Why the Rich Keep Getting Richer

by Darwin on April 30, 2013

There’s a recent headline making the rounds of late showing that the rich keep getting richer while the rest either tread water or fall behind.  Consider this recent report by Pew Research and I’ll share my thoughts below:

During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.

From 2009 to 2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.

This should not come as a surprise at all to anyone, nor should it be “shocking” or even create the anger and resentment that the typical MSM outlets use to foment class warfare.  See, this is completely to be expected and it has nothing to do with “fairness”, the rich not being taxed enough or attempts to hike the minimum wage, etc.  Here’s why:

Again, from Pew (I was going to say this before I even read beyond their headline, but they summed it up nicely):

These wide variances were driven by the fact that the stock and bond market rallied during the 2009 to 2011 period while the housing market remained flat.

Affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home.

Is This Fair?

Of course it is.  You can debate whether you think the rich should be paying even higher taxes than they do and since half the country doesn’t even pay any federal income tax, it’s tough to argue that the middle class and poor are “over-taxed”.  But that aside, regardless of the tax rate you levy upon well-off Americans, they’re still going to make the same investments – higher risk, higher returns.  Note that this report conveniently chooses as its starting point 2009.  That spring is when the stock market reached pivot bottom, so anybody invested in equities from early 2009 onward has seen their holdings virtually double in the years following. If minimum wage was an arbitrary $12 instead of what it is in your state, people at the lower end of the spectrum would broadly follow the same behaviors.  People tend to live up to their income, spend what they make (often more, incurring debt) and don’t invest in these same assets that the affluent do anyway.  Right, wrong or indifferent, the only way to get more Americans into the right gear is for them to earn more (which requires higher paying job creation, not the retail and service sector jobs this recovery is generating) and a change in behavior from consumption to investment.

Wealth Inequality Continues to Widen

This is a natural outcome of two broadly divergent situations: those with wealth who invest in positive-gain asset classes versus those with little to no investments where the only gains to net worth would come from real estate (which was stagnant at that time).  So, of course, we’d expect to see the wealth disparity widen.

Don’t forget that these wealthy individuals are also taking on risk by investing in stocks, bonds, real estate, and other alternative investments.  So, during a major stock market crash, you could tell a different story – the wealth gap shrinking, as again, middle and lower income Americans don’t see much change at all in their net worth while the affluent sample set sees their net worth decline dramatically.

So, in summary, these findings are not shocking or disappointing to me at all.  I’m not even in that top 7%, but I saw my net worth go way up since 2009 for the same reasons cited in the study.  I put away what I can in highly volatile, yet higher return asset classes since my time horizon is decades.

What Are Your Thoughts?

 

 

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{ 12 comments… read them below or add one }

1 Terry Pratt April 30, 2013 at 4:43 pm

If minimum wage were an arbitrary $12, I would probably be able to buy a starter home, while keeping my monthly housing expense nearly the same.

Even better, I would be able to lock in my monthly principal and interest payment for 30 years, while at best my rent goes up about every 24 months.

Even more better (doubleplusgood?) is the opportunity I would enjoy to rent out spare bedrooms and generate rental income.

Minimum wage workers don’t build wealth because home acquisition in this country is not scalable, and ‘buying what you can afford’ is generally not an option available to people earning minimum wage – the options available typically are either ‘more house than you can afford’ and ‘nothing you can afford to buy, so keep renting’.

[Reply]

Nancy Jones Reply:

@Terry Pratt, If minimum wage were $12, you would NOT be able to buy a home because home prices would rise. That’s what happens; the housing bubble busted because home prices were rising faster than income levels as an aggregate. But further, if minimum wage rises,there is no possible way that, over time, your entire cost of living would not also rise, because employers paying $12 to OTHER workers would have to raise their wages, otherwise someone making $12 is suddenly making minimum wage.

The answer to minimum wage workers is to learn how to do something that pays better than minimum wage. If you are unwilling to do that, why should you deserve to have the things that more skilled people have? I’m not saying you don’t work hard, just that you are working hard at something that is easy to find people to do. You need to learn something that is more difficult to train people to do, and no, you do not need to go to college to do it. But you will have to give up going out with your friends and watching reality tv.

[Reply]

Terry Pratt Reply:

@Nancy Jones,

What I deserve is a free market in housing and the opportunity to purchase from a willing seller a home I can afford. That necessarily would be a smaller property than government currently allows.

There is irony in people insisting that homebuyers should be permitted to buy only what they can afford – instead of government prodding lenders into making unsustainable loans – while government prohibits the sale of homes low-wage workers could afford.

I’d love to get some skills but that costs money that I don’t have. For some reason, training providers always demand cash up front.

[Reply]

Nancy Jones Reply:

@Terry Pratt, I have zero formal training and in six years I have transitioned from being a secretary (no formal training required for that job either) to a System Administrator in the largest technology services provider in the nation. In that six years I have doubled my income and I have further opportunities outside of my 8-5 job–all this with no outlay of cash to a “training provider.” I was the training provider. You are on teh internet if you are reading this, that means you have access to a no-cost training provider. there are libraries everywhere if you can’t scrape up $20 for a book. I have taught myself everything I know in technology, and I am a qualified security professional, systems administrator, Windows technician, Linux technician, Mac technician, and hardware technician. I grew up so poor that my parents couldn’t always give me fifty cents to go swimming at the city pool. I’ve done my share of restaurant work, so I am not a stranger to manual labor. I really don’t want to hear any gripes about the cost of education. There is no cost to learning something you don’t know right now. I have done it. Get over your pity party and get out and learn something. If you need someone to train you in how to lear, you really aren’t cut out for anything better anyway.

Terry Pratt Reply:

@Nancy Jones,

I disagree with the idea that a minimum wage increase would drive up other wages. I’ve had jobs where I was paid slightly above minimum wage until the minwage was increased, at which point my new wage was the minwage which co-workers previously earning the old minwage were now earning.

In other words, many workers earning slightly more than minwage will NOT see their wages rise to keep them above minwage.

[Reply]

2 Justin Katz May 1, 2013 at 10:59 am
3 krantcents May 1, 2013 at 3:02 pm

I disagree just a little bit with your statement that affluent people have their assets concentrated in stocks and bonds. I think most affluent people have other large assets such as their businesses and other investments. Yes, their assets grew at a greater rate than if it were in just their homes.

[Reply]

4 Matt May 2, 2013 at 8:07 am

Looks like you have a bunch of low income readers. I challenge them to make at least double minimum wage and start thinking like a rich person. Get rid of the poor me attitude! The wealthy do own large chunks of capital stock; they own busineeses outright to a lesser degree. -Matt

[Reply]

5 Keith Fox May 2, 2013 at 9:55 am

There’s many reasons why people are poor in the United States. In most cases, it really comes down to lack of education, which ultimately leads to lack of opportunity in the workforce. It’s certainly true that many poor people are lazy and irresponsible, and have no desire to work any harder than necessary to get by. Some are not physically and/or intellectually capable of anything better than menial employment, while others simply cannot work due to legitimate disabilities. Others are fully capable individuals who simply lack the opportunity for getting a quality education (such as inner city youth in failing schools) and are statistically prone to failure. The point is there’s a variety of reasons why people in this country are poor (legitimate or otherwise); I understand this and I am not quick to judge.

With that being said, the more important question you hint at is the fairness of the growing wealth gap in this country (at least in the last few years). As your moniker suggests, I’m sure you’re aware that throughout human prehistory everyday life was a struggle and those who were lazy and irresponsible were probably promptly removed from the gene pool (in evolutionary terms, of course). In this sense, government-sponsored social programs are a relatively new concept in our natural history, and are sort of the humane alternative for those who are incapable of sustaining themselves versus mother nature’s way of dealing with these things.

The general idea of taxation is to create a “return” (government services) through collective investment. As such, I believe your analysis fails to account for the “return” the poor have received over decades of social programs, which provide nothing more than sustained squalor. Considering half of Americans pay little to no federal taxes as you suggest, the calculated return on their “investment” must be astronomical!!! So, my point is everyone benefits from society – in one fashion or another. Fairness is a subjective term.

[Reply]

6 James Miller May 3, 2013 at 8:22 am

For years I busted my butt. Working a full time job, skilled but not high paying. And on top of that I ran a side business. It turned a modest profit. But somehow, I couldn’t get it to turn that corner. I was always to busy going from crisis to crisis to make any money. While every thing collasaped. It made me look at all of it in a new light. Now I’ve learned, I use the system, No stress, My bills are all paid every month. And theres even some moneyleft at the end of the month. I’am not in the top bracket, But I’am confortable.

[Reply]

7 Elena @ Responsible Lending May 23, 2013 at 12:13 am

I have always thought the slow and steady will win the race, and it is quite true. If you chase high returns, there is lots of chances for failing. I made my share of investing mistakes myself and learnt it the hard way. Now I have a serious investment strategy in place: investing in sold companies with low or medium dividend yield. If the stock goes down, you are still getting dividends, so your investment keeps growing. The rich invest their money the right way and always try to preserve the capital whenever they can, that’s why they will always be rich. We can learn from them and get richer ourselves. Live and learn.

[Reply]

8 Thomas June 10, 2013 at 9:58 am

You are never going to please everyone. If you have more you stand more to lose and make depending on what you do with your money. Maybe if more people were savings and spending money on what they really need I would feel different. I am not rich (not in the least money wise) but I understand that even I had a point where I was spending more money then I was making. You buy a soda they buy stocks and open companies. Go figure.

[Reply]

9 Simon Halls June 28, 2013 at 7:37 am

I agree that it’s obvious that if low-skilled workers were paid more, then they could afford more as prices would simply rise. It’s not what you are paid that matters but the skill level you have. One should never stop increasing skill levels as life goes on because it is only that which will increase standard of living. If you’re happy to be unskilled then expect lower living standards.

[Reply]

10 kiko @ quickcashautoloans July 3, 2013 at 8:14 pm

The reason the rich get richer because money makes money. Experience levels go up and the rich learn how to manage their money and how to invest their money correctly.

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11 Modest Money November 24, 2013 at 9:24 am

It is the unfortunate reality of life that alas 80% of the wealth is going to be concentrated in the hands of 20% of the population. The wealth disparity gap is a complex subject with many factors coming into play that maybe beyond the individual. The market collapsing forexample, there is little to nothing you can do about that.
However, instead of focusing on those numbers and looking for who to blame, I think its best to scale it down to the individual level. What are you doing to close that gap. Yes the rich maybe cutting corners and enjoying tax loopholes and you can fight that if you want, but ask yourself whether you are doing your part to increase your wealth – improving skills, living below your means, saving, investing in appreciating assets.
I believe financial independence is achievable by everyone…just requires a bit of hardwork and discipline.

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12 Andrew March 10, 2014 at 8:06 pm

This argument can go on forever but it will always be the same answer: the more money you have to invest, the more money you will make. You might tend to lose more if you aren’t cautious but most people who have gotten to the place they are didn’t do it by making bad investments.

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