This article should be titled: wealth is hard to measure and silly measurement techniques yield silly conclusions.
The benefit of wealth is logarithmic (one can debate the appropriate base, eg 2 or 10).. A family’s second million dollars is much less useful than the first, and a family’s 11th million isn’t that important at all.
The faux “inequality” created by stock market swings would disappear upon adjustment for the logarithmic effect. This adjustment would also give proper weight to what happens in the middle and bottom of the labor market— having $5000 in your bank account is much better than having $500 and having $50k begins to confer a degree of independence.
I maintain the position I took a few weeks ago, which I think complements Matt's.... that wealth inequality itself is not ipso facto a moral atrocity. The moral issues have to do with the way we've both legally and culturally linked capital to personal dignity and access to things that really should be basic human rights (health care, housing, education, freedom from incarceration, etc). There's something in here about "class" in the way Scott Alexander depicted it... class isn't your income bracket or wealth, it's your social status, the deference your wants and needs are given by others, heavily influenced by your wealth in our culture but really a function of all sorts of personal characteristics, both innate and influenceable. Wealth gives you more influence over the characteristics that increase your social status (degrees, fancy clothes, Substack subscriptions that help you sound smart), which in turn gives you more influence over your outcomes in life and the outcomes of people and causes you care about. People with less access to capital often struggle to secure the basics like housing, health care, education, effective legal protections--never mind Beamers and Substacks. The cultural association of wealth to social status to human dignity is the first moral problem. The close second (or arguably bigger) one is gatekeeping access to the basics with a price tag higher than many can afford. Raw wealth redistribution is not the worst idea, but it's also not the only way or the best way to address the problems we really care about. We could start by questioning whether a college degree is really a job requirement as often as we claim it is, for example.
That being said, I'm not sold on government owned housing for all. Sounds rather Soviet to me. "Capitalism is the worst economic system except for all the others that have been tried" and all that. But Matt has convinced me of contrarian ideas before!
I know the mega-landlords thing is a thought experiment that would never happen, but I'm surprised you didn't touch on the mortgage interest deduction as a perverse incentive. My understanding of the research around this is that it just encourages people to buy larger homes and doesn't actually help anyone with affordability, and that countries who have eliminated it haven't seen their home ownership rates plummet. Is there any feasible political path to getting rid of this? Seems like you could do a lot to end the "have most of your wealth tied up in your home" problem by doing so.
These are all good reasons why “wealth”, individual net worth as of today, is problematic for measuring how well off 25 year olds and billionaires are in the short run, why it might be better for us to have less of our individual wealth tied up in housing, and why social security is good.
But I don’t think that’s convincing that “wealth isn’t what matters”. We need some way of measuring how financially secure people are that takes into account current income, future income, assets/liabilities and other benefits (gov health insurance, social security).
Totally agree the argument that student loan forgiveness helps low-wealth people is dumb because by definition they have big student loan balances and may be negative.
But we also need a measure that helps distinguish a 30 year old making $50k/year with a big student debt balance and renting an apartment from someone with same age and income with no student debt and paying a mortgage because their parents supplied tuition and a down payment— because they had more wealth than the other parents.
Also someone making $40k with a degree at age 25 is likely to earn more over the course of her life, and be much better off, than someone age 60 making $40k with no degree.
Most of our means testing is income based, which misses this distinction— that’s the key reason I see for this (currently not great) part of the discourse right now. Survey questions like “Could you handle a surprise $400 expense?” try to get at it. Credit scores try to build a picture of your future ability/reliability to pay, which is kind of close.
So sure, net worth isn’t a great indicator for taxing and means testing, but there’s got to be some measure to pull out what pure income misses.
It helps if you think of wealth as the present value of expected future income, minus liabilities. That's what the value of a securities portfolio is, after all, and it also brings the value of a dental degree into the picture. Of course the latter is an imprecise calculation, to say the least, but at least it tells us that your newly minted dentist is actually pretty well off, student loans notwithstanding.
It would be interesting to see a measure of wealth that counts human capital and social security. Seems like that would give a more realistic (and probably more equal?) picture of wealth inequality.
I do think a distinction should be made between the ideas A) "wealth inequality doesn't matter very much" and B) "a lot of people have little or no wealth." (I'm not suggesting Matt is eliding these two; just pointing out "B" is a problem, irrespective of the wealth inequality situation).
Matt makes an elegant case for the former (A) proposition.
But I feel that, over and above any arguments about spiraling wealth *differentials*, there remains the bitter truth that too many Americans can't handle a $400 emergency. And that's a problem, quite apart from the fact that Musk and Bezos could buy many a small country.
(I remember reading a statistic a few years back; it was something to the effect that: *average* household net worth in the US was 4th or 5th highest in the world; but *median* household net worth in the US was like (quoting from memory) 22nd. The US was behind powerhouses like Portugal and Taiwan on this score. To me such a statistic indicates that the political economy of the United States is set up in such a way as to ensure plentiful revenue streams for the wealthy. In more enlightened polities, things are arranged so that the non-rich can enjoy a modicum of financial security. This seems bad for Americans.)
So there are really two big ways to solve "wealth inequality" - one is redistribution (touted by the left) and the other is "equality of opportunity" (touted by the right). We hear a lot about that second one but very little about actual creative ways to implement it other than vagaries like "hard work" or "pull yourself up by your bootstraps". But the barriers to entry to those wealth castles can be really high and many of our laws and rules are designed to make scaling those walls more difficult, not easier.
If we found creative ways to bridge the "moats" that keep people from building wealth or acquiring ways to attain wealth, we'd go a long way towards solving that wealth inequality. One hidden advantage of Universal Basic Income, for example, is that it would allow many to spend their time starting small businesses instead of working a 9 to 5 job. We know it takes time and energy to start a business, as well as a ramp up until enough business is generated to pay the bills, so a UBI could offer that. If we offered "people investments" so that you could buy "stock" in persons who seemed promising in their potential but lacked resources (based on, say, their ability to acquire a degree or pass a skills test or start a small business), we could help fund these people getting their needs met so they could work on things that really yielded results instead of being stuck in an hourly job that just barely paid the bills. This already happens with those well-off and their offspring and is a proven methodology so writing directed checks towards the disadvantaged could go a long way to evening the playing field.
We give lip service to this kind of thing, but all the attempts are half-hearted (try getting a loan from the SBA or your local bank if you don't already have wealth or momentum to back it...). Not everyone is going to be entrepreneurial, but even a 10% or 15% rise in new small businesses could lead to tons more jobs created as well as wealth for the entrepreneur. Look at Kiva for an example of how we can invest in "people stock" in third world countries right now.
Whenever I get into arguments about income, wealth, millionaires etc... I always specify the term "liquid wealth". Seems much more useful.
I have a decent amount of equity in my house here in Boise (thanks to all the Californians moving in and driving up prices), but two years ago when the wife and I looked at trading down to a smaller house, we couldn't find anything that wasn't also expensive, and there wasn't much to find anyway.
So our imaginary wealth was basically useless, well unless we move to Cleveland.
I like to think of useful wealth. I know people who live month to month that have a lot more fun and a higher quality of life than chronic savers who save everything. Sure, their retirements might be different, but...
What's worth more? $2K to someone in their 20s or $10K to someone in their 80s?
Anyway... fuck the rich. The rich being anyone who earns 50% more than I do.
Another great article. Thanks! I’m sending this around.
But please stop advocating for taking my house away and giving it to landlords or building apartment complexes or oil refineries or whatever next door. You’re freaking me out. We spend the money we’d saved over decades on this split level so our kids could play in the backyard and ride bikes around the neighborhood without getting creamed by a car. We’d like to keep it that way
Hi Matt, great piece with a gloss on Apple that could really use revision:
"Apple doesn’t own the factories where the iPhone is made. The most valuable company in the world is mostly a cluster of brands, patents, trademarks, and human relationships. The companies like Foxconn and TSMC that own the physical capital used to make Apple gear are decent businesses, but the best businesses are very heavily tilted toward the intangible."
1. Apple's value comes from knowing how to produce extraordinarily useful tools that most productive rich people purchase. Patents and trademarks are details, brand is an epiphenomenon. "Human relationships" is part of it, but not the essence. César Hildalgo's work focuses on this point; see your boy Paul Romer's encomium: https://paulromer.net/why-information-grows/
2. Foxconn *is* a great deal of that know-how; the underlying relationship between Foxconn and Apple is complex. Apple bullies them a lot, but then the Chinese government sort of owns Apple via its high level control over Foxconn. To your larger point, how the accounting is done is sort of beside the point.
The interesting taking off point for getting rid of private homeownership is to look at places where there are no private homes. This would include company towns such as the one featured in Nomadland. The house Fern lived in was seemingly very nice but completely went away when the source of income supporting the town disappeared.
The other is base military housing. These range from dorms for enlisted men to McMansions for generals, all publicly owned and maintained. It is especially salient on overseas bases where owning private home would be foolhardy or legally difficult. The United States military is the most successful socialist society ever developed. Government provided housing, health care, and education. Plus heavily subsidized food and recreation. It's worth an investigation.
On the same day as the last MY Wealth Tax post the NYT Opinion section ran an article on closing the $7.5 trillion tax-gap to fund an infrastructure bill. I don't know where they're getting the $7.5T number since the latest IRS net tax-gap figures are still from the Obama era at $381B / year. Maybe they're throwing in the fraud estimates and then a 10 year run...
But on just straight tax code compliance, closing the tax-gap would raise more than Warren's "2 cents" Wealth Tax ($300B / year) without any of the mark-to-market enforcement impossibilities her plan faces. I feel like an IRS fairness message would have huge appeal to the tent building coalition. Hope it gets prioritized.
Accurately measuring wealth requires constructing full accrual personal financial statements for individuals. Given that most people wouldn't be able to read them anyway, that is just going down an endless rabbit hole.
Let's focus on how we got to this level of inequality, and use that knowledge to help us get out.
We got here largely by greatly reducing the most progressive features of our income tax, capital gains tax, and inheritance tax. The way out of it is to build those progressive features back in.
No, that doesn't address inequality quickly by tapping the Bezos' fortune, but it does get to it before it's passed to the next generation, and consequently would be an easier lift politically.
This article should be titled: wealth is hard to measure and silly measurement techniques yield silly conclusions.
The benefit of wealth is logarithmic (one can debate the appropriate base, eg 2 or 10).. A family’s second million dollars is much less useful than the first, and a family’s 11th million isn’t that important at all.
The faux “inequality” created by stock market swings would disappear upon adjustment for the logarithmic effect. This adjustment would also give proper weight to what happens in the middle and bottom of the labor market— having $5000 in your bank account is much better than having $500 and having $50k begins to confer a degree of independence.
I maintain the position I took a few weeks ago, which I think complements Matt's.... that wealth inequality itself is not ipso facto a moral atrocity. The moral issues have to do with the way we've both legally and culturally linked capital to personal dignity and access to things that really should be basic human rights (health care, housing, education, freedom from incarceration, etc). There's something in here about "class" in the way Scott Alexander depicted it... class isn't your income bracket or wealth, it's your social status, the deference your wants and needs are given by others, heavily influenced by your wealth in our culture but really a function of all sorts of personal characteristics, both innate and influenceable. Wealth gives you more influence over the characteristics that increase your social status (degrees, fancy clothes, Substack subscriptions that help you sound smart), which in turn gives you more influence over your outcomes in life and the outcomes of people and causes you care about. People with less access to capital often struggle to secure the basics like housing, health care, education, effective legal protections--never mind Beamers and Substacks. The cultural association of wealth to social status to human dignity is the first moral problem. The close second (or arguably bigger) one is gatekeeping access to the basics with a price tag higher than many can afford. Raw wealth redistribution is not the worst idea, but it's also not the only way or the best way to address the problems we really care about. We could start by questioning whether a college degree is really a job requirement as often as we claim it is, for example.
That being said, I'm not sold on government owned housing for all. Sounds rather Soviet to me. "Capitalism is the worst economic system except for all the others that have been tried" and all that. But Matt has convinced me of contrarian ideas before!
I know the mega-landlords thing is a thought experiment that would never happen, but I'm surprised you didn't touch on the mortgage interest deduction as a perverse incentive. My understanding of the research around this is that it just encourages people to buy larger homes and doesn't actually help anyone with affordability, and that countries who have eliminated it haven't seen their home ownership rates plummet. Is there any feasible political path to getting rid of this? Seems like you could do a lot to end the "have most of your wealth tied up in your home" problem by doing so.
These are all good reasons why “wealth”, individual net worth as of today, is problematic for measuring how well off 25 year olds and billionaires are in the short run, why it might be better for us to have less of our individual wealth tied up in housing, and why social security is good.
But I don’t think that’s convincing that “wealth isn’t what matters”. We need some way of measuring how financially secure people are that takes into account current income, future income, assets/liabilities and other benefits (gov health insurance, social security).
Totally agree the argument that student loan forgiveness helps low-wealth people is dumb because by definition they have big student loan balances and may be negative.
But we also need a measure that helps distinguish a 30 year old making $50k/year with a big student debt balance and renting an apartment from someone with same age and income with no student debt and paying a mortgage because their parents supplied tuition and a down payment— because they had more wealth than the other parents.
Also someone making $40k with a degree at age 25 is likely to earn more over the course of her life, and be much better off, than someone age 60 making $40k with no degree.
Most of our means testing is income based, which misses this distinction— that’s the key reason I see for this (currently not great) part of the discourse right now. Survey questions like “Could you handle a surprise $400 expense?” try to get at it. Credit scores try to build a picture of your future ability/reliability to pay, which is kind of close.
So sure, net worth isn’t a great indicator for taxing and means testing, but there’s got to be some measure to pull out what pure income misses.
It helps if you think of wealth as the present value of expected future income, minus liabilities. That's what the value of a securities portfolio is, after all, and it also brings the value of a dental degree into the picture. Of course the latter is an imprecise calculation, to say the least, but at least it tells us that your newly minted dentist is actually pretty well off, student loans notwithstanding.
It would be interesting to see a measure of wealth that counts human capital and social security. Seems like that would give a more realistic (and probably more equal?) picture of wealth inequality.
Why say, "Wealth isn't what matters,"
when you could say, "Wealth isn't the only thing that matters"?
I do think a distinction should be made between the ideas A) "wealth inequality doesn't matter very much" and B) "a lot of people have little or no wealth." (I'm not suggesting Matt is eliding these two; just pointing out "B" is a problem, irrespective of the wealth inequality situation).
Matt makes an elegant case for the former (A) proposition.
But I feel that, over and above any arguments about spiraling wealth *differentials*, there remains the bitter truth that too many Americans can't handle a $400 emergency. And that's a problem, quite apart from the fact that Musk and Bezos could buy many a small country.
(I remember reading a statistic a few years back; it was something to the effect that: *average* household net worth in the US was 4th or 5th highest in the world; but *median* household net worth in the US was like (quoting from memory) 22nd. The US was behind powerhouses like Portugal and Taiwan on this score. To me such a statistic indicates that the political economy of the United States is set up in such a way as to ensure plentiful revenue streams for the wealthy. In more enlightened polities, things are arranged so that the non-rich can enjoy a modicum of financial security. This seems bad for Americans.)
So there are really two big ways to solve "wealth inequality" - one is redistribution (touted by the left) and the other is "equality of opportunity" (touted by the right). We hear a lot about that second one but very little about actual creative ways to implement it other than vagaries like "hard work" or "pull yourself up by your bootstraps". But the barriers to entry to those wealth castles can be really high and many of our laws and rules are designed to make scaling those walls more difficult, not easier.
If we found creative ways to bridge the "moats" that keep people from building wealth or acquiring ways to attain wealth, we'd go a long way towards solving that wealth inequality. One hidden advantage of Universal Basic Income, for example, is that it would allow many to spend their time starting small businesses instead of working a 9 to 5 job. We know it takes time and energy to start a business, as well as a ramp up until enough business is generated to pay the bills, so a UBI could offer that. If we offered "people investments" so that you could buy "stock" in persons who seemed promising in their potential but lacked resources (based on, say, their ability to acquire a degree or pass a skills test or start a small business), we could help fund these people getting their needs met so they could work on things that really yielded results instead of being stuck in an hourly job that just barely paid the bills. This already happens with those well-off and their offspring and is a proven methodology so writing directed checks towards the disadvantaged could go a long way to evening the playing field.
We give lip service to this kind of thing, but all the attempts are half-hearted (try getting a loan from the SBA or your local bank if you don't already have wealth or momentum to back it...). Not everyone is going to be entrepreneurial, but even a 10% or 15% rise in new small businesses could lead to tons more jobs created as well as wealth for the entrepreneur. Look at Kiva for an example of how we can invest in "people stock" in third world countries right now.
Whenever I get into arguments about income, wealth, millionaires etc... I always specify the term "liquid wealth". Seems much more useful.
I have a decent amount of equity in my house here in Boise (thanks to all the Californians moving in and driving up prices), but two years ago when the wife and I looked at trading down to a smaller house, we couldn't find anything that wasn't also expensive, and there wasn't much to find anyway.
So our imaginary wealth was basically useless, well unless we move to Cleveland.
I like to think of useful wealth. I know people who live month to month that have a lot more fun and a higher quality of life than chronic savers who save everything. Sure, their retirements might be different, but...
What's worth more? $2K to someone in their 20s or $10K to someone in their 80s?
Anyway... fuck the rich. The rich being anyone who earns 50% more than I do.
Another great article. Thanks! I’m sending this around.
But please stop advocating for taking my house away and giving it to landlords or building apartment complexes or oil refineries or whatever next door. You’re freaking me out. We spend the money we’d saved over decades on this split level so our kids could play in the backyard and ride bikes around the neighborhood without getting creamed by a car. We’d like to keep it that way
Hi Matt, great piece with a gloss on Apple that could really use revision:
"Apple doesn’t own the factories where the iPhone is made. The most valuable company in the world is mostly a cluster of brands, patents, trademarks, and human relationships. The companies like Foxconn and TSMC that own the physical capital used to make Apple gear are decent businesses, but the best businesses are very heavily tilted toward the intangible."
1. Apple's value comes from knowing how to produce extraordinarily useful tools that most productive rich people purchase. Patents and trademarks are details, brand is an epiphenomenon. "Human relationships" is part of it, but not the essence. César Hildalgo's work focuses on this point; see your boy Paul Romer's encomium: https://paulromer.net/why-information-grows/
2. Foxconn *is* a great deal of that know-how; the underlying relationship between Foxconn and Apple is complex. Apple bullies them a lot, but then the Chinese government sort of owns Apple via its high level control over Foxconn. To your larger point, how the accounting is done is sort of beside the point.
The interesting taking off point for getting rid of private homeownership is to look at places where there are no private homes. This would include company towns such as the one featured in Nomadland. The house Fern lived in was seemingly very nice but completely went away when the source of income supporting the town disappeared.
The other is base military housing. These range from dorms for enlisted men to McMansions for generals, all publicly owned and maintained. It is especially salient on overseas bases where owning private home would be foolhardy or legally difficult. The United States military is the most successful socialist society ever developed. Government provided housing, health care, and education. Plus heavily subsidized food and recreation. It's worth an investigation.
In other words, the true wealth is the friends we made along the way.
On the same day as the last MY Wealth Tax post the NYT Opinion section ran an article on closing the $7.5 trillion tax-gap to fund an infrastructure bill. I don't know where they're getting the $7.5T number since the latest IRS net tax-gap figures are still from the Obama era at $381B / year. Maybe they're throwing in the fraud estimates and then a 10 year run...
But on just straight tax code compliance, closing the tax-gap would raise more than Warren's "2 cents" Wealth Tax ($300B / year) without any of the mark-to-market enforcement impossibilities her plan faces. I feel like an IRS fairness message would have huge appeal to the tent building coalition. Hope it gets prioritized.
https://www.irs.gov/newsroom/irs-releases-new-tax-gap-estimates-compliance-rates-remain-substantially-unchanged-from-prior-study
Accurately measuring wealth requires constructing full accrual personal financial statements for individuals. Given that most people wouldn't be able to read them anyway, that is just going down an endless rabbit hole.
Let's focus on how we got to this level of inequality, and use that knowledge to help us get out.
We got here largely by greatly reducing the most progressive features of our income tax, capital gains tax, and inheritance tax. The way out of it is to build those progressive features back in.
No, that doesn't address inequality quickly by tapping the Bezos' fortune, but it does get to it before it's passed to the next generation, and consequently would be an easier lift politically.