Why There is Wealth Inequality

The greatest inequality of wealth holdings is among the elderly and the primary reason for that inequality is the different saving rates of people when they are young. Here is Noah Smith:

If you do the math, you discover that in the long run, income levels and initial wealth…are not the main determinants of wealth. They are dwarfed by…savings rates and rates of return. The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.

Pointer from Arnold Kling.

Comments (25)

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  1. Vladamir Viatopolokovsky says:

    The best way to transfer more wealth to the poor and middle-class would be to create a government program that gives every individual within 500 percent of the federal poverty line a $1,000 stipend to be spent on financial self-help books. BUT, the $1,000 can only be spent inside special government exchanges, my book is the only book that is offered and coincidentally, it costs $1,000. In my book , I advocate people creating passive incomes for themselves. Are you in?

  2. James McGee says:

    The best way to transfer wealth is to raise wages – make it easier to for unions to organize workers and negotiate contracts.
    It is using the logic of the quality control experts – find the solution upstream, not after the mistake has been made.

  3. Kumar says:

    For the incoming generation, it might be difficult to have much savings to begin with since most of them have so much college debt to pay off. By extension, this means that there will be less wealthy people in the coming generations.

  4. Hoover says:

    Increasing minimum wages and facilitating unions is FAR from the best way to transfer wealth. Perhaps restoring confidence in financial institutions and stopping the financial equivocation which fosters uncertainty would increase savings rates.

    I’ll never forgive unions for the grievous damage they’ve done to Americana. The loss of the Twinkie..

  5. H. James Prince says:

    “In the short run, in fact, they’re the opposite – every dollar you save (which goes straight to your “wealth”) is a dollar you don’t spend on food, or clothes, or gas, or housing, or something else you can actually use. So maybe we should just worry about consumption equality, and let the rich sit on their useless stock portfolios like Smaug the dragon sitting on his giant pile of gold.”


  6. Jack says:

    Normatively speaking, wealth inequality is expected, and will always exist. The fact that we’re even having this discussion is incredible, given the course of human civilization — we’re at the very far margins in terms of inequality.

  7. Gabriel Odom says:

    While I understand this mathematically, and economically, I remember all too well being poor. My mother had her pay checks budgeted to the last penny – including the $1 per week that my siblings and I earned through allowance. We looked forward to the 1 movie per month we could afford to rent
    I am not writing a “woe is me” sob story because I want pity. I write this to give perspective. Sure, my family could have saved that $2.25 Blockbuster rental and the $4 per month in allowance, but some expenses are worth more in family enjoyment. There are people who work very hard, but would still have a difficult time finding $5 per month they could save.

  8. Corey says:


    There may always be wealth inequality but that doesn’t mean we shouldn’t try to decrease it in some instances.

    Given the course of human civilization we’re at the very far margins in terms of the violent death rate, but you would be very silly to say “the fact that we’re even having this dicussion is incredible,” on a blog post about avoiding a war or conflict.

  9. Desai says:

    @ Jack

    Yes wealth inequality has always existed in society, that said, this does not justify that we let inequality grow to the point where there is major social unrest. This is prevalent in many developing countries, and the changes in these cases come with enormous political costs.

  10. Sandeep says:

    @ Desai

    Yes social inequality has existed since the inception of human civilization, but it is important to note that really social mobility is the main thing society needs to buffer against the kinds of social turmoil you speak of.

  11. John Kumar says:

    I agree with Sandeep, indeed, as long as there is social mobility, we should not have to worry about the wealth inequality. This is because there will be a understanding and respect for people who earned their wealth, because you know you have to work for it. Additionally, we know that the same opportunity is available for everyone.

  12. Kyle says:

    Pretty sure Jack meant what he said: incredible, not incredulous. It’s true, over the course of civilization, the gap is orders of magnitude smaller than at any other time. So yes, it is incredible that we can have meaningful discussions over something like wealth inequality. I’m sure your feudal lords, or Bhattacharyya would care about inequality complaints.

    I’m also pretty sure that this article from the Atlantic is terrible, and addresses the same video that Pam discussed.

    Why do you think elections generate so much in donations? It takes money to get elected. Once elected, logic follows that one would legislate in such a way to keep making money. The revolving door with lobbyists is proof of that.

    I recall seeing an article that the 10 wealthiest members of Congress all voted to extend tax cuts, both reps and dems. Go figure.

  13. Yoon says:

    I wouldn’t confuse wealth with money.

    Wealth is only transferred when we take an action that adds value, whether it is manufacturing a good, performing a service, or taking a risk that others may not. If you put more money into someone’s hands who adds no additional value in exchange, the money ultimately gets devalued to match the underlying value it represents.

    That’s why when you raise the minimum wage, the poor may be better off for little while, until the value of money adjusts to negate it.

    As long people continue to do different things of different value, there is no way to avoid wealth inequality. Then we are left to confiscate wealth, or we simply decide that no one can be rewarded differently regardless of the value of their actions. We know how this turns out, and yet, people still think it’s a good idea.

  14. Devon Herrick says:

    Pundits worry about the unequal distribution of wealth. Supposedly, the wealthy possess more than their fair share. But, the reason this has occurred is because some people invest in ideas and education, save and invest and accumulate wealth. They teach their kids to do the same. They often pass wealthy to heirs upon their death. At the same time, there are others who don’t invest in education and consume their earnings. Our society could not survive if either type of family disappeared. Our economy needs both savers and consumers; it needs both workers and producers.

  15. James McGee says:

    First, I misstated my argument. What I should have said is that the best way to increase the savings rate is to increase wages.
    The rest of my argument stands.
    And to the misguided soul who blames the BCT union for the demise of Twinkies (will he assert the Twinkie defense) the case of Hostess is an excellent example of how wealth gets transferred in America..
    Let’s leave aside the contribution of consumers who are becoming less inclined to inflict their bodies with Hostess products.
    Over a 10 year period, the union agreed to hundreds of millions in give backs severely impacting wages, health and pension benefits.
    During the same time venture capital firms such as Silver Point Capital, Monarch Alternative Capital, and Ripplewood Holdings mismanaged the company, dug it deeper in debt, cut worker wages by 30% yet tripled the pay of top executives, not to mention accruals to their own personal wealth.
    This is called saving money in America, Mr Goodman.

  16. James McGee says:

    By the way no one, at least not I, is arguing against unequal wealth distribution. Only extreme wealth inequality. And most certainly when maintaining that wealth inequality means impoverishing tens of millions of fellow citizens.

  17. Jordan says:

    Wage increases are the best way to ensure increases in savings rates? You might be mistaken. Go compare the PSAVERT with Minimum Wage Increases over the last 40 years.

  18. Pam says:

    There are many people who make high incomes but do not save. Instead all of their money is tied up in their mortgage. While housing is considered an investment by many, it is not that great of one in the long term. Simply increasing wages is not going ot keep people from wanting to “keep up with the Jones.”

  19. Jack says:

    Twinkies are delightful, are you taking the endogeneity defense for the overweight? In their bankruptcy filings Hostess listed the 800+ million in debt they carried from legacy pensions etc, and turned to capital investment firms to try and stay afloat.

    At least try and be objective.

  20. Buster says:

    Increasing wages would increase — not reduce — inequity. Wages are a function of marginal product of labor. If the minimum wage is raised above workers’ productivity, the marginal workers will be fired or replaced with labor-saving equipment. As these marginal workers dropped out of the labor market, aggregate demand would fall resulting in a new cycle of layoffs of (newly) marginal workers. In the end, there would be mostly medium and highly-paid workers, with huge numbers of low-skilled, unemployed workers.

    You can boost the price floor amount an unskilled laborer can be paid. But you cannot do much (in the short run) to boost the skills of those who skills are priced out of the labor market. Without that first “bad” job, many people will never move on to get the slightly better job and ultimately the lower middle-class job that could have sustained them throughout their lives.

  21. Lonnie Guinn says:

    Phaw, Buster — the Soviets disproved MPL theories back in the ’30s…

  22. James McGee says:

    Who’s defending the overweight?

    Do you honestly expect a bankruptcy filing to declare, “we pilfered the pension fund and took the company into debt in order to fatten our paychecks. And when we didn’t have enough money to pay ourselves we asked the union to take even more cuts in wages and benefits and they refused. The ingrates!”

  23. Kyle says:

    I actually had to look up the “Twinkie defense” lol. Good thing I’m not going to law school.

    It’s obvious that all pro-market anti-union rhetoric will be instantly biased, and since Hostess is full of liars and thieves, let’s talk about venture capital firms.

    If they have dozens of companies, and one of them is failing, is it their fault for realizing a bad investment and liquidating it? Or is it the pay raises for CEOs that incense you?

  24. James McGee says:

    “If they have dozens of companies, and one of them is failing, is it their fault for realizing a bad investment and liquidating it? Or is it the pay raises for CEOs that incense you?”

    I don’t see this as an either/or question. If the company is failing, the pay cuts should be across the board. If it needs to be liquidated, well as the Bible says:
    To every thing there is a season, and a time to every purpose under the heaven:

    It is the combination – when the company is being run by people who understand nothing about the food processing industry, make no adjustments to market changes or production methods, yet insist that the workers must pay the price for their incompetence and they line their own pockets while there and ensure soft landings after it implodes.
    The Venture Capital firms should be given credit for demonstrating conclusively that you can have your (symbolic) cake and eat it too.

  25. Kyle says:

    A lot of this is speculative, on both sides. I’m inclined to believe that Hostess would decide not to perjure themselves, especially if they had union reps nipping at their heels.

    Mismanagement and failure is a necessary part of capitalism. Inertial problems with the auto industry makes me see unions and inflexible uncompetitive bargaining agreements’ antithetical to free market ideals. It certainly increases incentives for execs to file for a second bankruptcy, rob the company, and jump ship. So those evil venture capitalists brought in a restructuring expert as CEO, cut the execs salary, but the unions decided to strike anyway. The courts questioned the strike — because it seemed specifically designed to permanently cripple the company.

    It could just be me though — I think in terms of business incentives. Not “workers” and “executives.”