How different wealth distributions can affect the bottom part of society

Browsing the web I found the graph I am showing above [1], it summarizes how wealth is distributed in families, splitting them into different percentile groups. Although percentages show interesting information, I had the idea of calculating how much wealth (in US dollars) we are talking about per family in average. This can help us see if a different wealth distribution can be life changing for poorest families, or if on the other hand since the available wealth is limited, a redistribution of wealth will maybe leave families with only a small increment in their current belongings. But before diving into the specific lets first explain how the graph works for those who have no idea about economics, or have never seen one of this before.

On the bottom part of the graph what you can see is the years, so basically moving along this axis you can see how wealth evolves trough time. The vertical axis shows basically money, in trillions of dollars. This money is all the wealth owned by all the families that live in the United States, which is a lot of money. In the next paragraph we will compare this to the GDP.

Now back to the graph, the last thing and more difficult thing to understand of the graph, what are those percentages doing there on the right? Well short answer, when you are analyzing who owns what, it is useful to know how much the wealthiest own compared to the poorest sector of the population. So, in order to do that, you have to divide the population in percentiles.

In this graph we have 3 percentiles, the bottom 50 %, the 51st to 90 and the top 10 percent. How do we get this percentiles?

Basically, what you do is divide the population by how much they own. Imagine we put them all in order, from the one who owns the most, to the poorest one. If we select the 50% of the population that owns the least, we have the bottom 50 percentile. If we select the 10% of the population who owns the most, you have the top 10 percentile and so on.

Now with this information in mind, we can do a bit of an analysis of the economic situation based on what we can see.

The first thing that hits you really hard when you look at the graph is how much more wealth the top percent has. To put it in numbers the top 10 percent of the population owns 76 % of all wealth, or in other words, they almost own everything there is to own. Think about that for a second… they almost own everything there is to own…

This level of inequality is the highest achieved in the last 90 years, and soon it will be comparable with the levels the UK had in the 19th century.

We will come back to that later, but now in order to give you a quantitative idea of how much people own, we can compare the total amount of wealth owned to the gross domestic product (GDP). The GDP is a measure of the monetary value of all goods and services produced in a country in a given period of time [2]. The GPD in the United States in the year 2013 was of 16 trillions of US Dollars. If we compare the GPD vs the total family wealth (around 67 trillion of US dollars) we can see that people own around 4 times the yearly GDP. So to put it in simple terms, it will take the United States 4 years of work to produce as much services and goods, as the amount of wealth owned by their citizens. I think it is easy to agree that that is indeed a lot of wealth.

Another thing that is easily notable, by taking into account the horizontal axis, is that wealth is increasing in a really high rate in families in the top 10 percent. This is of course with the exception of the period following the financial crisis of 2007–2008. However, this crisis has only slow down the growth, but is not doing anything to stop the increasing inequality. On the contrary, the gap between rich and poor is growing steadily.

Our analysis is based on this graph alone, but it is important to say that these tendencies are replicated in other countries around the world. For a more in depth analysis you should check Piketty’s Capital [3].

Before we continue two things need to be noted, as to the limits of what I am saying:

1. Wealth distribution is different from income distribution (how much people earn from working a paid job). The income distribution in the US is not as unequal as wealth (although its inequality is higher than in Europe).

2. Libertarians economist will argue that this is a dynamic system, and that families that were in the top 10 percent in 2007 may not be there anymore in 2010. (But this is a controversial topic that I will not be discussing here, maybe it will be discussed in a future article)

Now let’s do the fun part. Let’s go into details and calculate how much an average family owns in real US dollars, because honestly this percentages do not gives us much information about that, and percentage and percentiles can look big but then the numbers may not be. And we are interesting in knowing if a different percentage can make a family from not having anything, to owning for instance a small house.

So to start, I created a table that holds how much wealth, an average family, from each particular percentile owns:

I did this by dividing the amount of wealth each percentile owns, by the total population of that group (considering a nuclear family of 4 individuals). This way we can know how much, on average, each family on that group owns.

While looking at this graph you can immediately see that the bottom half of the population owns virtually nothing. While the top 10 percent owns quite a lot, like really a LOT.

Now, let’s compare this numbers with the value of an average house in the United States, which is 165.000 us dollars (this is an average for the country in 2013 [4]). We can clearly state that while the 51st to the 90 percentile has enough to own 3 houses, the bottom 50 percent does not have enough for even a single house (they can actually afford only 10% of a house). This difference goes through the roof when we compare it to what the top ten percent can afford: an average family has enough wealth to own around 39 houses.

This wealth disparity is insanely big, and as Piketty [3] says while the rate on return on capital is higher than economic growth, this difference will only be increased over time. So there is not much hope for the future.

Now let’s image a new scenario, where everyone gets tired of this society and tries to make it more equal. In order to do so every family gives up their wealth, and then it gets distributed evenly across every family. In this case, how much will every family get? Well if we make the math we will find out that in the new equalitarian society, each family has 842767 us dollars in wealth.

That if we compare it with the graph we had above, we can see how different the situation will be for everyone:

Each family group in the 51 to 90 percentile will almost double its wealth, while the bottom part of society goes to a major change, increasing its wealth an average of 5000%. Of course this scenario leaves the top 10 percent with an 87% loss.

If we compare with the previous scenario, now every family in the United States, has enough wealth for buying 5 houses! This is without a doubt a tremendous improvement.

Now, let’s discuss this a bit. Is this solution possible? Well probably not, for a high number of reasons. First everyone should do this voluntarily, because otherwise people will be force to give in their wealth, which is nothing else than theft. Some people will argue that you cannot steal what has already been stolen, but reality is more difficult than this.

A less aggressive approach can be taken, with a minor wealth distribution, by just giving the bottom 50 Percent, 10 percent of the wealth (instead of the 1% they have now). If we take this wealth from the top 10 percent, the distribution will look something like this:

Which is not as aggressive but can make a significant change in people’s lives. In this scenario poorer families will be able to afford a hose on their own, while wealthier people will maintain most of their wealth.

Now, back to the egalitarian society, this presents another issue: lack of education. Not everyone is high educated and can make long term plans, manager their investments or money. Sure this could heal a lot of the short term symptoms society may be undergoing, but it will not cure the illness, and it will be short before we see the same tendencies unfolding, and the top class regaining what was taken from them.

To solve this issue it is necessary to attack all the inequalities that affect our modern society, lack of access to education of the lower classes being the main one. But this is not enough, there is a moral necessity of looking at the world as a unique system, thinking of people from other countries as what they are: people.

Joining forces in order to solve the problems in our society will help clean the bad deeds of capitalism, like tax evasion, which is one of the issues I didn’t discuss before. In short the wealth estimation of the top 10 % is highly underestimated, since this type of people are capable of hiding assets in founds and in fiscal paradises around the globe, which makes estimating their wealth a complex issue. So since governments cannot asses the wealth, taxing becomes harder, and re distribution of wealth is even a harder task.

The wealth disparity also creates a power unbalance that allows wealthy people to have leverage on political issues and the media. Therefore more people can be easily manipulated into the interest at hand. An example of this situation is what is currently happening with climate change, an undeniable problem worldwide, with scientist giving alarming warnings and countries trying to generate a common legislation in order to mitigate the effects by reducing greenhouse gas emissions. In this scenario a high percentage of the population in the United States keeps on dying the existence of climate change. This is of course due to a political and media campaign, done by wealthier people to maintain their industries, despite of the impact on the environment. Which in turn helps them generate more money. A powerful snowball that is hard to stop.

This power unbalance creates weird effects where, for instance, higher educated people with higher income are more likely to be manipulated and to deny facts and science. This is of course done in order to follow their own class interest (mainly the political class) [5]. Therefore opinions differ, and the gap grows in several dimensions.

We can easily see that the inequality our society is facing today is not an easy problem, it cannot be easily solved, but understanding the causes and working together with a will to improve and change, can in the short term lead to a brighter future. However, it is important to understand the complexity of the situation, so we do not fall for simplistic solutions, since those are always held by opportunistic politicians that can do more harm than good.

[1] https://www.cbo.gov/publication/51846

[2] Callen, Tim. “Gross Domestic Product: An Economy’s All”.

[3] Piketty, Thomas, “Capital in the Twenty-First Century”, 2014

[4] http://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-20

[5] http://www.motherjones.com/environment/2014/07/climate-denial-wealth-rich-republicans