Published On: Tue, Apr 29th, 2014

The rich and the super-rich

Pinchas-LandauThe most important issue in global political economics today is that of income inequality. Theoretical economists, who live in a world of models based on mathematical formulae and an idolatrous belief in the market and its innate ability to generate desirable outcomes, are either not concerned about the growing gulf separating a narrow elite of rich from the overwhelming majority of the population, or they justify this trend and explain why it is good and “efficient”.

However, political economics is still connected to the real world and recognizes that the goal of economic policy, at least in a liberal democracy, is to improve the welfare of the largest number of people (if not all) — and not to condone or facilitate the concentration of wealth in the hands of a gilded elite. Consequently, some economists who are concerned about the real world are focusing their efforts on tracking and understanding the processes at work in both income and wealth distribution, with a view to developing policy prescriptions.

Two such people are Emmanuel Saez of the University of California at Berkeley and Gabriel Zucman, of the London School of Economics, who is a visiting professor at Berkeley. In a recently analysis, they address the widespread assumption that inequality of wealth has increased less than has inequality of income. This assumption seems strange, but the statistical evidence available seemed to point in that direction, so efforts have been made to explain why this should have happened.

Saez and Zucman’s main methodological contribution is to use income data from the IRS — which has the advantage of covering the entire population, rather than being based on narrow samples — and then build an analytical bridge from income to wealth. This involves making some important assumptions of their own, especially with regard to the rate of return on assets of different types over various periods — but they use charitable foundations, for which there is full data on both assets and income, as their control group and find they obtain accurate results.

The analysis has been reported in the media — see, for example, the article by Peter Coy in Bloomberg Business Week — and is certain to make waves, not just in academic circles but far beyond. Given the socio-political implications, a fierce controversy would seem guaranteed.

Perhaps the most surprising finding, for many people, will be that the problem of inequality is not focused on the “99 per cent versus the 1 per cent”, that was the rallying cry of the Occupy Wall Street movement. In fact, the Israeli buzzword, “the top thousandth” — meaning the richest 0.1%, rather than the richest 1%, is nearer the mark.
Thus although Saez and Zucman find that the share of total wealth in the US held by the “bottom 90%” of families in the nation is barely one-quarter of the total (25.6%), and the next 9% — i.e. the percentiles from 91 to 99 — hold another third (34.6%), leaving the remaining almost two-fifths (39.8%) of the total in the hands of the top 1%, this is not new to anyone involved in wealth management.

What is new, and hence surprising, are the findings about the distribution of wealth within the top 1%. Please follow closely: The top 1% has, as noted, 40% of the total. But the bottom 90% of the top 1% (nine out of ten of the very rich) hold only 18.3% of this 40%, or less than half. That leaves 21.5% of the total wealth of the United States in the hands of the top 0.1% of families — the top thousandth.

However, the bottom 90% of this top thousandth (these are the families in the band between 99.9% and 99.99%, so they are very, very rich) hold less than half of the 21.5% that the top thousandth own (10.4% to be exact). Now we reach the summit, where the top ten-thousandth (0.01%) wallow in ultra- or mega-wealth. This very narrow stratum owns 11.1% of the country’s total wealth.

Even more important than the breakdown of who owns how much, is the finding that the share of the bottom nine-tenths of the top 1%, large though it is (18.3%, remember) has actually not grown over the last generation. The new wealth has accumulated disproportionately to the top thousandth, not the top hundredth — and this group’s share has reverted to levels not seen since the 1920’s. As for the top ten-thousandth, their share has quadrupled (gone up four-fold) since 1980, when the Reagan revolution set the recent trends underway.

The main policy recommendation proposed to address this state of affairs is to tax wealth, or at least to start thinking about steps in that direction. Good luck with that in Congress, where the ultra-wealthy use their influence to make sure they are not disturbed in their ongoing wealth-accumulation.

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About the Author

- About Pinchas Landau is an economic and financial analyst, serving as a consultant to major financial institutions in Israel and abroad on domestic and global developments. After working in banking and investment, he moved to journalism in 1983 and served as financial correspondent of the Jerusalem Post and then as senior columnist for Globes, Israel’s business daily. He has written for many international newspapers, including the Wall Street Journal and Barrons, as well as numerous professional publications. Since 1996, Pinchas has been writing and publishing The Landau Report, a unique newsletter service which analyses economic, business and financial trends in Israel, as well as tracking Israeli and regional geo-political affairs and has attracted a global subscriber base. He has also been providing quarterly and annual reports on Israel for the Economist Intelligence Unit for 25 years. Landau is also an accomplished speaker, lecturing in English and Hebrew to audiences in Israel and overseas on a range of issues relating to Israel and the Jewish world. Born in London and educated at the London School of Economics, he and his family have been living in Jerusalem since 1976.

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