Ta-Nehisi Coates, maven for black reparations: “Perhaps no statistic better illustrates the enduring legacy of our country’s shameful history of treating black people as sub-citizens, sub-Americans, and sub-humans than the wealth gap.”
Ignorant cliche #1 is still intersectionality. Until the woke universe invents a more ignorant one, anyway, and they will. But wealth gap may remain a favorite for a long time, because envy never dies. My daughter is taking a sociology class, and the teacher had the students write essays about the wealth gap between genders. Two genders that is. Because who knows what the latest woke gender count is (I saw an article that said 221). The students put their essays online, so each could read and critique everyone’s essays. There was no critique, no disagreement, and no understanding. Wealth gap = bad because it’s evidence of discrimination!
In the face of such accumulated brain power, or not, I will defend my blog post title. Here goes. Pew Research concluded that family and individual net worth fluctuated less, and could be more accurately assessed, than income. Net worth or wealth, is the market value of assets – debt. What is market value? The formal definition is “what an informed buyer is willing to pay a seller at any given time.” Let’s consider how this works for various assets, in order of how easy it is to set a market value on them. Cash is easy to value; at any given time, it’s the face value of the currency, or the bottom line of your bank statement. Cash also includes “cash equivalents, like money market funds. Now it gets harder. Next to cash, publicly traded stocks and mutual funds, which includes assets in most retirement accounts, are the easiest to value. The stock market (I am using the New York stock exchange NYSE, as the proxy for the stock market) establishes the market value of stocks, minute by minute throughout the day, until 4p.m. e.s.t., when the NYSE closes. Mutual funds hold many different stocks, and the fund’s value is set once, at the end of the trading day. The market value is what you can sell for or what you have to pay to buy, but it’s set by the stock market (which is the sum total of every transaction of a stock during the day).
Now the task of measuring market value becomes much harder. Homes, land and other real estate values are very dependent upon local conditions. A home in Atherton, California and an equally impressive home in Detroit, Michigan, will have markedly different market values, hundreds of thousands, if not millions, of $$ different. Even homes in different neighborhoods will differ significantly in market values. What about when the market value is measured? From 2006, towards the end of the run up in home values due to lending shenanigans (called the housing crisis, but really a lending crisis) to the end of 2008, a median home in Monterey county, California lost 49% of its market value. The stock market as a whole lost about 50% of its value from late 2007 to March of 2009.
What about even more difficult to value assets, like privately held stock and business assets, or farms, or commodities, like precious metals or timber? How do they get counted? You might say, “well, if those aren’t counted, wealthy people are even wealthier than the wealth gap indicates.” Perhaps, but then we will also have to count the value of tax transfer payments to poorer people, like welfare payments, food stamps, and Medicaid. While the stream of payments is technically income, the promise of future payments, as long as you’re poor enough to qualify, functions like an income-producing asset. The most important principle to remember about the wealth gap is: the real value of an asset is it’s ability to furnish an income stream, or to sell for an income-producing asset.
Let’s get into a specific example to understand what I have said to this point. Individual #1, Mr. Rich, owns a home in California with a market value of $2,000,000 and a mortgage of $950,000, a SEP-IRA retirement account of stock mutual funds worth $300,000, leases a new Porsche Cayenne and a Range Rover, and has a net income (after business expenses) from his prosthetics practice (80% Medicaid and Medicare patients) of $300,000/yr. Being “self-employed”, he must buy health insurance from the state marketplace for his family, at a cost of $1,200/month to get a low deductible policy. His property taxes, based on home value, have just gone up to $11,000/yr. His mortgage payments are about $4,300/month and home insurance is $1,200/year. Total housing cost is $63,800/yr. The lease payments on the vehicles total $20,000/yr. Individual #2, Mr. Poor, owns a home in Michigan with a market value of $120,000 (mortgage of $60,000), a savings account worth $3,000, owns a 10 year old Toyota Camry outright, and earns $38,000 from his job at General Motors, qualifies for Medicaid and food stamps for his family of 5. His property taxes are $2,000/yr. Mortgage payments of $3,540/yr., home insurance of $200/year.
Now, let’s apply my lifestyle effective net income rule. I call it that, as a way to determine how secure and comfortable a lifestyle really is. Medicaid and Medicare just raised their inflation-adjusted benefits, but lowered their payouts to medical providers like Mr. Rich. His income suddenly dropped by 20% due to that change, and the large hospital down the block just added a department for making prosthetics, and no longer refers business to him. There goes another 30% of his income. Due to the loss of income, his bank has insisted on renegotiating his lease on his office building, increasing his costs. Suddenly his net income is $120,000/yr. Subtract his lifestyle costs of $63,800 (housing), $14,400 health insurance, $20,000 vehicles, $12,000 groceries, leaves $9,800/yr. for utilities and other incidentals. He would like to terminate the vehicle leases, but that is extremely expensive. He could begin liquidating his SEP-IRA, but would pay a 10% early withdrawal tax penalty, plus income taxes on the amount withdrawn. If his troubles hit in 2008, he would also take a 50% loss on the value of his mutual funds! Mr. Rich’s lifestyle effective net income (gross income after taxes, housing, food and health insurance) is -$21,100. What? His income and self-employment taxes in 2008 were $30,700. Subtract that from the $9,800 after housing, food and health insurance. He will have to liquidate around $27,000 of his retirement funds to pay the normal taxes plus tax penalties.
Mr. Poor just got a slight raise from G.M., but still qualifies for food stamps worth $9,120/yr., Medicaid, worth $13,000/yr. (what he would pay for similar health insurance). Mr. Poor’s life style effective net income is $56,380, subtracting housing and adding the value of tax transfer payments. The asset equivalent value (how much of an income-producing asset would be required to generate the annual value of the $22,120 payments if the asset produced a 3% return–which is generous for these days) of the transfer payments (food stamps, Medicaid) is $737,333! So qualifying for those payments by dint of poverty is like OWNING $737,333.
Am I implying we should be more sympathetic to the rich? No. What about the three richest people in the graphic, above? Bill Gates’ primary wealth is Microsoft stock. Does he own the most? No, you might (I will explain in a moment). Over 73% of Microsoft stock is owned by mutual funds, and much if not most of that is in millions of retirement accounts. Jeff Bezos’ wealth is primarily in Amazon stock. Does he own the most? He owns about 17%. Mutual funds own over 56%. The rest is owned by individuals, including Amazon employees. Warren Buffet’s wealth is mainly stock in Berkshire Hathaway, a holding company for many stocks. Forbes estimates he owns about 32% of the company, even after donating hundreds of thousands of shares, but the market value rose faster than the amount he gave away. The point is that these people are insanely wealthy because the companies they had the vision to start many years ago, and the faith to hold onto, have become extremely valuable. Why? Because millions of people want to buy those stocks. Why? They know that stock ownership is the biggest key to wealth and future security. You probably own shares of these stocks if you have mutual funds or retirement accounts. Why? They are the most popular, therefore the most successful. If Bezos is richer tomorrow, so are millions of others. Meanwhile, when you see the cliche wealth gap, keep in mind that for every Bezos, Gates and Buffet, there are thousands, possibly even millions, of Mr. Rich’s. Rich on paper, or at a certain moment in time, and whose wealth on paper contributes to the so-called wealth gap, while the asset equivalent value of tax transfer payments to the poor are not counted as an asset.
Mr. Rich is an actual person, a friend of mine, and that stuff actually happened to him. He declared bankruptcy in 2009.