Video about wealth inequality

[ktgrok]

I found this video pretty stark. I can't see how this kind of wealth inequality is sustainable long term. I'm not sure exactly what and how this needs to change but I'm certain it does. Especially when you compare it to years past. 

 

http://www.upworthy.com/9-out-of-10-americans-are-completely-wrong-about-this-mind-blowing-fact-2

[SemiSweet]

I've seen that one before but it never fails to get my goat. Without going political, I cannot believe that so many people are okay with this and actually vote for this.

[Sarah CB]

The biggest problem I have with this video is that there isn't a limited amount of wealth available.  The 1% guy doesn't prevent me from finding ways to generate more wealth for myself.

 

I was talking to my ds about the need for immigration.  Especially in our province where we have a real need to increase our population.  He kept thinking that immigrants will use up too many resources, but really, what they tend to do is contribute positively to the economy - they generate more wealth.  They open up businesses and employ others and they work and they pay taxes. 

 

I think that video uses scare tactics.  What we really should be looking at is whether there are ways we can make it easier for people to generate more wealth. 

[PineFarmMom]

The biggest problem I have with this video is that there isn't a limited amount of wealth available. The 1% guy doesn't prevent me from finding ways to generate more wealth

 

I think that video uses scare tactics. What we really should be looking at is whether there are ways we can make it easier for people to generate more wealth.

Every time I quote something it posts before I add anything.

 

Just want to agree with this!!!!

Edited February 16, 2016 by Texas T

[Frances]

The biggest problem I have with this video is that there isn't a limited amount of wealth available. The 1% guy doesn't prevent me from finding ways to generate more wealth for myself.

 

I think that video uses scare tactics. What we really should be looking at is whether there are ways we can make it easier for people to generate more wealth.

While it is true that wealth isn't limited, it is also true that wealth buys power and control, especially politically. And at least some of those for whom the current system has worked wonderfully do not want things to change and risk losing any of their wealth or power.

 

Also, research has shown that the economy suffers with concentration of wealth and that affects all of us.

 

I'd be interested to hear some of your ideas for making it easier for others to generate more wealth. In the US, I think some form of universal healthcare would help because people might feel more free to take job or business risks if health insurance wasn't so tied to employment.

[PineFarmMom]

While it is true that wealth isn't limited, it is also true that wealth buys power and control, especially politically. And at least some of those for whom the current system has worked wonderfully do not want things to change and risk losing any of their wealth or power.

 

Also, research has shown that the economy suffers with concentration of wealth and that affects all of us.

 

I'd be interested to hear some of your ideas for making it easier for others to generate more wealth. In the US, I think some form of universal healthcare would help because people might feel more free to take job or business risks if health insurance wasn't so tied to employment.

From things I am seeing, smaller government would make it easier for the little guy to make it!! I have friends in different areas trying to make a go of small businesses and it is hard because of all the red tape. Edited February 16, 2016 by Texas T

[Scarlett]

I have seen this video before and it affects me physically. From the time I was a little girl I can not get over how some people have almost nothing.....and some people have more than they could ever use.

[Frances]

From things I am seeing, smaller government would make it easier for the little guy to make it!! I have friends in different areas trying to make a go of small businesses and it is hard because of all the red tape.

I've heard this before, but I have two friends who came to this country with nothing and virtually no English skills who are successful small business owners. While I certainly agree we shouldn't unduly burden small businesses, I haven't seen research showing it's really a significant barrier.

Edited February 16, 2016 by Frances

[ktgrok]

The biggest problem I have with this video is that there isn't a limited amount of wealth available.  The 1% guy doesn't prevent me from finding ways to generate more wealth for myself.

 

 

 

 

True, but in a given company there is a finite amount of wealth at any one time. Some can be invested back into the business and the rest goes to pay salaries. If the top CEO is taking a  MUCH larger percentage than is typical historically (as the video and other evidence shows) than that leaves a much smaller percentage for the rest of the workers. 

[Guest]

I've heard this before, but I have two friends who came to this country with nothing and virtually no English skills who are successful small business owners. While I certainly agree we shouldn't unduly burden small businesses, I haven't seen research showing it's really a significant barrier.

*Removed due to the fact that I remembered my train of thought and it would have headed in a slightly different direction than this topic.

Edited February 17, 2016 by WendyAndMilo

[Pam in CT]

I've seen that underlying data before in different forms (and it's telling, that Harvard Business School is taking up leadership on the issue of income inequality), but the presentation here is very compelling -- thank you.

 

Re expanding the pie/opportunities for growth -- for me, part of the US' painting-ourselves-into-a-corner is related to how we view public investment.  In many other countries, investment in both physical infrastructure (roads/bridges/dams/water resource management, and also public transport to enable people who want jobs to reach places that have them) and also social infrastructure (education at all levels, public health and personal health) are viewed as essential to market growth. 

 

My brother and family live in Singapore, and there is a common consensus that cuts across the political divide that such public investments are essential to future private-sector led growth, as well as to current well-being.  We don't have such any consensus in the US.  

 

 

I do think income inequality, and the inability of the rising millenial generation to dig out from debt loads, purchase and maintain their own homes, and raise families without holding down 2 (and 3 and 4 part-time) jobs is among the greatest risks we face as a society.

[EmseB]

True, but in a given company there is a finite amount of wealth at any one time. Some can be invested back into the business and the rest goes to pay salaries. If the top CEO is taking a  MUCH larger percentage than is typical historically (as the video and other evidence shows) than that leaves a much smaller percentage for the rest of the workers. 

 

I think this is a different question, economically, than talking about wealth generation in general.

 

Presumably, if a company is generating income and people are voluntarily taking jobs there, and people are voluntarily buying the products from said company it is not mismanagement to pay a high CEO salary.  That's going to be up to the stockholders and board of the company.  If it is in their best interest to attract a great CEO with a high salary to generate more revenue for the company, then that's what they are going to do.  If the high CEO salary isn't paying dividends in terms of growing the company and generating wealth, then the board will probably do something about that.

 

But it doesn't follow that the company pays workers less because of a high CEO salary.  I think it does appear that way on paper, but I don't think one causes the other, I think other factors are in play that determine worker pay, and I say this because there are companies that have high CEO salaries and also pay their workers well.  I don't think the relative percentage of CEO salary to overall earnings is really important because there are so many factors that determine CEO salary and employee wages.

 

And in an economy with so many people out of the workforce (a record number have simply stopped participating in the workforce in the past few years) then economics dictates that managers will be able to pay less because there is so much supply of ready labor.  In order to fix that problem, you generally have to have an economy conducive to starting businesses with few barriers to entry.  Otherwise, the fat cats at the top will always be able to dictate the terms of employment with little hope of anyone else growing a business to that point.

 

Ideally, there would be so many jobs available that employers would have to compete for good workers with higher wages, but that's not the situation we have in this economy, despite what unemployment numbers would say.

[Frances]

I think this is a different question, economically, than talking about wealth generation in general.

 

Presumably, if a company is generating income and people are voluntarily taking jobs there, and people are voluntarily buying the products from said company it is not mismanagement to pay a high CEO salary. That's going to be up to the stockholders and board of the company. If it is in their best interest to attract a great CEO with a high salary to generate more revenue for the company, then that's what they are going to do. If the high CEO salary isn't paying dividends in terms of growing the company and generating wealth, then the board will probably do something about that.

 

But it doesn't follow that the company pays workers less because of a high CEO salary. I think it does appear that way on paper, but I don't think one causes the other, I think other factors are in play that determine worker pay, and I say this because there are companies that have high CEO salaries and also pay their workers well. I don't think the relative percentage of CEO salary to overall earnings is really important because there are so many factors that determine CEO salary and employee wages.

 

And in an economy with so many people out of the workforce (a record number have simply stopped participating in the workforce in the past few years) then economics dictates that managers will be able to pay less because there is so much supply of ready labor. In order to fix that problem, you generally have to have an economy conducive to starting businesses with few barriers to entry. Otherwise, the fat cats at the top will always be able to dictate the terms of employment with little hope of anyone else growing a business to that point.

 

Ideally, there would be so many jobs available that employers would have to compete for good workers with higher wages, but that's not the situation we have in this economy, despite what unemployment numbers would say.

At least in parts of the US, we do have the situation of a strong economy and fairly tight labor market, and wages are slowly rising as a result. But there's solid evidence that in general, economic gains disproportionally have benefited those already at the top in recent US history.

 

And my state, a very blue progressive state that doesn't usually rank high in terms on business friendly measures, was just found to be the state that has recovered the best from the recession using a very wide variety of measures. And we've seen the opposite happen in states that tried to boost the economy by cutting all taxes for small businesses. So again, while I think we should try to not overly burden small businesses, I'm not sure it makes a significant difference.

 

And all of the reasons for people dropping out of the labor market are not completely understood and quantified. It is not just due to people giving up looking for work. More educated women are choosing to stay home, there are still people finishing education they started when the economy tanked, etc. While measuring unemployment is complicated and there are lots of methods that can be used, there are significantly more jobs and significantly more people employed than in 2008.

[ktgrok]

 

 

But it doesn't follow that the company pays workers less because of a high CEO salary. 

 

 

 

It kind of does though. If 80% of the money goes to the CEO, that only leaves 20% for the other workers. If 40% goes to the CEO than that leaves 60% for the workers. And so on. If CEOs are taking a larger share of the profits for themselves that means there is less for the workers. When that percentage keeps increasing in favor of the CEO and against the worker you get more income inequality and it doesn't do our economy any good. 

[Bluegoat]

The biggest problem I have with this video is that there isn't a limited amount of wealth available.  The 1% guy doesn't prevent me from finding ways to generate more wealth for myself.

 

I was talking to my ds about the need for immigration.  Especially in our province where we have a real need to increase our population.  He kept thinking that immigrants will use up too many resources, but really, what they tend to do is contribute positively to the economy - they generate more wealth.  They open up businesses and employ others and they work and they pay taxes. 

 

I think that video uses scare tactics.  What we really should be looking at is whether there are ways we can make it easier for people to generate more wealth. 

 

I agree with your principle here to a certain extent - it isn't like wealth is finite (though resources are, which is a serious consideration.)  And I agree with you about immigration.

 

But those stats aren't supposed to make you think there is a finite amount of wealth.  It is supposed to make you ask how it is that what wealth exists in the population right now is being more and more diverted to a few people.  It isn't as if somehow the well off have suddenly started working much harder than the poor, or that they are that much smarter, that they are managing to generate more income.

 

It points to a problem in the system which means it is easier for those who are already wealthy to generate more wealth without actually doing more work themselves, whereas those who are not do not have access to those possibilities no matter how hard they work.  This is a problem that has been pointed out as a particular one for the way modern capitalism is structured from very early on, almost since it first appeared.

 

And ultimately it isn't just bad for the poor, or even bad for all because it is likely to cause violent revolution.  If it were followed to its logical conclusion, and wealth worldwide was concentrated into the hands of one super-capitalist who owns all means of production, and the masses only had the bare minimum to get by, it would be bad for everyone. Who would buy the products that the owner produced?

[Bluegoat]

From things I am seeing, smaller government would make it easier for the little guy to make it!! I have friends in different areas trying to make a go of small businesses and it is hard because of all the red tape.

 

This is a funny thing.  It's true red tape is bad for small business.

 

But on the other hand, small government cannot very easily control corporate power - the kind that likes to lobby government to do things that are good for it, but usually bad for individuals and small business.

 

In fact big business has quite an interest in weaking government's ability to deal with corporate power while promoting things (like safety regs) that are too onerous for small business.  Not only does it remove potential competition,they can use people's dislike of those things to argue for further weakening the legitimate powers of government.

[SKL]

Annoying video.

I know too many people who came into the game with $0 wealth (or negative) and are doing just fine.

[ktgrok]

Annoying video.

I know too many people who came into the game with $0 wealth (or negative) and are doing just fine.

 

So you are disputing the numbers? Or are you saying those you know happen to be outliers? Do you dispute the fact that the middle class is shrinking and has less percentage of wealth than in years past? 

 

Anecdote doesn't equal evidence. The fact is, wealth is being concentrated more and more among a few, and those who are at or near poverty are a growing percentage of our population. Who you happen to know doesn't change that. 

[Frances]

Annoying video.

I know too many people who came into the game with $0 wealth (or negative) and are doing just fine.

But that doesn't refute the video.

[Frances]

This is a funny thing. It's true red tape is bad for small business.

 

But on the other hand, small government cannot very easily control corporate power - the kind that likes to lobby government to do things that are good for it, but usually bad for individuals and small business.

 

In fact big business has quite an interest in weaking government's ability to deal with corporate power while promoting things (like safety regs) that are too onerous for small business. Not only does it remove potential competition,they can use people's dislike of those things to argue for further weakening the legitimate powers of government.

Exactly. And not only can wealth buy political power directly, it can buy it indirectly through the purchase of propaganda used to influence others. So not only does great concentration of wealth weaken the economy, but it also weakens our democratic form of government.

[idnib]

I've seen this video before and I agree with almost everything in it.

 

That said, the place where he loses me is when he asks if someone is making a multiple of a salary, are they working that much harder? I understand the point he is trying to make about the disparity and that the disparities are very large, but I can't get over such an illogical argument. Is a house that costs twice as much supposed to be twice as large? What if has a better location, or higher end finishes, is closer to a large area employer, or has a new roof? There are houses in this country that are $50,000, and there are houses that are worth 380 times that ($19 million). Do we argue whether a house is really worth a certain dollar amount? You may assert it is not, but as soon as someone buys it for that amount, it is.

 

Apparently it's the same for CEO pay. Most CEOs belong to companies with investors, and those investors approve these salaries and packages either explicitly by voting, or implicitly by continuing to keep their money invested. I think a large part of the problem is the removal of citizens from what they're investing in via 401ks, IRAs, mutual funds, pension plans, insurance, etc. This removal allows executives to reach ridiculous pay levels with the approval of shareholders who probably cannot even name all the companies in which they have investments, much less the names and salaries of those CEOs. And the shareholders who are paying attention (rich investors, hedge fund managers, etc) probably happen to also be quite wealthy themselves.

Edited February 16, 2016 by idnib

[Pam in CT]

re compensation in the top quartile/particularly the very top 1%:

 

I've seen this video before and I agree with almost everything in it.

 

That said, the place where he loses me is when he asks if someone is making a multiple of a salary, are they working that much harder? I understand the point he is trying to make about the disparity and that the disparities are very large, but I can't get over such an illogical argument. Is a house that costs twice as much supposed to be twice as large? What if has a better location, or higher end finishes, is closer to a large area employer, or has a new roof? There are houses in this country that are $50,000, and there are houses that are worth 380 times that ($19 million). Do we argue whether a house is really worth a certain dollar amount? You may assert it is not, but as soon as someone buys it for that amount, it is.

 

Apparently it's the same for CEO pay. Most CEOs belong to companies with investors, and those investors approve these salaries and packages either explicitly by voting, or implicitly by continuing to keep their money invested. I think a large part of the problem is the removal of citizens from what they're investing in via 401ks, IRAs, mutual funds, pension plans, insurance, etc. This removal allows executives to reach ridiculous pay levels with the tacit approval of shareholders who probably cannot even name all the companies in which they have investments, much less the names and salaries of those CEOs. And the shareholders who are paying attention (rich investors, hedge fund managers, etc) probably happen to also be quite wealthy themselves.

I dunno, idnib.  CEO compensation is established at the board of director level (yes putatively "approved" by shareholders, but  that is much more often than not a pro forma process, and in any event majority shareholdings of large companies are very often, as you say, by pension funds, mutual funds and other institutional investors).  And BODs are populated by CEOs of other boards.  The dynamic of self-dealing is quite real.

 

The level of CEO compensation of Fortune 500 companies in the US are on average 2+ times the level of CEO compensation of similarly-sized companies in other countries.  Study after study has demonstrated this.  US companies are not on average 2+ times more profitable.  Here is one article, in Fortune (largely sympathetic to very high executive compensation) which acknowledges the 2x factor, and takes a familiar argument -- that CEOs are paid more because they "take more risk."

 

But stock options don't really represent "risk" the way ordinary people understand it -- it is true with options that you make MUCH MORE if the stock price increases (whether stock price really reflects CEO performance, rather than industry fundamentals or the market as a whole, is yet another question, but put that aside).  But you don't lose if the stock goes down, you just don't cash out your under-water options.  So it's more like "heads I win, tails I don't lose."  Not risk in the ordinary-person sense.

 

(And the other side of the CEO-average worker ratio is of course the level of average-worker wages.  This particular data set looks mostly at wealth, not income.  But there are equally eye-popping studies that illustrate the falling -- not stagnating, falling -- real wage levels of all quintiles other than the top, both administrations, over 30+ years.  So that too drives the ratio numbers.)

 

 

To me what is so revealing about the HBS data is the extraordinary gap between "how 92% of respondents believe wealth is distributed" and "how wealth is actually distributed."  

[idnib]

I dunno, idnib.  CEO compensation is established at the board of director level (yes putatively "approved" by shareholders, but  that is much more often than not a pro forma process, and in any event majority shareholdings of large companies are very often, as you say, by pension funds, mutual funds and other institutional investors).  And BODs are populated by CEOs of other boards.  The dynamic of self-dealing is quite real.

 

I agree with everything you wrote, and as I said I agree with almost everything in the video, but from the paragraph I quoted above it sounds like we're saying the same thing. 

[Pam in CT]

Ah.  Sorry.

 

 

I agree with everything you wrote, and as I said I agree with almost everything in the video, but from the paragraph I quoted above it sounds like we're saying the same thing. 

 

I misunderstood this

 

 

Do we argue whether a house is really worth a certain dollar amount? You may assert it is not, but as soon as someone buys it for that amount, it is.

to mean something along the lines of, if a company is willing to pay its CEO $84 million, then by definition, he is "worth" that much.

 

Sorry 'bout that...

 

[Frances]

re compensation in the top quartile/particularly the very top 1%:

 

I dunno, idnib. CEO compensation is established at the board of director level (yes putatively "approved" by shareholders, but that is much more often than not a pro forma process, and in any event majority shareholdings of large companies are very often, as you say, by pension funds, mutual funds and other institutional investors). And BODs are populated by CEOs of other boards. The dynamic of self-dealing is quite real.

 

The level of CEO compensation of Fortune 500 companies in the US are on average 2+ times the level of CEO compensation of similarly-sized companies in other countries. Study after study has demonstrated this. US companies are not on average 2+ times more profitable. Here is one article, in Fortune (largely sympathetic to very high executive compensation) which acknowledges the 2x factor, and takes a familiar argument -- that CEOs are paid more because they "take more risk."

 

But stock options don't really represent "risk" the way ordinary people understand it -- it is true with options that you make MUCH MORE if the stock price increases (whether stock price really reflects CEO performance, rather than industry fundamentals or the market as a whole, is yet another question, but put that aside). But you don't lose if the stock goes down, you just don't cash out your under-water options. So it's more like "heads I win, tails I don't lose." Not risk in the ordinary-person sense.

 

(And the other side of the CEO-average worker ratio is of course the level of average-worker wages. This particular data set looks mostly at wealth, not income. But there are equally eye-popping studies that illustrate the falling -- not stagnating, falling -- real wage levels of all quintiles other than the top, both administrations, over 30+ years. So that too drives the ratio numbers.)

 

 

To me what is so revealing about the HBS data is the extraordinary gap between "how 92% of respondents believe wealth is distributed" and "how wealth is actually distributed."

There have also been news reports lately about companies being sold for significantly lower prices than the stocks were worth at the time most employees received them, but the executives had protections written into their contracts for this possibility, guaranteeing them certain payouts, while the majority of employees are simply left with huge losses and in some cases no job.

[Pam in CT]

re stock options and CEO "risk"

There have also been news reports lately about companies being sold for significantly lower prices than the stocks were worth at the time most employees received them, but the executives had protections written into their contracts for this possibility, guaranteeing them certain payouts, while the majority of employees are simply left with huge losses and in some cases no job.

Right.  That would be the "heads I win, tails I... still win" model, lol.

[idnib]

Ah.  Sorry.

 

 

 

I misunderstood this

to mean something along the lines of, if a company is willing to pay its CEO $84 million, then by definition, he is "worth" that much.

 

Sorry 'bout that...

 

Well, I was kind of saying that, but what I meant was that he's (or she's) worth that because wealthy people who mingle with that CEO, went to college with that CEO, are waiting for their place to be that CEO, need other quid pro quo type things, etc are willing to give him or her that money. And investors who would not be willing to pay that much find the process very opaque, if they try to figure out the process at all. Most don't even try because they are so far removed from the situation:

 

Employee --> HR --> 401k fund options --> each fund has many holdings --> holdings change on a regular basis --> CEOs of each holding --> CEOs change on a regular basis --> CEO's salary changes. Do this for each retirement vehicle, 529, etc.

 

Mutual funds and such are not all upside, and the downside is not just management fees, it's an opacity that I honestly feel was more transparent when people bought single company stocks themselves. Yes, that also had a downside, so neither is perfect, but I think modern investment vehicles have contributed to the rise in CEO pay.

Edited February 17, 2016 by idnib

[Tsuga]

The red tape is virtually non-existent if you are from a specific subset of the population that the government has deemed more "needy" and is therefore more willing to help. Also some states are definitely easier (I'm thinking Idaho vs. CA for example)

 

This cannot possibly refer to poor people. There are a lot of very broad statements on this thread but this is just patently false. Getting housing and enough calories to survive from the government is a full-time job. When we qualified for WIC when my ex-h was in the military and I on unpaid maternity leave, I calculated that I was making about 5c / hr with the WIC appointments and extra time back and forth for the total value of food received.

 

Some people know how to work the system, but it is not easy to get benefits and if anyone says it is... I don't even know. In our state it can take weeks just to get basic benefits. It is a very liberal state.

[Frances]

This cannot possibly refer to poor people. There are a lot of very broad statements on this thread but this is just patently false. Getting housing and enough calories to survive from the government is a full-time job. When we qualified for WIC when my ex-h was in the military and I on unpaid maternity leave, I calculated that I was making about 5c / hr with the WIC appointments and extra time back and forth for the total value of food received.

 

Some people know how to work the system, but it is not easy to get benefits and if anyone says it is... I don't even know. In our state it can take weeks just to get basic benefits. It is a very liberal state.

I was also wondering who these supposedly favored people are getting government help for their small businesses. One of the no government (or small government or local government) Oregon occupiers had an outstanding $100K loan from the small business administration.

 

As far as I know, my immigrant friends who are successful small business owners had no government help. They and their spouses all worked minimum wage jobs for many years while living very frugally. They still work six or seven days per week, but do now have more financial security.

[Pam in CT]

re executive compensation, and opacity in corporate governance:

Well, I was kind of saying that, but what I meant was that he's (or she's) worth that because wealthy people who mingle with that CEO, went to college with that CEO, are waiting for their place to be that CEO, need other quid pro quo type things, etc are willing to give him or her that money. And investors who would not be willing to pay that much find the process very opaque, if they try to figure out the process at all. Most don't even try because they are so far removed from the situation:

 

Employee --> HR --> 401k fund options --> each fund has many holdings --> holdings change on a regular basis --> CEOs of each holding --> CEOs change on a regular basis --> CEO's salary changes. Do this for each retirement vehicle, 529, etc.

 

Mutual funds and such are not all upside, and the downside is not just management fees, it's an opacity that I honestly feel was more transparent when people bought single company stocks themselves. Yes, that also had a downside, so neither is perfect, but I think modern investment vehicles have contributed to the rise in CEO pay.

Yes, executive boards are cozy clubs, and mutual back-scratching naturally follows.

 

:iagree: re opacity and small investors' distance from the market: here is a classic example, typical management fees for hedge funds (which many institutional investors are in, whether or not the ultimate "investors" ("customers" is maybe more accurate) in mutual funds are aware: the managers take a 2% asset fee (on the stock of money invested) and then in addition a 20% profit fee, if the fund increases.  Heads we win, tails we... still win, just not quite as much.  The bigger the fund gets, the more the managers make on the asset fee -- whether the underlying investors are making or losing.

[SKL]

Thing is, "wealth" is a term that people read into, often incorrectly.

 

Say you have a decent job and you go take out a mortgage to buy a house.  Then you run up some bills on your credit card.  Your wealth may be $0 [house asset minus debts], even if you can afford good food and other amenities, have good health insurance, and live in a comfortably big house.  Is this a tragedy, and if so, where does the responsibility lie?

 

I assume the statistics also include all the members of a household who are enjoying a comfortable life though they don't happen to be the owner of the assets that make them comfortable.  Like me and my siblings when we were in college.  For that matter, my "wealth" was hugely negative from age 16 to about 30 while I borrowed and eventually paid off my student loans.  And I did live frugally during those years, but again, that was not a tragedy.  It was an investment into a better future.

 

It would be interesting to see how the graphs would look if marketable skills, valuable knowledge, earning potential, wealth of good relationships, good health, accessible community / environmental assets, and capacity to make one's own happiness could be included in the analysis.

Edited February 17, 2016 by SKL

[idnib]

 here is a classic example, typical management fees for hedge funds (which many institutional investors are in, whether or not the ultimate "investors" ("customers" is maybe more accurate) in mutual funds are aware: the managers take a 2% asset fee (on the stock of money invested) and then in addition a 20% profit fee, if the fund increases.  Heads we win, tails we... still win, just not quite as much.  The bigger the fund gets, the more the managers make on the asset fee -- whether the underlying investors are making or losing.

 

I don't have a problem with this if it's simply individuals who are investing with an individual hedge fund manager. I know an excellent and very upright hedge fund manager who takes money from individuals and invests for them. He did a great and straightforward job until his retirement. If he had performed badly, individuals will remove their money and go elsewhere, so it is more like heads, we win, tails, you leave and people no longer want to place money with me. It's when the investors are removed from the process, and institutions are investing, it gets much more opaque.

[Pam in CT]

re importance of human capital to question of wealth distribution:

 

Thing is, "wealth" is a term that people read into, often incorrectly.

 

Say you have a decent job and you go take out a mortgage to buy a house.  Then you run up some bills on your credit card.  Your wealth may be $0 [house asset minus debts], even if you can afford good food and other amenities, have good health insurance, and live in a comfortably big house.  Is this a tragedy, and if so, where does the responsibility lie?

 

I assume the statistics also include all the members of a household who are enjoying a comfortable life though they don't happen to be the owner of the assets that make them comfortable.  Like me and my siblings when we were in college.  Fro that matter, my "wealth" was hugely negative from age 16 to about 30 while I borrowed and eventually paid off my student loans.  And I did live frugally during those years, but again, that was not a tragedy.  It was an investment into a better future.

 

It would be interesting to see how the graphs would look if marketable skills, valuable knowledge, earning potential, wealth of good relationships, good health, accessible community / environmental assets, and capacity to make one's own happiness could be included in the analysis.

 

You might enjoy another study also conducted by Harvard Business School that looks at just these issues: An Economy Doing Half its Job.  It examines a number of US public policy and evaluates the extent to which they help or hinder US global competitiveness.  

 

It's HBS; the basic orientation is business-friendly.  Nonetheless the study concludes, along the lines of your insight about the importance of human capital, that that policies that help business do not necessarily help working people.  Unfettered access to global capital markets, strong enforcement of contract and intellectual property rights, and what the study calls “innovation infrastructure†(access to high quality research and availability of scientists and engineers) are all great for business; while workers are far more affected by factors such as the quality of the healthcare and education systems:

 

 

Workers and firms depend on quite different elements of the business environment. The economic fates of workers are bound up with the quality and scarcity of their human capital, which— particularly in the middle class—has been eroded by weaknesses in the nation’s K–12 education system and workforce skills. Moreover, American workers cannot escape the consequences of a weak political system or a convoluted tax code, for instance. In contrast, the success of firms (and the highly educated professional class) depends not just on the human capital they can tap but also on the quality of American management, the vibrancy of U.S. capital markets, and access to innovation and world-class research universities. Global mobility allows firms to offset a poor business environment and break free from poor government policy, at least in the short run.

 

That is, global businesses can cross borders to find the the most congenial source of capital, or tax treatment, or legal environment, or skilled or unskilled labor.  If the US still has the best universities in the world, great!  Global businesses will continue to recruit highly skilled labor here (while jobs requiring fewer skills can be moved to lower cost locations.)  If the US has comparatively strong intellectual property rights, great!  High tech research and product design can start here, patent protected (and the actual manufacturing once the products are ready for the market can be done in lower cost locations).

 

Whereas, American workers… work in America, and are, therefore, bound to the “social capital†institutions — the primary and secondary schools, the entry-level technical training, the health care system–  that we have here.  Because here is where Americans are. 

 

 

Why is HBS of all institutions stepping up on income inequality?  Because we've evolved to the point that our macroeconomy is overwhelmingly driven by consumer demand.  We don't do heavy industry any more, we run trade deficits so our GDP net isn't fueled by exports.  What boosts growth is consumer spending... and over the long haul, in the aggregate, credit card debt notwithstanding, "consumers" whose income is declining in real terms over 30 year intervals, will not be able to sustain growth.

 

[Tsuga]

Thing is, "wealth" is a term that people read into, often incorrectly.

 

Say you have a decent job and you go take out a mortgage to buy a house.  Then you run up some bills on your credit card.  Your wealth may be $0 [house asset minus debts], even if you can afford good food and other amenities, have good health insurance, and live in a comfortably big house.  Is this a tragedy, and if so, where does the responsibility lie?

 

 

This is precisely my family.

 

I ASSURE you, we are nowhere NEAR top 10% in wealth, even with top 10% in income and top 15% in income per capita.

 

These are not people we are talking about and it's the classic straw man. "Why, I'm not rich!" No, you're not rich. I'm doing okay now, I have really worked the past couple of years, and we're still climbing up out of student debt. Nobody with any sense is talking about families like ours when they talk about wealth inequality.

 

There are people who make 100 times what we do. 100 times a dual-income family in research. That's what we talk about when we complain about wealth inequality.

 

It would be interesting to see how the graphs would look if marketable skills, valuable knowledge, earning potential, wealth of good relationships, good health, accessible community / environmental assets, and capacity to make one's own happiness could be included in the analysis.

 

 

I would bet my right hand that there is no measure of human ability or abilities that would justify a 100x or 1000x salary differential or 1 billion times wealth differential.

 

I can accept and do accept that what I've put into my education and my work makes me worth what I do in my state, but then, we have a decent minimum wage.

 

I don't accept that I am worth 5 times what someone who works 40 hours per week than a daycare worker is worth. I think that person makes too little and it's appalling.

[Pam in CT]

I don't have a problem with this if it's simply individuals who are investing with an individual hedge fund manager. I know an excellent and very upright hedge fund manager who takes money from individuals and invests for them. He did a great and straightforward job until his retirement. If he had performed badly, individuals will remove their money and go elsewhere, so it is more like heads, we win, tails, you leave and people no longer want to place money with me. It's when the investors are removed from the process, and institutions are investing, it gets much more opaque.

:laugh: Once again, wish we could chat over mint tea.  Much to talk over...

 

I totally agree that the opacity concern is different, with individual vs. institutional investors.  I would however suggest that when the failing funds that missed the benchmarks drop out leaving only the survivors, it leaves a rather false impression of the profitability of the business as a whole.  It's like dropping the times of the bottom half of the swim team, and then crowing about your above-average performance...

[Amy in NH]

[sNIP]

 

And in an economy with so many people out of the workforce (a record number have simply stopped participating in the workforce in the past few years) then economics dictates that managers will be able to pay less because there is so much supply of ready labor.  In order to fix that problem, you generally have to have an economy conducive to starting businesses with few barriers to entry.  Otherwise, the fat cats at the top will always be able to dictate the terms of employment with little hope of anyone else growing a business to that point.

 

Ideally, there would be so many jobs available that employers would have to compete for good workers with higher wages, but that's not the situation we have in this economy, despite

what unemployment numbers would say.

 

 

Baby boomers are retiring.  Many people can afford to retire early, before their Medicare kicks in, now that they can purchase affordable health insurance on the state exchanges. 

 

I heard this interesting piece on NPR's Here and Now that fact-checked some ridiculous unemployment numbers a particular political candidate was throwing around.

Edited February 17, 2016 by Amy in NH

[Frances]

Thing is, "wealth" is a term that people read into, often incorrectly.

 

Say you have a decent job and you go take out a mortgage to buy a house. Then you run up some bills on your credit card. Your wealth may be $0 [house asset minus debts], even if you can afford good food and other amenities, have good health insurance, and live in a comfortably big house. Is this a tragedy, and if so, where does the responsibility lie?

 

I assume the statistics also include all the members of a household who are enjoying a comfortable life though they don't happen to be the owner of the assets that make them comfortable. Like me and my siblings when we were in college. For that matter, my "wealth" was hugely negative from age 16 to about 30 while I borrowed and eventually paid off my student loans. And I did live frugally during those years, but again, that was not a tragedy. It was an investment into a better future.

 

It would be interesting to see how the graphs would look if marketable skills, valuable knowledge, earning potential, wealth of good relationships, good health, accessible community / environmental assets, and capacity to make one's own happiness could be included in the analysis.

There certainly can be different definitions of wealth, and I've seen similar studies that look at income disparities rather than wealth disparities. But regardless of the exact definitions used, the disparities we are now experiencing in the US have not been seen since right before the Great Depression.

[SKL]

I don't think equality of either wealth or income is an ideal worth striving for.

 

If we spent less energy comparing we'd have more energy for finding true happiness.

[Tsuga]

I don't think equality of either wealth or income is an ideal worth striving for.

 

If we spent less energy comparing we'd have more energy for finding true happiness.

 

There is comparing and there is recovering what is rightfully yours.

 

When you work a 40 hour week or a 50 or 60 hour week and cannot provide a home, education, and health care for your family, you're going to look at what is happening to the fruits of your labor.

 

Well, people have found it.

 

And nobody (literally, NOBODY I have ever met in person) is arguing for equality of wealth or income.

 

What people are arguing for is equity: a living wage for a life's work, and extra if you work extra smart or extra hard.

 

You're talking as if we were looking at one person making 2x what another person, working 70% as much, made.

 

That is not at all what is happening in the United States. It is theft.

 

I made $80k last year, partner, $89k. Happy? We are. But we think it is disgusting, DISGUSTING, nauseating, that some people are working the same hours and making 1/3 that much. It is unconscionable. We don't have everything and we don't feel wealthy at all! You all know how not wealthy I feel. But look at us on paper.

 

What that suggests to me is that some people are being cheated out of the pay they deserve.

 

I won't compare myself to my neighbor across the street who in her 60s started a new business and is no doubt making at least twice our incomes--I know she's "doing well" and I know she's doing manual, physical labor at her age at midnight and watching the baby during school hours and on her computer in the laundry room. Do I compare? No. I don't compare myself to a lot of people.

 

But I don't blame someone who can't get their child's medication without selling their home and quitting their job so they can go on WIC and get benefits for the kids, for saying, "My husband is working full-time, how is this happening? How the HELL is this possible?"

 

No, I don't blame them one tiny bit.

Edited February 17, 2016 by Tsuga

[SKL]

 Nobody with any sense is talking about families like ours when they talk about wealth inequality.

 

But the question is, is that what those graphs in the video are talking about?  Where do the "wealth" graphs place people who live comfortably (even extravagantly) but have a high debt to asset ratio?

 

If we don't know what they are even talking about, how can we have a rational discussion about it?

[idnib]

I don't think equality of either wealth or income is an ideal worth striving for.

 

If we spent less energy comparing we'd have more energy for finding true happiness.

 

I think there is a point of diminishing returns once things are more equal. But when there's this much inequality on the table, I do think it's worth taking the time and effort to bring things back into balance. Perfect equality is impossible and I haven't heard of anyone calling for it.

[Tsuga]

Why, yes! That's what the entire debate is about. My family's from a rural area. (Edit: shorthand for conservative, not highly educated on average, but hard-working and often poor.)

 

I've never heard anyone malign two doctors or a nurse and a computer scientist, not in my entire life. People are talking about those who cannot possibly work more than a 160 hour week and who are still making far, far, FAR more than four times what most people make.

 

Let's say I am LITERALLY twice as smart as someone--IQ 160. And I work four times as many hours. 160 hours. So that's eight times the salary, right?

 

Except that is not how it works at all. Even the very, very smartest who work more than most would say is even humanly possible, sleeping an hour per day, that person, if salaries are truly based on effort, is making what, 100 times what a fast-food worker is making. In some cases, up to 1,000 times more. And we are assuming in that case that they are doing work that can be performed by someone with an IQ of 80--I'm not sure if cashiering actually can be done by certain people with an IQ of 80 but maybe. I'm not familiar with the 60 - 85 IQ range but I think that many people can hold a simple job.

 

And even if we go by standard deviations, even then, you still couldn't justify a salary 100 times higher than the wage labor. Even with an IQ of 160 and a 160 hour week. The math doesn't work out.

 

Even if you grant superhuman powers to these executives, they can't possibly be worth 100 or 1,000 times the wage labor.

 

And that is the objection.

 

It's not to skill-based or hour-based payment for work, but for payment that seems to bear no linear relationship to actual skill, talent and effort.

Edited February 17, 2016 by Tsuga

[MaeFlowers]

nm

Edited February 17, 2016 by MaeFlowers

[Frances]

I don't think equality of either wealth or income is an ideal worth striving for.

 

If we spent less energy comparing we'd have more energy for finding true happiness.

I don't think anyone is advocating for equality, just decreasing the extreme and growing inequality, due to its detrimental effects on among other things the economy, economic mobility, and at least for me, our democratic form of government.

[Tsuga]

But that's not how the world works exactly nor has it ever. Skill, talent, effort, intelligence only go so far. Often times it has more to do with the value we place on the profession than anything else.

 

I was also curious and looked up wealth distribution in quite a few European countries. I couldn't find same year comparisons but our wealth distribution was better than most. (Actually, it was fairer than all the countries I looked up.)

 

 

Yeah, and for several thousand years you were allowed to kill your wife as she was your property. That's why equity and labor are progressive and not conservative values.

 

More importantly, wage differences aren't that high compared to wealth differences. I find it absolutely fascinating and somewhat terrifying that people who appear to defend wealth inequity keep pointing to salary inequality. Is it that you don't understand salary  vs. wealth, or inequality vs. inequity? Or what? $30k/year vs. $130k/year is not anywhere near the same problem as no home vs. owns entire island which was inherited from wealth earned during slavery times.

 

Can you please post the links to the comparisons you looked at?

 

 

I have read many articles in publications such at the Wall Street Journal, the Economist, and other moderately conservative papers that suggest otherwise.

Edited February 17, 2016 by Tsuga

[Frances]

But the question is, is that what those graphs in the video are talking about? Where do the "wealth" graphs place people who live comfortably (even extravagantly) but have a high debt to asset ratio?

 

If we don't know what they are even talking about, how can we have a rational discussion about it?

Numerous studies have been done on both wealth and income inequality and it's to find them online and read about how exactly they define wealth. As always, it's possible to play with the data and get slightly different results. But at least for me, the most important differences are comparisons over time using the same measures. And those results consistently show disparity is as high as it's ever been and growing.

 

As to your example above, while it's true such people may fall lower on the wealth scale even though they are doing fine, they would likely be higher on an income scale. Similarly, many wealthy people might not have all that much income, but lots of wealth. But basically regardless of the exact definitions used, the results generally tell the same story, especially when compared over time.

[Frances]

I think there is a point of diminishing returns once things are more equal. But when there's this much inequality on the table, I do think it's worth taking the time and effort to bring things back into balance. Perfect equality is impossible and I haven't heard of anyone calling for it.

And while there is certainly not consensus on the causes of solutions for growing inequality, there does seem to be an ever growing consensus, supported by research, that it is a problem.

[SKL]

Why, yes! That's what the entire debate is about. My family's from a rural area. (Edit: shorthand for conservative, not highly educated on average, but hard-working and often poor.)

 

I've never heard anyone malign two doctors or a nurse and a computer scientist, not in my entire life. People are talking about those who cannot possibly work more than a 160 hour week and who are still making far, far, FAR more than four times what most people make.

 

Let's say I am LITERALLY twice as smart as someone--IQ 160. And I work four times as many hours. 160 hours. So that's eight times the salary, right?

 

Except that is not how it works at all. Even the very, very smartest who work more than most would say is even humanly possible, sleeping an hour per day, that person, if salaries are truly based on effort, is making what, 100 times what a fast-food worker is making. In some cases, up to 1,000 times more. And we are assuming in that case that they are doing work that can be performed by someone with an IQ of 80--I'm not sure if cashiering actually can be done by certain people with an IQ of 80 but maybe. I'm not familiar with the 60 - 85 IQ range but I think that many people can hold a simple job.

 

And even if we go by standard deviations, even then, you still couldn't justify a salary 100 times higher than the wage labor. Even with an IQ of 160 and a 160 hour week. The math doesn't work out.

 

Even if you grant superhuman powers to these executives, they can't possibly be worth 100 or 1,000 times the wage labor.

 

And that is the objection.

 

It's not to skill-based or hour-based payment for work, but for payment that seems to bear no linear relationship to actual skill, talent and effort.

 

Well I don't agree with your premise that the value of what one produces is relative to one's IQ.

 

I do think there are people who have the same IQ as their neighbor, work the same hours, and produce many times more value.  There are also some people who produce negative value and still get paid / supported.  Some of these people have no idea that they aren't net producers.

 

But another thing to remember is that the people who have a lot of income or wealth on paper usually put that money to use in ways that benefit others.  They may not actually end up living any more comfortably than the average person.  They may actually live less comfortably than average.  While they may not worry about what their health insurance will pay for, they may worry about how they can keep their employees working through economic downturns.  I've known "rich" people who went without pay so their employees wouldn't have to suffer.  I myself have had a series of years when my net take-home pay was negative because the tax man said I made a lot of money and I had to pay tax on money I never saw.  Why didn't I see that money?  Because it was going to build a business and create jobs for people who took home a lot more net pay than I did.  Yet those "wealth charts" don't tell any of that story.

[Frances]

Well I don't agree with your premise that the value of what one produces is relative to one's IQ.

 

I do think there are people who have the same IQ as their neighbor, work the same hours, and produce many times more value. There are also some people who produce negative value and still get paid / supported. Some of these people have no idea that they aren't net producers.

 

But another thing to remember is that the people who have a lot of income or wealth on paper usually put that money to use in ways that benefit others. They may not actually end up living any more comfortably than the average person. They may actually live less comfortably than average. While they may not worry about what their health insurance will pay for, they may worry about how they can keep their employees working through economic downturns. I've known "rich" people who went without pay so their employees wouldn't have to suffer. I myself have had a series of years when my net take-home pay was negative because the tax man said I made a lot of money and I had to pay tax on money I never saw. Why didn't I see that money? Because it was going to build a business and create jobs for people who took home a lot more net pay than I did. Yet those "wealth charts" don't tell any of that story.

And poorer people spend almost every penny they make, thus putting every cent right back into the economy. But again, regardless of what the graphs are exactly capturing, they are capturing the same thing over time. We had a very long period in the mid 20th century when income and wealth were generally rising for everyone. But we've not seem a time like the present since right before the Great Depression.

[idnib]

It's not to skill-based or hour-based payment for work, but for payment that seems to bear no linear relationship to actual skill, talent and effort.

 

That's correct, payments are not based only upon skill, talent, or effort, but value, real or perceived. I'm not saying things are not terribly lopsided right now, and shouldn't be fixed. I'm just saying we often pay based on value to us, and we should include that in our calculations.