Wealth and Distribution


Occupy Wall Street is having an impact.  There’s little doubt that they have generated much conversation and debate.  Some think that the impact they’ve had is positive; others negative.  For me, it’s focused the debate on income distribution, income mobility and wealth distribution.

We’ve talked about the GINI.  That’s the tool, in general, that measures distribution.  It could be World Series Titles or brown hair.  It could be the letter “W” in license plates or it could be income.  And I’ve come to the conclusion that the GINI, as reported by the major players, isn’t reporting anything useful.  The GINI measures income per family.  And all families aren’t created equal.

So, next up is wealth.  This time I built a thought experiment.  A simple and crude one to be sure, but, based on feedback, could be refined.  In fact, it’s my goal to refine it as I go.  The idea is to create a world that is as equal as possible.  I’ve built a population that is the same in every regard.  They make the same, save the same and spend the same.  And they advance the same.  Given such a world, what does income and wealth distribution look like?

Let’s look at wealth.

I assume a number of things.  All in the name of equality:

  1. 1000 people per year
  2. A starting salary of $30,000
  3. A raise of 3% a year.
  4. Progressive living: roommate-own apartment-saving for home
  5. Progressive retirement savings – none to 401k
  6. Rent and food don’t increase in real terms
  7. People only have living and food expenses.  And save ALL other money.

If we start at year 1 and continue to build our population, it looks like this for the first 15 years:

The graphics are tough to see without clicking through.  Lemme give ya the money shot:

Total
Worth
$20,150.00
$41,065.00
$62,768.00
$85,282.81
$108,633.07
$132,996.30
$155,049.73
$178,141.44
$202,303.53
$227,569.27
$253,973.07
$281,551.59
$310,340.71
$340,378.62
$371,702.83

Using the gross assumptions above, I have identified the “Total Worth” of the individuals year over year.

Each row above represents another cohort advancing and the previous year taking it’s place.  That is, this year’s “Year Ones” becomes next year’s “Year Twos”, And this year’s “Year Twos” become next year’s “Year Threes”.

We like to break down distributions by quintiles.  Let’s do that.  Let’s break it down by quintile.

If you sum all the wealth of the 15 represented years, you get $2,771,905.  If you divide $2,771,905 by 5 you get $554,381.  The first SIX years of cohort classes don’t equal one single quintile.  On the other end of the spectrum, just 2 cohort classes are at $712,081.  Nearly 40% more than the top quintile.  In other words, more than the poorest third of people control less than 20% of the net wealth while the richest 14% control more than 20% of the net wealth.

6/15th’s of the poorest control less money than the top 2/15ths.

And this in a world controlled by exact equality and accounting for no good/bad decisions.

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3 comments
  1. In the world we have one problem is the lack of class mobility. I don’t mind there being poor and rich, as long as those reflect peoples’ decisions, and that people are empowered to make good decisions. In each case, that isn’t happening. The empowering part will never be perfect, but a kid born in a ghetto is not given the tools, role models and education that makes it likely they’ll make the decisions to pull them out of that (or rural poor, for that matter). We’ll never equalize the opportunity of the ghetto kid with the suburban kid, but we should try. Second, the structure of the economy has an impact. Consider this: Average CEO pay since 1990 has gone up 298%, corporate profits up 106%, banks have made more money on Wall Street since 2008 than they did in the eight previous years, yet worker pay is up only 4.3% and the minimum wage is down 9%. Every measure of wealth and income change shows the wealthiest getting wealthier and the poor and middle class sliding. This isn’t even controversial, the data speaks loudly. Wealth distribution was most equal in 1976, and now it’s at a level that is back at 1890s levels. The problem is real, and that’s why people are starting to get upset.

    • pino said:

      In the world we have one problem is the lack of class mobility.

      I hear this a lot. And I think it’s a term that isn’t used well. For example, it is used to describe the concept of wage disparity, wealth disparity and quintile mobility. I’m not sure what it means much of the time.

      The empowering part will never be perfect, but a kid born in a ghetto is not given the tools, role models and education that makes it likely they’ll make the decisions to pull them out of that (or rural poor, for that matter).

      I agree. Which is why I think we need to discuss within trends and not the simple existence of some individual.

      Every measure of wealth and income change shows the wealthiest getting wealthier and the poor and middle class sliding.

      See? This is what I’m talking about. You start by saying we have a class mobility problem and then demonstrate that we have income or wealth disparity problem.

      Every measure of wealth and income change shows the wealthiest getting wealthier and the poor and middle class sliding.

      I disagree. As a group, the wealthiest group may be wealthier than the poor group. However, the people that make up those groups are most certainly different. People move in and out of those groups all the time.

      The problem is real, and that’s why people are starting to get upset.

      I don’t think people are upset about the very tippitty top being that much richer than the rest of us. I think they start getting upset when they feel the American Dream is no longer accessible. And I think it still is.

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