The simple truth about the wealth and income gaps.

It appears that the top 1% continues to increase their ownership of wealth in this country, while the middle and lower class are losing ground.

The Widening Gap Between the 1% and the rest

Wealth Class198920072019
Top 1%24%29%32%
90-99%37%37%37%
50-90%35%31%29%
Bottom 50%4%2%2%
What do these figures prove?????

There are two predominant classes of theories on why this is: 1-The unfairness class of theories (systemic discrimination-corruption-cheating-theft); 2-The consequences of decisions class of theories. Which do YOU subscribe to? Let’s consider some bare facts.

One of the biggest differences between the wealthiest classes and everyone else is their ownership of financial assets–primarily stocks of publicly traded companies. The top 10% in terms of wealth own roughly 84% of the stock market in the United States. And that number is rising, up from 77% in 2001. Not only do the top 10% own more financial assets, they don’t have their entire equity ownership tied up in their home.

TO ALL OF THE ABOVE, I SAY “SO WHAT!”

It used to be “conventional wisdom” that buying a home is the best investment you’ll ever make. Perhaps that was true at one time, before the U.S. stock market grew to the point where even people with modest assets could buy stocks cheaply while diversifying their risk through mutual funds, and later Exchange Traded Funds (ETFs). But owning a home is not only a liability that slowly turns into an asset, but also a form of consumption. You have to pay property taxes and homeowners insurance, both of which most people include in their mortgage payments. Maintenance and upkeep are required. Designs can go out of style which could require renovations over time. There are also considerable transaction costs involved with the purchase and sale of a home, far greater than the transaction costs of mutual funds, along with the interest being paid on the loan.

Then there’s the fact that you can’t spend your house as if it were a liquid asset, which is significant in times of financial risk, like losing your income, or having unexpected large medical bills. If you suddenly need a source of income beyond your job, your legal options are, in order of ease and availability: 1- liquidate—turn them into cash—some of your financial assets; 2- borrow against your home or other assets; 3-borrow “nakedly” (without assets as loan collateral); 4- try to sell your home. But a home is also the most emotional asset you can own. It’s literally the roof over your head, the neighborhood you reside in, and part of the community you live in. So while becoming a homeowner can provide a certain level of psychic income, it can also be your downfall when things go wrong because it offers little in the way of diversification if you lose your job or run into financial difficulty during a downturn.

I asked which classes of theories you subscribe to. Your answer to the following question will tell me: If you suddenly came into an unexpected, significant windfall of money, such as winning a lottery or an inheritance, what would you do with the money, in order of priority? The majority of the wealthy would probably: 1- pay off high interest debt (if they had any); 2- invest in their business or financial assets like stocks; 3- perhaps help family members with financial emergencies (but not the profligate), or give to charity (if they were Christians they would probably have tithed the first 10%); 4- buy stuff for cash.

What would many, perhaps most, of the bottom 50% do? Probably: 1- buy stuff they couldn’t have afforded before; 2- give money away to family members, some of whom were profligate; 3- pay off some debts; 4- save money, if any was left, typically in low interest, high liquidity bank products. Have you ever driven past a ramshackle looking house, with a satellite dish on the roof and a newer-looking, semi-luxury vehicle in the driveway? Of course you have. Do they own the car, or is it financed? Do you think they might be paying quite a lot for cable or satellite TV? If you got inside, what would likely be the most expensive items in the house? Could be the entertainment systems. It seems to me that if you did with the windfall what the wealthy are likely to do, you would subscribe to the consequences of decisions theory, and would probably be wealthy, or well on your way. If you spent the windfall the way the financially struggling would be likely to, you would also be financially struggling and probably subscribe to the unfairness theories.

If you were a Democrat politician, you would certainly flog the unfairness theories for all they were worth, because that’s what they do. I suppose we could also say “promoting the idea of unfairness (or prejudice or discrimination), = votes.” Let me be clear, in case you missed my point. “Regardless of your background or the system, your decisions produce your outcomes.” The best way to overcome your background is to emulate the decisions of those who are where you want to be. The best way to overcome the inherently unequal distribution of abilities, or the prejudices of those in power, is to apply what I call the “Booker T. Washington principle: Make yourself indispensable. Whatever your duties, do them impeccably, and you will get noticed.

The simplest truth about wealth/income gaps–or any kind of UNEQUAL outcome–is: Talent, abilities, initiative (ambition + drive + perseverance) and vision (TAIV) are unequally distributed, no matter what the politicians and grievance hustlers say. Don’t let them influence your decisions. Whom will you listen to?

Oh, about that “widening gap” between the 1% and everyone else: If most of your wealth is in the publicly-traded stock of the company you either started with or joined very early, and that company is successful (Amazon, Facebook, Apple, Microsoft, Google), and therefore lots of people and institutions (mutual funds, pension plans, etc) buy that stock, the price of the stock goes up. Is there not a direct relationship between the increase in value of your stock and your net worth??? Any stock is still “riskier” than a bank CD or cash, and the extra “risk premium” is why an investor takes the risk. This hue and cry about wealth or income inequality is pure ignorance or demagouguery.

Author: iamcurmudgeon

When I began this blog, I was a 70 year old man, with a young mind and a body trying to recover from a stroke, and my purpose for this whole blog thing is to provoke thinking, to ridicule reflex reaction, and provide a legacy to my children.

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