Monday, October 27, 2014

Emmanuel Saez and Gabriel Zucman — Exploding wealth inequality in the United States

Wealth inequality in the US has followed a U-shaped evolution over the last century – there was a substantial democratisation of wealth from the Great Depression to the late 1970s, followed by a sharp rise in wealth inequality. This column discusses new evidence on the concentration of wealth in the US. Growing wealth disparity is fuelled by increases in both income and saving rate inequalities between the haves and the have nots.… 
How can we explain the growing disparity in American wealth? The answer is that the combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fuelling the explosion in wealth inequality. For the bottom 90% of families, real wage gains (after factoring in inflation) were very limited over the past three decades, but for their counterparts in the top 1% real wages grew fast. In addition, the saving rate of middle-class and lower-class families collapsed over the same period while it remained substantial at the top. Today, the top 1% families save about 35% of their income, while the bottom 90% families save about zero (Saez and Zucman 2014).
If income inequality stays high and if the saving rate of the bottom 90% of families remains low then wealth disparity will keep increasing. Ten or 20 years from now, all the gains in wealth democratisation achieved during the New Deal and the post-war decades could be lost. While the rich would be extremely rich, ordinary families would own next to nothing, with debts almost as high as their assets.…
What should be done to avoid this dystopian future? We need policies that reduce the concentration of wealth, prevent the transformation of self-made wealth into inherited fortunes, and encourage savings among the middle class.…
Exploding wealth inequality in the United States
Emmanuel Saez, Professor of Economics and Director of the Center for Equitable Growth, University of California Berkeley, and Gabriel Zucman, Assistant professor of economics, London School of Economics


Matt Franko said...

"Our definition of wealth includes all pension wealth—whether held on individual retirement
accounts, or through pension funds and life insurance companies—with the exception of Social
Security and unfunded defined benefit pensions. Although Social Security matters for saving
decisions, the same is true for all promises of future government transfers. Including Social
Security in wealth would thus call for including the present value of future Medicare benefits,
future government education spending for one’s children, etc., net of future taxes. It is not clear
where to stop, and such computations are inherently fragile because of the lack of observable
market prices for this type of assets. Unfunded defined benefit pensions are promises of future
payments which are not backed by actual wealth. The vast majority (94% in 2013) of unfunded
pension entitlements are for Federal, State and local government employees, thus are conceptually
similar to promises of future government transfers, and just like those are better excluded
from wealth.


OK so the people who dont work for the govt pay the taxes that go to fund the "unfunded pensions"... but they dont count the after tax income of these people they use the pre-tax... BUT, then they dont take the present value of these future "unfunded" liabilities into account for the pension/benefit recipients...

Who was their accountant? David Walker? did they consult with the Peterson people to come up with this rationale?

Count the pre-tax as 'income' and then dont count the benefits that the taxes are used for on the other end????

Matt Franko said...

and this:

" According to the Flow of Funds, unfunded defined benefit pensions represent the
equivalent of 5% of total household wealth today"

Page 123 here:

Note 1 "... Defined benefit pension entitlements are included in line 14"

Line 14 is over 30T out of 95T in the household sector total ... add the other 5% they mention in the funds and that is 35% to 40% of household wealth that they do not include....

Is this good analysis?

It would seem that if they thought "we're out of money!" then they wouldnt want to include this 30T as part of "household wealth"...

Maybe they consulted with David S. Walker on how to treat PV of govt defined benefit programs...

Matt Franko said...

Are the Peterson people funding these 2?

Matt Franko said...

ok here is the full Note 1 from the Household table at the Z.1

"(1) Defined contribution plans. Assets held by defined benefit pension funds are not considered assets of the household sector. Defined benefit pension entitlements are included in line 14."

So what it looks like the Fed does is to not include the assets in the defined benefit schemes but rather does some sort of PV of the benefits that will be received and comes up with 30.15T of 95.44T for households so 32% of PV household wealth...

So looks like these 2 are not including this 32% that the Fed includes here...

AND neither the Fed or these 2 include any PV of future Federal/State/Local benefits such as SS or Medicare or VA benefits, military retirements, etc...

IIRCs just the VA benefits last year were 50B, same for military pensions, so PV of another 2T or so over 20 years at 0%....

SS/Medicare/Medicaid at about 1.5T last year so PV of another 30T or so over 20 years at 0%...

Pretty important to those receiving these benefits...

Dan Lynch said...

Good points, Matt.

Government provided education, health care, and pensions are defacto forms of wealth that we take for granted. I don't know how you could easily account for them when calculating wealth inequality.

But we can say that by providing universal free education, universal free health care, and universal pensions that you could actually live on, would effectively reduce defacto wealth inequality.

Anyway, I was going to say that Huey Long had this wealth inequality thing figured out 80 years ago.

Huey called for:
-- free education K-Phd
-- a means tested BIG
-- public works to create jobs
-- a universal pension at age 60
-- a 30 hour work week
-- cap income
-- cap wealth
-- cap inheritances
-- minimum 4 weeks vacation

Tom Hickey said...

Some people see it in reverse.

Charles Biderman, founder of TrimTabs Investment Management Float Shrink (TTFS) says the U.S. gives its future obligations, as of Q2 2014, as $16.5 trillion. But, in fact, Biderman says, the actual number is $98 trillion.… Biderman said the actual figure of the country’s future obligations, which is $98 trillion, is in the 2013 OASDI (Old Age, Survivor’s and Disability Insurance) Trust Funds, a combination of Social Security and Medicare Trustee Reports.

Biderman Blasts "Either Obama Is Ignorant, Or He Is Hiding The Truth"