Wealth Inequality: Should We Care?

I have been dismissive of many of the folks, mostly progressives, who highlight wealth inequality as a measure of overall inequality. As most of us know, the richest people in the country have gotten a lot richer since the start of the pandemic. (Of course, the story isn’t quite as dramatic if we use February of 2020, before the hit from the pandemic, as the base of comparison.) As much as I am not a fan of rich people, this doesn’t especially trouble me.

I have never considered wealth a very good measure of inequality for several reasons.

  • Wealth depends on financial asset values (e.g. stocks and bonds) that fluctuate wildly;
  • Wealth can be a very bad measure of people’s economic circumstances;
  • Wealth and social insurance are very direct substitutes.

There is also the very important issue of wealth translating into political power. I will get into that at the end of this essay.

Sculpture, Art, Breadline, Bronze, Depression, 1930

Image Source: Pixabay

The Fluctuating Value of Wealth

We have seen a sharp run-up in the price of stocks, bonds, and other financial assets in the pandemic, as the Federal Reserve Board pushed short-term interest rates to zero and also sought to lower long-term rates. Since the majority of these assets are held by the richest ten percent of households and close to half are held by the richest one percent, this meant there was a huge rise in wealth inequality. Should this bother us?

I would argue no, first because it is hard to disagree with the merits of the policy. The economy went into a steep recession last spring. Low interest rates have helped sustain demand in the economy since the onset of the pandemic. They have encouraged homebuying and new construction. They also encouraged car buying. And millions of people are now saving thousands of dollars in interest payments each year because they were able to refinance their mortgage.

Lower rates also eased the financial situation of state and local governments, who were able to borrow at lower interest rates. They also likely led to somewhat more investment in both the public and private sector. This is exactly the sort of increase in demand we needed in the economy.

Turning more directly to the wealth issue, Jeff Bezos and Elon Musk have more wealth now than would otherwise be the case, because the short-term interest rate is zero and the long-term rate on U.S. government bonds is around 1.0 percent. Let’s say that’s bad.

Suppose in a year or two, the economy has recovered and the interest rate on long-term bonds is up to something like 3.0 percent. Let’s imagine this knocks stock prices down by 20 percent and the price of bonds by even more.[1] Is everyone happy now?

If wealth inequality is the big evil that we want to combat, then we should be celebrating a drop in the stock market that lessens inequality. Perhaps the opponents of inequality will be out there dancing in the street if the market plunges, but somehow I doubt it. Just as a logical matter, you don’t get to be upset about a rise in the stock market increasing inequality and not then be happy a fall in the stock market reducing inequality.

For my part, I find it hard to get too upset about fluctuations in wealth that are likely to be temporary. There was not a fundamental change in the structure of the economy that caused the soaring wealth of the last ten months. In all probability it is a temporary fluctuation that will be reversed. (I’m not making stock market predictions, so I’m not advising everyone to go short.)

Wealth as a Measure of Well-Being

If we stacked everyone in the world by wealth, going from richest to poorest, those at the very bottom would be recent graduates of Harvard business and medical school. I’m not kidding. Many of these people have borrowed hundreds of thousands of dollars to pay for their education. Most of them have few, if any assets. This means that on net, they are hundreds of thousands of dollars in the hole.

Should we be concerned about these very poor people? Since they are likely to be earning well over $100,000 a year, and quite possibly over $200,000 a year, as soon as they start work, it is hard to feel terribly sorry for them.

In fact, many of the poorest people by this wealth measure, both internationally and nationally, are recent graduates who have taken out student loans. While many of these recent grads will have trouble paying off their debts, most won’t.

The number of people with large negative wealth creates silly scenarios where we can say that Jeff Bezos or Elon Musk has more wealth than the bottom 40 percent (or whatever) of the world’s population. That is dramatic, but it also doesn’t mean much.

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