Lake Atlantic-begone

Another day, another article full of awful commentary relating to that misleading video about “wealth inequality”.

Here is Jordan Weissmann:

But take note: wealth is extraordinarily uneven all over the world, not just in America. In the study Politizane’s video cites, by economists Dan Ariely and Michael Norton, Americans said they would prefer the top fifth of households percent own just 32 percent of the wealth. At the time, Ariely and Norton referred to this as the “Swedish” model. But as Josh Barro pointed out, they were actually fudging a bit for effect by using Sweden’s income distribution. In reality, just the top 10 percent of Swedish households still lay claim to more than half the country’s wealth, as shown above.

Just like all of those people who live in Lake Woebegone whose children are all above average, Weissmann would have us believe that all over the world, wealth is distributed “extraordinarily”. If that is the case, what is the definition of “ordinarily”? It stands to reason that the benchmark exists on this planet, or does have another in mind?*

Weissmann goes on to pontificate on the sources of wealth inequality:

Why is wealth inequality so skewed all over the world? Part of it is that income inequality has become a global problem, and that the rich inherently have more disposable income they can invest to build their bank accounts. But another aspect boils down to the nature of wealth accumulation: it takes time. Even outside the U.S., families often store their wealth in housing. And, to risk stating the obvious, it can take a while to save up for a down payment. Once a young family house a house, they need to start paying down their mortgage before they can actually claim to have “wealth,” since, again, wealth equals a household’s assets minus its debts. So these calculations are going to favor the middle aged and old by default.

While wealth is, of course, a function of income, and so income inequality does ceterus paribus add skewness to the wealth distribution, this is not the driving factor. The driving factor is that an unequal distribution is the natural tendency in a wide array of social phenomena, as described by the Pareto principle. Wealth accumulation certainly does take time, and the relative level of wealth throughout the population exhibits strong life-cycle effects. However, it is misleading to mention time like this without noting that wealth accumulation is also a function of time preference. Yea, a lot of people own houses in the United States because that has been a public policy goal since after WWII…but owning a house is no guarantor of wealth accumulation. Many families draw upon their home equity for current consumption — indeed, this was one of those problems that we heard a lot of about over the last decade.

Weissman finishes with this paragraph:

his doesn’t change the fact that Americans are probably living far from the egalitarian ideal. We are, after all, at the extreme end of this chart. But the reality is that no matter where you are in the world, wealth is going to be concentrated with the wealthy.

No longer is it “extraordinary”, I guess. And, of course, it’s always good to end with a tautology. If the “egalitarian ideal” is providing wealth equality by making everyone poor — or “leveling down”, so to speak — then yes, most Americans are living far from that “ideal”. The fact of the matter is that all wealth could be leveled out in a once-and-for-all transfer to make everyone “equal” (assume away all economic effects of this misguided policy) and given a few generations, wealth distribution would almost certainly be highly skewed (I would bet a fortune on that outcome). I wish that lefties would pick up Joseph Heath’s excellent book, which has two chapters addressing the issues with the ideas the left is bandying about once again.**

Also, Scott Sumner’s magnum opus on taxes, and recent commentary on the wealth tax. Scott and I are on the same page, but I should note that I jumped the gun in an earlier post; I do support land taxation. Finally, Garett Jones’ post on the Chamley-Judd Impossibilty Theorem.

*It seems “extraordinary” because when asked, people confuse the concepts of income and wealth. Income distribution differs quite a bit around the world. I’d bet this is the frame of reference that gave way to Weissmann’s thinking.

**Note, Joseph Heath is a leftist-liberal Canadian philosopher.


3 thoughts on “Lake Atlantic-begone

  1. What do you think of the Caplan Gochenour critique of Georgism? I still support land taxes, but with far less enthusiasm, because separating the base land value from the improved land value is not at all easy and the base land value is very low, which means that it would be unlikely to raise significant revenue. The government could try to tax a change in property values when they embark on an infrastructure project to capture the positive externalities, but I am still skeptical of how a Georgist tax would work in practice.

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