature Dynamics (HANDY): Modeling Inequality and Use of Resources in the Collapse or Sustainability of Societies”. The authors have developed a model that explicitly uses wealth inequality (rather than general wealth level) as a variable in modeling scenarios and testing the results. Here is a striking excerpt from their findings:

“It is important to note that in both of these scenarios, the Elites —due to their wealth—do not suffer the detrimental effects of the environmental collapse until much later than the Commoners. This buffer of wealth allows Elites to continue “business as usual” despite the impending catastrophe. It is likely that this is an important mechanism that would help explain how historical collapses were allowed to occur by elites who appear to be oblivious to the catastrophic trajectory (most clearly apparent in the Roman and Mayan cases). This buffer effect is further reinforced by the long, apparently sustainable trajectory prior to the beginning of the collapse. While some members of society might raise the alarm that the system is moving towards an impending collapse and therefore advocate structural changes to society in order to avoid it, Elites and their supporters, who opposed making these changes, could point to the long sustainable trajectory “so far” in support of doing nothing.”

3. The world of book reviews on the subject of economics is buzzing with a new volume that will be available to the public in April—Capital in the Twenty-First Century by French economist Thomas Piketty. In his research and analysis, Piketty focuses on the reasons that wealth inequality rises and falls and warns that we are in a period of rising inequality due to concentrations of inherited capital and the relationship between economic growth and return on capital. For those who see wealth inequality not only as unfair but as a short and long term hazard to our health and survival, Piketty offers a thought-provoking premise. John Cassidy of the New Yorker has taken a particular interest in Piketty's book and its findings as well as the author’s insightful and accessible style.

At so many levels, it’s unhealthy to accumulate and store vast amounts of wealth—whether in the form of houses or horses, stock options or liens on other people’s property. It can be tempting to see that as just an ideological statement in elevated rhetoric, but these and other experts are telling us that wealth inequality is actually dangerous to our health and well-being. Just like smoking.

If gross wealth inequality threatens our health, then at what point does wealth accumulation become a behavioral disorder like hoarding? At what point will there be a TV show about wealth hoarders? What would happen if Forbes renamed its famous list from "The Forbes 400—The Richest People in America" to "The Forbes 400—The Biggest Hoarders in America"?

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