Author Danny Vinik

Income Inequality vs. Wealth Inequality

Danny Vinik 1 Comment

In today’s edition of The Chronicle, the student newspaper here at Duke (Disclaimer: I wrote for the sports section during my freshman and sophomore years), freshman Jonathan Zhao wrote an op-ed pushing back against a viral YouTube video depicting the massive wealth inequality in the United States. Here’s Zhao’s key point:

[T]he video makes the case that the rich have become disproportionately wealthier over time. Again, so what? This is simply an example of Pareto’s principle that a small minority generates the majority of production. As such, they receive the majority of the wealth created. The key point to understand is that both the rich and the poor have become wealthier over time. According to data from the U.S. Census Bureau, from 1967 to 2009 the real mean household income of the top quintile increased by 71 percent. Over the same period, the real mean household income in the bottom quintile increased by 25 percent.

Zhao has already made an error here: mean household income is very different than wealth. Income is what a household earns in a given year, but wealth is the cumulative value of all assets that the household owns (houses, investments, savings, etc.). Those are very different things, but Zhao equates changes in mean household income and changes in wealth. Luckily, the Economic Policy Institute graphed the changes in wealth for different income groups from 1983-2010:

Wealth Inequality

As you can see, over the past few decades, the top five percent of households have seen massive rises in their wealth while the lowest 60 percent have actually seen their wealth decrease. Zhao is wrong: both the rich and poor have not become wealthier over time, only the rich have.

The freshman continues on to correctly point out that the video implies “that CEOs do not deserve to be paid what they’re paid. Zhao’s right: CEO pay does not represent the work effort of the CEO, but instead measure the CEO’s value to the company. Some CEOs may be worth 380 workers. Others may not be. The comparison is not meaningful. The video uses it to emphasize that wealth inequality has risen in recent years. If that rise had coincided with increased wealth for everyone, than Zhao could be right that it is just the price of the country growing richer (see more from Ezra Klein on why it still would be an issue). Nevertheless, the fact of the matter is that the poorest have lost wealth over the past 30 years and the rich have seen huge gains. The “rising tide” lifted a few boats way in the air while drowning everyone else.

On a separate note, it’s disappointing to read through the comments on the article and see very few people engaging Zhao’s argument. These are complex, important topics and the difference between wealth and income is especially vital. Most people in the comments simply attack Zhao morally without responding to his article whatsoever. The Duke Community can do better.

Scott Sumner on Fiscal Stimulus

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Yesterday, Scott Sumner penned a post arguing against liberals’ blind acceptance that the stimulus worked. He presents a counter factual arguing that if Congress hadn’t passed the stimulus, that the Fed would have stepped up and done more to offset the crisis. He argues that under that scenario, the economy would be in better shape now thanks to the Fed. At the very least, he says, liberals cannot claim that the stimulus worked without acknowledging his counter factual.

Fair enough. I’m with Matt Yglesisas here – economists agree that the stimulus worked, but are split on whether the benefits outweighed the costs. I’m not entirely sure how to evaluate Sumner’s counter factual. Is there any way to judge this? Are we forever left to wonder if the stimulus was the most effective policy or if, absent it, the economy would be in better shape due to the Fed? I wish there was an answer and I hesitate to offer one. I’m just a senior in college soon to have a degree in economics – nothing like Sumner or all the other economists who are unable to answer this question. Sumner’s theory is very interesting though and I’d love to hear a response from Paul Krugman, who has argued for quite a while that the stimulus succeeded.

One other point – at the end of his post, Sumner writes, “PS.  Remember those Keynesians telling us that higher payroll taxes would slow retail sales in Q1?  Looks like they might want to revise their models” and then quotes an article about how retails were way up in February. I’m going to offer a counter factual here: maybe retail sales would have been higher without the rise in payroll taxes and thus the higher payroll taxes did slow retail sails! I have no data or evidence for this – just as Sumner has no evidence that the Fed would’ve have done more and our current economy would be better if there was no stimulus. But both arguments are certainly plausible and worth exploring. Nevertheless, Sumner spends the majority of his post berating liberal economists who don’t consider Sumner’s counter factual only to make the exact same mistake himself. Nevertheless, a fascinating post and worth a read.

Question for Felix Salmon on Charitable Giving

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Reuter‘s Felix Salmon wrote a blog post a few days ago on charitable giving and how the internet allows random acts of kindness. However, at one point Salmon asserts something and makes the rare error of not citing or linking to supporting evidence for his assertion:

The fact is that almost none of us have some kind of annual giving budget, from which we draw when we send money to someone like Karen Klein. Instead, we give as and when we’re moved to do so. Once you start giving money away, you’re more likely to give money away in the future; Stevenson’s implication, by contrast, is that giving money in one place makes you less likely to give money somewhere else. Which is completely wrong.

The first part of that paragraph I believe, but is it really true that once you start giving money, you’re more likely to give more in the future? When is “the future” exactly? For instance, if i give to a charity in April, am I then more likely to give in June? Or not until next year when I’ve earned more money (or in my case, hope to have earned more money)? I wish Salmon had linked to a study or any academic literature that shows this.

Also, at the extreme, giving money in one place DOES make you less likely to give to another. If you give your last $20 to one charity, there’s nothing left for you to give to another. Of course, that’s the extreme, but there has to be some point where an individual giving money to once charity makes them less likely to give elsewhere. That point may vary with each individual, but it does exist and Salmon seems to act here like it doesn’t.

Nevertheless, I agree with Salmon that the advent of the internet has changed how people give and charities must react to these changing times. Will this lead to a rise in charitable giving? I hesitantly say yes, but I’m not sure. Will it lead to less giving to charities and more to individual people? I’m very unsure about that, but it will be interesting to see how it plays out.