Homeownership, Pensions, and the Wealth Distribution

13 Monday Dec 2021

Posted by pnoetx in Markets, Wealth Distribution

Tags

Capitalism, Daniel Waldenström, Housing Assets, income inequality, Pension Assets, Popular Assets, Progressive Taxation, regulation, rent seeking, Social Security, Wealth Concentration, Wealth Inequality

My theme in “What’s To Like About Income Inequality?” was the existence of natural drivers of an unequal distribution of income, as where institutions reward merit and legal systems assign strong property rights. I also discussed trends in income and wealth inequality and how standard measures of inequality are distorted by income taxes and transfer payments, including differences in unrealized and realized capital gains. Furthermore, income mobility makes “snapshots” of inequality less compelling, as individuals are not “stuck” for all time at a point in the income distribution, but are typically moving across the distribution and usually upward as they age through their working years.

Wealth inequality is another matter, but a new paper by Daniel Waldenström entitled “Wealth and History: An Update” shows that wealth concentration, which he defines as the share of wealth held by the top 1%, declined markedly between 1920 and 1970 in Europe and the U.S. After 1970, however, the share remained flat in Europe and was flat in the U.S. as well if unfunded pensions and Social Security benefits are valued as wealth. However, the near-entirety of the earlier decline in U.S. wealth concentration occurred by about 1950.

So a great thinning in the fat right tail of the wealth distribution occurred during the middle years of the 20th century. Waldenström attributes this transition to growth of homeownership and pension assets. These are so-called “popular assets” because they are held more broadly than the legacy wealth of the 1800s and early twentieth century:

“… the structure of private wealth has changed over the twentieth century, from being dominated by elite fortunes in agriculture or businesses to consisting mainly of widely dispersed assets in housing and funded pensions.”

Waldenström concludes that the facts run contrary to claims that wealth inequality has worsened in Western, capitalist economies over the years:

“These new findings have implications for the historiography of Western wealth accumulation and wealth concentration. They cast doubt over the view that an unfettered capitalism, such as in pre-democratic and pre-taxation nineteenth-century Europe, generates extreme levels of capital accumulation. The new findings also question the pivotal role of wars, crises and progressive taxation as the sole important factors behind the wealth equalization of the twentieth century.

Waldenström considers the role of progressive taxation in equalizing wealth, but he acknowledges that taxes undermined wealth accumulation at all levels, so the effect was ambiguous. A point on which I’d take issue with Waldenström is the role of regulation, which he believes “curbed the growth of large fortunes”. That might be true in some cases, but this effect is also subject to ambiguity. Regulation is often welcomed by powerful market players as a way of consolidating market position and hindering new competition. The regulatory state has long been considered a primary channel for rent seeking, so the impact on the wealth distribution is likely to be mixed.

Market institutions, together with rising education levels, labor reforms, and gains in productivity enabled this broadening in the accumulation and distribution of wealth. Social Security certainly played a part as well, though we don’t know how private pensions might have evolved in its absence. Of course, Social Security has a terrible record as an “investment” of payroll taxes. Private control over the investment direction of those funds would have done far better, and still could, which would be a further boon to wealth for the lower 99%.

It is true that inequality in both income and wealth is to be expected under merit-based systems of rewards. However, Daniel Waldenström’s paper offers evidence that markets do not merely concentrate wealth at the expense of workers. Rather, they deliver gains to all participants, who are in turn free to accumulate wealth in the kinds of “popular assets” discussed by Waldenström.

Degrees of Poverty and The Social Safety Trap

01 Thursday Oct 2015

Posted by pnoetx in Poverty

≈ 1 Comment

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Anti-Poverty Programs, Census Bureau Report on Poverty, David Henderson, Family Disintegration, income inequality, James D. Agresti, Living Standards, Measuring Poverty, Minimum Wage, Poverty, Public education, Robert Rector, War on Drugs, War on Poverty

The poor in the United States are extremely well-off by international standards. That is clear in the chart above, which David Henderson discusses in “The Role of Luck In The Income Distribution“. By luck, Henderson means that one’s country of birth has a huge impact on their ultimate place in the global income distribution. The chart compares positions in a single country’s income distribution with corresponding points in the global distribution (2008 data). For example, an individual in the 20th percentile of the U.S. income distribution (20 on the horizontal axis) is in roughly the 86th percentile of the global distribution (from the vertical axis). Those at the very bottom of the U.S. income distribution have a greater income than half of the individuals in the world. The average U.S. earner in the lowest 20% earns more than nearly 75% of all earners globally. Individuals across the entire income distribution in the U.S. have higher incomes than their counterparts elsewhere.

Within the U.S., we often use the term “impoverished” in a fairly parochial sense: compared to our compatriots, not to the rest of the world. Robert Rector discusses the living standards of the poor in America in “How Do America’s Poor Really Live? Examining the Census Poverty Report“. The actual census report released this month is discussed in The Atlantic here. Rector states the following:

“According to the government’s own reports, the typical American defined as poor by the Census Bureau has a car, air conditioning, and cable or satellite TV. Half of the poor have computers, 43 percent have Internet, and 40 percent have a wide-screen plasma or LCD TV. … Far from being overcrowded, poor Americans have more living space in their home than the average non-poor person in Western Europe.“

Rector notes that the Census Bureau’s measure of poverty is based on a flawed definition of income, one that is inconsistent with how income is defined in calculating official measures of poverty in other countries. The Census definition excludes most welfare benefits, and taxes aren’t always subtracted from income by other countries. The Rector post linked above contains an incorrect link to this recent article on international comparisons of poverty rates. When the measurement inconsistencies are corrected, the official U.S. poverty rate is similar to the advanced economies of Europe, and it is lower than Eurooean poverty rates based on a more inclusive definition preferred by many on the left. And again, the actual standard of living of those below the official poverty level in the U.S. is impressive compared to the rest of the world. It is also impressive from a historical perspective.

Rector discusses the failure of the welfare state and the War on Poverty to lift the impoverished out of dependency. This has been covered here on Sacred Cow Chips several times (see here and here). The terrible structure of incentives built into many anti-poverty programs is one of the primary causes, as well as the failure of public education. Also at fault are minimum wage legislation, the War on Drugs, tax policy and a regulatory regime that discourages job creation by punishing new capital investment and business creation.

The left often claims that the distribution of income in the U.S. is becoming increasingly skewed toward high-income households. In “Myths and Causes of Income Inequality“, James D. Agresti demonstrates that the real causes of this phenomenon are demographic. The splintering of families at low income levels has increased the number of low-income households and reduced average incomes among those households. At the level of individual earners, there is no discernible trend in income inequality. According to Agresti:

“… the rise of household income inequality stems from family disintegration driven by changing attitudes toward sex, marital fidelity, and familial responsibility.“

Agresti stops short of drawing a link between anti-poverty policies and the disintegration of the family, though there are reasons to suspect pernicious connections along those lines.

It is easy to exaggerate the extent and severity of poverty in the U.S.; doing so is of obvious value in promoting the leftist agenda. In reality, the poor in this country are provided with a standard of living through public assistance that is high relative to their counterparts across the globe, and it is similar to other advanced economies. In addition, when changes in the structure of households are neutralized, there has been no upward trend in income inequality, contrary to assertions from the left. Our long-term objective should be to lift able recipients out of dependency, consistent with President Johnson’s original goals for the War on Poverty. That will require major reforms to our anti-poverty efforts, public education and many other aspects of public policy. Most poor families in the U.S. receive support that is enviable to the poor elsewhere. Nevertheless, their plight of dependency has dispiriting and self-reinforcing effects.

Fractured Households, Echoes of War, and Inequality

03 Friday Oct 2014

Posted by pnoetx in Uncategorized

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Distribution of income, Gini coefficient, Household structure, income inequality, Inequality, Political Calculations, Redistribution, World War II

A friend sent me this interesting link to the “Political Calculations” blog in response to my recent post on distorted metrics of changing income inequality. The PC link is from about 10 months ago, but it is very timely nevertheless. It compares trends in three versions of the “gini coefficient” for the U.S., a common measure of inequality. A gini of zero indicates absolute equality of income across quantiles. A gini of one indicates that all income flows exclusively to the top quantile. The most interesting feature of this comparison is that the gini calculated for individual income earners has shown no trend up or down since about 1960, while the gini for households has trended upward since about 1970. This difference implies that the much-bemoaned increase in inequality is actually the result of changes in household structure, as opposed to earnings increasingly skewed toward elite individual earners.

In two follow-up posts (“The Widow’s Peak” and “The Men Who Weren’t There“), the author(s) identifies some demographic factors that were important in creating the upward trend in the household gini. Single-person households grew dramatically throughout this period, as did the number of seniors (aged 65+) living alone. The number of senior, female single-person households grew even more dramatically. Many of these women were either widows or never had good opportunities to marry because so many males in their age cohort were killed in World War II. Unfortunately, they constituted a group of very low-income households. There were other reasons for growth in the number of low-income, single-person households, such as increases in the divorce rate and perverse welfare-state incentives. The following lament by the author(s) in the last follow-up post is noteworthy:

“To us, it’s more remarkable that so many economists and politicians insist on focusing on the opposite end of the income spectrum in attempting to blame the highest income-earning Americans for that increase.”

Of course, the trends in ginis shown at the links above are subject to the same criticism made by the sabermatrician discussed in my earlier post: the comparisons over time implicitly assume that the quantiles used in the calculations are static, composed of the same sets of households or individuals, but they are not. Therefore, they tend to overstate trends toward greater inequality.

The fact that household structure has so much to do with trends measured by standard household gini coefficients, that the gini for individual earners has no trend, and that in any case, fixed quantile comparisons overstate trends in inequality, all suggest that redistributionist policies are misguided and unnecessary. And those kinds of policies tend to undermine the growth of the economy. Only policies designed to boost economic growth can help households across the income distribution to prosper. Moreover, unraveling the negative incentives built into current social programs would help to stabilize household and family structure.