The dynamics of income inequality

[Lothar]

http://www.princeton.edu/~moll/dynamics.pdf

... it's an actual math paper. Get out your popcorn and dust off your math books

The interesting bit is discussed at http://www.bloombergview.com/articles/2 ... -different

Over the past four decades, inequality has increased much too quickly. If tax levels or investment income were the only drivers, the change should have taken a few centuries. Mathematically, there must be another driver, something that empowers the wealthy to take an increasingly large share of the pie.

The economists offer a couple candidates, such as the emergence of "superstar entrepreneurs or managers" who possess special skills or hold key positions, or "superstar shocks," such as better information or investment advice that give the rich an edge in getting richer. These factors, they calculate, would be enough to account for the rapid change in inequality witnessed in recent years.

Their research provides compelling evidence that recent trends in inequality really do reflect something new and different in the workings of capitalism. It suggests that the wealthy have, solely by virtue of their status, gained the ability to steer even more money their way. As the authors note, it also backs up the famous conclusion of the French economist Thomas Piketty -- that, in recent decades, inequality has exploded because the rate at which wealth generates more wealth has exceeded the pace of overall economic growth.

[Tunnelcat]

All these researchers would have had to do was talk to the average American worker. They feel it and see it every day with stagnant wages, longer hours, loss of pensions, later and later retirement age requirements, and expensive healthcare. But like all unstable top heavy systems, it will either collapse under it's own weight, or foment a revolution. We had a Great Depression once when the wealthy overreached and overplayed their game, will we get another, or something more violent? Because if the status quo remains, it won't be very palatable to the average laborer for too much longer. Why do you think the likes of Bernie Sanders, a socialist, is making a splash this time?

[Lothar]

"Average workers" don't have the slightest clue about economics. They might be angry, and they might believe that the system is going to collapse, but that's a worthless sentiment -- it doesn't accomplish anything (except, possibly, contributing to an eventual collapse.) Given that collapse is a terrible option, it seems better to look for the root cause than to simply spout off about how bad it is. That's what makes this paper interesting -- it actually looks at potential causes of the sudden rise of the even-wealthier and identifies what's the actual likely cause.

Specifically, it's not most of the "usual suspects" like the wealthy overreaching in terms of tax policy. Those policies increase inequality, but over the course of centuries, not decades. The reason the rich have climbed so much over the course of mere decades is that they've gotten very good at generating wealth, organizationally. So if that's a problem, approaching it from a mere "tax the wealthy more" perspective won't even touch the underlying dynamic. If that underlying dynamic is bad, it's going to need to be solved in some other way.

[callmeslick]

as I have tried to note here before, the 'rich' have a built in network, access to more sophisticated tools and more initial capital, and can thus accelerate wealth accumulation.

[Lothar]

the rich have always had their own network, better tools, and more access to initial capital. What changed? That's the interesting question.

[callmeslick]

the rich have always had their own network, better tools, and more access to initial capital. What changed? That's the interesting question.

oh, pretty obviously the speed and efficiency of the tools and network in modern days. For instance, one can make about 20 buy/sell trades of the same block of shares in the time it once took to execute ONE trade of the same block. Today, one can jump on nearly unseeable transient peaks and valleys during a trading day, and execute trades instantly. The timeframe needed to utilize the network, access the proper information from that network and execute a financial move based upon that information is a tiny fraction of what would have been the case in 1930 or even 1990.

[woodchip]

Those networks are not the exclusive playground of the rich. Just open a Scottrade account and you can get instant info and buy and sell as much as you want.

[callmeslick]

Those networks are not the exclusive playground of the rich. Just open a Scottrade account and you can get instant info and buy and sell as much as you want.

based on inside information from whom, with expertise gleaned from whom?When talking about networks, I am referring to actual HUMAN networks. You are referring to the part I call tools, and even there, you are wrong. Try checking with Scotttrade and see what 'levels' of speed trading are available for WHAT price and WHAT minimum account balance. With Fidelity, who I use for wealth management stuff, there are 3 levels of accounts. At the lower level(below $150,000, I think) you are on your own, but can access information, between that point and $1,000,000, you get advanced services and enhanced information, with a personal representative, over 1 mil you get a branch VP level person, their staff, even more tools, faster transaction speed and the ability to operate off programmed trading regimens with detailed nuance.

[Lothar]

What changed?

oh, pretty obviously the speed and efficiency of the tools and network in modern days. For instance, one can make about 20 buy/sell trades of the same block of shares in the time it once took to execute ONE trade of the same block.

Are the super-rich getting richer off of day trading? Do you have evidence to the effect that day trading (or HFT) accounts for a significant portion of the gains the super-rich have made over the ordinary-rich and the ordinary?

[callmeslick]

What changed?

oh, pretty obviously the speed and efficiency of the tools and network in modern days. For instance, one can make about 20 buy/sell trades of the same block of shares in the time it once took to execute ONE trade of the same block.

Are the super-rich getting richer off of day trading? Do you have evidence to the effect that day trading (or HFT) accounts for a significant portion of the gains the super-rich have made over the ordinary-rich and the ordinary?

they have their money MANAGED for them, Lothar, and it doesn't really cost them a damn thing. Perhaps I didn't make clear, the only ticket to a first rate brokerage account is the AMOUNT deposited. Actually, I think they impose fees on the low deposits, but am not sure. And, yes, part of how those folks grow your money for you is via what you describe as day trading, others would call it algorithm based trading. It has a general rate of return about double what the normal 'conservative' investment yields, and is still extremely low-risk, assuming you have a competent manager.

[Lothar]

We know that's a thing the super-rich do, but is it where their relative gains are coming from?

[woodchip]

Funny, my pension acct has been getting 7-10% return being managed by a regular large well known investment company. I certainly don't have a Million in it either.

[callmeslick]

We know that's a thing the super-rich do, but is it where their relative gains are coming from?

I would suspect, but don't know for sure. I know this much: if my manager weren't generating pretty high yields,relative to indices, I'd pull my money to another manager. That sort of pressure tends toward the cream of the crop managing for the top 5%, as the stakes are high. They are making decent money WITH my money, and still producing a sufficient yield for me, and I, for one, wouldn't wish to have that sort of pressure on me. The average person is just playing the game with restrictions on liquid capital(huge disadvantage),investment vehicles(equally huge) and a reliance on themselves, not on a team of experts. That the reality tends to pull the poles apart, in this day and age, doesn't shock me.

on a tangental note, it would be interesting to see overall disparity in wealth over a longer period of time. A glance at history would suggest(although I'm making a layman's guess here) that at certain historical points, in some societies, the gap was even more massive. One of the key changes to modern times is that the whole situation is essentially global, not regional.

[callmeslick]

Funny, my pension acct has been getting 7-10% return being managed by a regular large well known investment company. I certainly don't have a Million in it either.

I'm qute sure that is the case. Nothing about the above statement counters my statements. You merely don't know what others are making.

[Tunnelcat]

"Average workers" don't have the slightest clue about economics. They might be angry, and they might believe that the system is going to collapse, but that's a worthless sentiment -- it doesn't accomplish anything (except, possibly, contributing to an eventual collapse.) Given that collapse is a terrible option, it seems better to look for the root cause than to simply spout off about how bad it is. That's what makes this paper interesting -- it actually looks at potential causes of the sudden rise of the even-wealthier and identifies what's the actual likely cause.

Specifically, it's not most of the "usual suspects" like the wealthy overreaching in terms of tax policy. Those policies increase inequality, but over the course of centuries, not decades. The reason the rich have climbed so much over the course of mere decades is that they've gotten very good at generating wealth, organizationally. So if that's a problem, approaching it from a mere "tax the wealthy more" perspective won't even touch the underlying dynamic. If that underlying dynamic is bad, it's going to need to be solved in some other way.

No, they don't. But they live and work in today's economics and they see how it affects their everyday lives and how things are different from what their parents and grandparents experienced. Most of us, with the exception of Foil and a couple of others here, are not great with differential equations and statistics and how that would apply to our real world economic situation. Most people go with what they see happening and form their opinions from that. Sure, it would be interesting to be able to understand "why" things have changed to favor wealthy people to such an extreme, from a purely mathematical point of view and yes, that may even help us understand how to fix it better instead of relying on destruction or failure of the system. But you're never going to explain the complexities of that to the average American. They only see that they are getting screwed while the rich get richer. It's also starting to piss them off.

You'll notice that the authors made the comment that this trend has been occurring for about the last 40 years, coincidentally, since the election of Ronald Reagan. Reagan's grand plan and his policies? Even Bill Clinton's and Obama's? I'd venture to say yes. Our government is now pretty much controlled and run by the wealthy and their sycophants, and that government has over the last 40 years chipped away at those loathed protective policies of FDR's, policies created in an effort to prevent another Great Depression, and that destruction pretty much started with the election of Ronald Reagan.

If a person is wealthy enough to have a large amount of money invested in the market, that person's account can go up or down in far greater amounts than that person could ever make as a laborer or even a middle class salaried worker in a year. It's all funny money. Those same wealthy people have inside knowledge of the market as well, an unfair advantage compared to the average retired person trying to manage their own portfolio. Even if they hire a money manager, most of these managers want to make as much money as possible for themselves and their clients, risky at best for a savings account to live off of in retirement. Plus, money loses it's meaning to people when it's easier to use money to make more money, instead of actually working to produce tangible and usable things for that money.

Lothar, you want to know where all the money's coming from? Easy. Off the backs of third world countries via arbitrage and wage reductions or wage stagnation in the U.S. and cheap immigrant and guest worker programs. I just noticed that a lot of electronic products are now being made in Vietnam or even Bangladesh. Even China's wages have gotten too expensive for corporate profits. Still, when China sneezes, the market freaks. I noticed today that we've had yet another dead cat bounce in the markets. Scary. Eventually all this market funny money is going to evaporate, because it doesn't have any real net worth except on paper.

[Lothar]

Most people go with what they see happening and form their opinions from that

Which might be the scariest thing in this entire thread. The rich are getting richer, and people are getting angrier, but their anger might not even remotely be directed in a productive way because they don't actually have a clue what's going on. (I notice that, by the end of your post, you offered your own speculation -- Reagan, cheap wages in third world countries, etc.) And of course that attitude allows the manipulators in government and culture and elsewhere to direct peoples' anger in various dangerous ways. Them immigrants done stole my job! Those rich kleptocrats done stole my pension!

People think they've become enlightened when they realize "the rich" are to blame for all the world's ills. But it's really just another step in the cycle, where someone else tells you who to hate and dehumanize and blame, without really understanding the problems or offering real solutions.

[snoopy]

the rich have always had their own network, better tools, and more access to initial capital. What changed? That's the interesting question.

My theory/guess: the globalization of our economy. Back in the day, having networks, better tools, etc may have meant having the best in the region, or the best in the state, or maybe even the best in the country. Now, these networks mean that globally the richest have the best tools in the world. It also means that local or regional politics has less power to influence the balance... because the rich always have the option to go elsewhere (either physically or virtually as demonstrated by the likes of Google.) - so local politicians are stuck being forced to cater to the rich for fear of them simply deciding to leave.

[callmeslick]

very fair analysis, Snoopy.

[Spidey]

Rocket #1 is going 10,000 MPH
Rocket #2 is also going 10,000 MPH

Rocket #1 is increasing its speed by .1% every million miles traveled
Rocket #2 is increasing its speed by .11% every million miles traveled.

Follow that out in time and pretty soon rocket #2 is not only moving a lot faster than rocket #1, but it is also increasing its speed a lot faster than rocket #1

Continue that long enough and rocket # 2 is now increasing its speed over #1 exponentially, even if all things remain equal. Now add in a few factors also mentioned here and there……

This is the way money works as well…hell my brother explained this to me over 40 years ago.

Which all ties back to my comments in other threads about building family wealth over generations instead of starting a new family from scratch every generation or so.


The real question boils down to the difference between inequality and inequity, where the former is emphasized over the latter, for political reasons.

Example: Fairness

For political reasons a false “fairness” is used to compare one person's pay to another’s, where the true fairness is in comparing ones pay to the market value that person’s work is valued at.

In other words you are getting treated fairly if you are getting paid what your work is valued at in the market, and what another person is being paid is irrelevant.

And you are not being treated fairly if you are being paid less than your skills should demand in the market, and again what other are being paid relative to you is irrelevant.

Now if a person makes more than you at your expense, that is also unfair, but this question has been debated to death, with no resolution.

[Lothar]

Follow that out in time and pretty soon rocket #2 is not only moving a lot faster than rocket #1, but it is also increasing its speed a lot faster than rocket #1

Yes -- and we could calculate by how much. If all of a sudden rocket #2 started increasing its speed by much larger numbers than the math says it should, we'd wonder what changed. What happened to rocket #2? Did it pick up an afterburner? Learn to trichord? Use a cheat code? Is it something we could also apply to rocket #1? Is it stealing from rocket #1 by using its credit card to pay for extra fuel or something? Is it completely legitimate, or shady business?

[Tunnelcat]

Most people go with what they see happening and form their opinions from that

Which might be the scariest thing in this entire thread. The rich are getting richer, and people are getting angrier, but their anger might not even remotely be directed in a productive way because they don't actually have a clue what's going on. (I notice that, by the end of your post, you offered your own speculation -- Reagan, cheap wages in third world countries, etc.) And of course that attitude allows the manipulators in government and culture and elsewhere to direct peoples' anger in various dangerous ways. Them immigrants done stole my job! Those rich kleptocrats done stole my pension!

People think they've become enlightened when they realize "the rich" are to blame for all the world's ills. But it's really just another step in the cycle, where someone else tells you who to hate and dehumanize and blame, without really understanding the problems or offering real solutions.

You're forgetting about human nature and emotions in your equations Lothar. We as emotional beings are driven by lust, avarice and greed, not by logic, rationality, and equations. Those in power were driven by those emotions to gain that power and wealth and since power is survival and prosperity, they intend to keep their positions of power and wealth by any way possible, even using crooked and unfair tactics. Unfortunately, not all those with power and wealth are magmanimus towards their fellow man, especially those who believe they are of a greater stature. That's what should scare you Lothar, the fact emotions have no logic and can't be quantified.

[Lothar]

Most people go with what they see happening and form their opinions from that

Which might be the scariest thing in this entire thread. The rich are getting richer, and people are getting angrier, but their anger might not even remotely be directed in a productive way because they don't actually have a clue what's going on. (I notice that, by the end of your post, you offered your own speculation -- Reagan, cheap wages in third world countries, etc.) And of course that attitude allows the manipulators in government and culture and elsewhere to direct peoples' anger in various dangerous ways. Them immigrants done stole my job! Those rich kleptocrats done stole my pension!

People think they've become enlightened when they realize "the rich" are to blame for all the world's ills. But it's really just another step in the cycle, where someone else tells you who to hate and dehumanize and blame, without really understanding the problems or offering real solutions.

You're forgetting about human nature and emotions in your equations Lothar

No, I'm not. Instead, I'm recognizing the danger of allowing emotional responses to go unchecked and unchallenged by reason. If we just say "people are upset" and use that to excuse retaliation toward the rich (either personally or on a government/tax-policy level) without even understanding the problem, we don't really solve anything. We just create chaos -- and that's the circumstance in which those who "intend to keep their positions of power and wealth by any way possible" are the most dangerous.

[Tunnelcat]

The fact Trump, a bombastic egotist with no real solutions to our country's problems other than to throw insults at everyone he dislikes to rile up support, is this far ahead of any of his rivals at this juncture in the election season proves my point. Emotion, not reason, is controlling people's decisions. You can recognize the danger, most intelligent people can, but do you see a way to change that behavior?

[Lothar]

Emotion, not reason, is controlling people's decisions. You can recognize the danger, most intelligent people can, but do you see a way to change that behavior?

Stop catering to peoples' emotions. When someone on "your side" says something stupid that's driven by emotion and contrary to reason, call them out on it. Be willing to upset peoples' apple carts. Set an expectation that you won't ignore stupidity just because you agree with the conclusion. Influence whatever little corner of culture you're around. And when people ask you why you interrupt their fun with fact-checking and critical thinking, ask them if they really want to live in a world ruled by the kind of emotional outbursts and misplaced anger they're expressing, particularly from people on the other side of issues they really care about.

[Tunnelcat]

Just for your information, Bernie Sanders, a Democratic Socialist, is also tapping into that emotional rage on the liberal side as well. I'm not choosing party affiliation with this one. We're all humans, not robots or even a bunch of Spocks, no matter what political persuasion. I should have stated that in my earlier post to make that clear.

[woodchip]

The fact Trump, a bombastic egotist with no real solutions to our country's problems other than to throw insults at everyone he dislikes to rile up support, is this far ahead of any of his rivals at this juncture in the election season proves my point. Emotion, not reason, is controlling people's decisions. You can recognize the danger, most intelligent people can, but do you see a way to change that behavior?

Trump throw insults at people only because they insulted him first...kinda like how I respond on this board

[Top Gun]

Great, so a guy with a mentality of a five-year-old wants to be leader of the free world!

[Tunnelcat]

Trump throw insults at people only because they insulted him first...kinda like how I respond on this board

You've got that backwards, not including your experiences.

[callmeslick]

Trump throw insults at people only because they insulted him first...kinda like how I respond on this board

You've got that backwards, not including your experiences.

pretty much

[snoopy]

I had another thought on the OP, and on my "global economy" theme:

I think I'd connect the general growth of business size disparity to the general growth in personal finance disparity, with many of the same dynamics. These days, the "big" businesses have larger amounts of leverage (revenue) and larger ability to take a loss in order to secure (or hold) certain business sectors. In some ways I think technology has made it worse - because I think it has driven up entry cost into many business sectors.