Wealth: earned or inherited?

I’m glad to see Main Street Muse fighting the good fight.

That wealth is inherited seems like a pale, incidental detail next to the fact that so much of the burgeoning wealth of the 1/10th of 1% is funded from looting the middle classes and privatizing the state.

The staccato of daily reports on Naked Capitalism heralds a counter-revolution well-advanced. Talk of a neo-feudal future does not seem like a fanciful hyperbole.

Here;’s the list of the 10 richest people in the UK:

http://www.ibtimes.co.uk/britains-10-richest-people-revealed-1438579

By my count 4 of the 10 are ‘self-made’ (regardless of how that occured – hello Roman Abramovitch!) and 6 are inherited wealth (in that Lakshmi Mittal started out the son of a steel magnate and Srichand Hinduja also comes from wealth). Leonard Blavatnik, John Fredriksen and the Branson are the other three ”self-mades’ on the list

Not sure how many of the ‘self-made’ have kids but you can bet that if they do they’ll be knocking on the ’10 richest’ list next year (hello Hans Rausing!)

Over time the numbers of the ‘self made’ will fall – which is of course Piketty’s point…

I thought the Queen would be in the top 10.

Given a definition of “work” that is essentially “having to do stuff that is not immediately gratifying and requires expenditure of energy”:
It’s work to import heroin. Hard work. The more heroin the harder the work, so justifying greater profit from that work. Plus illegality means enormous risk, so why shouldn’t risk-takers be rewarded for their bravery?
It’s work to oversee slaves, and the more slaves there are the harder the work to oversee them. Overseeing overseers is meta-hard. Foxconn/Jobs/Apple.
It’s work to scam people out of their resources, getting them to sign binding contracts that are against their interests and well-being is serious work.
Lying to and tricking people is very hard work, fraught with the risk of discovery.

“…like Bill Gates is doing, and Warren Buffett is planning to do…”
On your screen they are.
In the real world, not exactly.

floopmeister – I thought she actually does own one of her castles (Balmoral? Sandringham?) in the sense that is the property of her family, not the Crown (or State).

Collin Street – unearned income is usually taken to mean rent, interest, dividends and capita gains.

The fee that an investment manager gets from providing advice is income from her labor, so is earned.

Tabasco I thought she actually does own one of her castles (Balmoral? Sandringham?) in the sense that is the property of her family, not the Crown (or State).

Yeah, that’s probably right – like I said I don’t know the exact details but the fact that she’s not in the top ten would imply that a large amount of her money falls into the ‘not strictly personal’ wealth (at least as defined by the people who compiled the list).

I guess that this is like the old Roman concept of wealth in that it’s whatever you are free to either use or abuse – it’s completely alien to the concept of wealth being ‘held in trust’ for some greater good or social value (either noblesse oblige or Christian concepts of social justice etc).

asset appreciation that is not cashed out is not counted as income, no? it’s a bit misleading to say wealth inequality is preceded by income inequality when what you do with the income (as well as existing wealth) also matter.

yea misleading wasn’t the right word when it comes to income inequality leading to wealth inequality. there’s an obvious effect there. but i do think it’s misleading with the causal reduction.

Fuck the wealth tax. Let’s just get rid of preferential treatment of capital gains, or even tax them higher than other sorts of income, with perhaps limited exemptions for the sorts of capital gains the 99% might see. Or just index each sort of unearned income according to the difference between its trend and that of median income.

I’m a wealthy layabout. All my income is unearned, and each income stream is differently taxed; only a portion of my interest income is subject to the same level of taxation as salaries. There’s no good reason why dividend income should be privileged; maybe dividend payments ought to be as deductible from corporate income as interest payments, but that’s a separate issue.

Ta-Nihisi Coates and others need to keep reminding us that there are already enormous disparities in wealth in America, because it’s not part of daily experience for most of us. A surprising number of fellow citizens are one or two missed paychecks or an emergency room visit away from homelessness. The fact that income inequality exceeds wealth inequality doesn’t mean that the latter isn’t a deadly problem, it means that the former has reached ridiculous levels.

I don’t understand why smart, progressive economists like JQ don’t plug the benefits of a land value tax at every opportunity, especially when talking about inheritance.

And, where the US leads, the rest of the world looks likely to follow.

I think this is wrong, though it’s a claim I’m willing to be corrected on. I believe it’s only right if by “rest of the world” you mean “developed countries”. My understanding is that inequality has actually decreased in the past decade in the places where it has traditionally been the highest, Latin America and Sub Saharan Africa (I’m fairly certain in regard to the former, less certain as to the latter).

In a strange way, the fact that the large increase in inequality in rich countries, particularly US, is finally getting some broad attention has overshadowed and pushed out of the spot light the fact that inequality has been falling in these other, “less noticed”, places. Which muddies the picture.

And along those lines, it’s not clear if one can make any grand sweeping political conclusions based on these trends. It’s not obvious that the decline in inequality in Latin America and Sub-Saharan Africa can be attributed to re-distributive or left wing policies. There is/was some of that, with the abandonment of the “Washington Consensus”. But at the same time, a lot of the countries which have been experiencing it retained fairly pro-market policies while nominally ruled by leftist parties or , in the case of Sub-Saharan Africa (and like I said, I’m a bit less convinced or sure here) have been doing the whole IMF style structural adjustment thing.

I think the picture will change soon enough, and I do not believe that *wealth*, per se, will be transmitted. Perhaps *social position* will be…

I say this because I think a big part of the story is the global synchronization of housing as a way to park cash–very much in the sense of Charles Stross’ concept of slow money. It’s not truly medium money because without timing luck, you’ll almost always lose money without substantial coordination of others who “cosigns” the validity of the worth of your consumption and person. The purpose of this social coordination is about insuring indexed returns, and it’s easy to press governments to make the nonflashy laws that assist such absentee handling.

I think that this setup is quite fragile in reality. I don’t think in terms of property market crashes, as all the internet blogs for disgruntled cynics attempts to prophesize. It wouldn’t take a real crash. It would only take acquiescence to ever stronger pressure for locally appropriate housing regulations in enough of the major cities of the world. Housing regulations that have to happen sooner rather than later, given the kind of crisis building in many places, from Singapore to San Francisco. No more or less than the ECB can refuse to address deflation for all that much longer.

If housing can’t provide one of the primary means to coordinate surplus gdp back to the .01% (politically, through control of other people’s need of housing, not necessarily pecuniary compensation) , for example as how Israel’s economic and political mix supports social stratification and settler policy goals, then the political regime must change. I think that this largely means bad news for oligarch families, because I think that the credibility of the new state will almost certainly depend on eating the rich. This is because of how well gattopardo maneuvers have worked to make previous changes rather stillborn–Orange Revolution 2004 vs. today’s Ukraine. Same path South Africa is headed now.

I really, really, think that worrying about the long term inheritance issue is a moot point. Modern society is not remotely capable of handling any sort of neofeudalism. It takes an utter ahistorical perspective that lacks any comprehension of how under-capitalized and inefficient feudalism is, and then imagine that any technological society can function in a political milieu anything like what agrarian societies were like. No matter how much robots can do for us, every single piece of human created devices are made of people. Are ultimately serviced of people. And when you look at the Ukraine (or Greece), it is not an unreasonable example of what modern technofeudalism is truly about–systematic underinvestment until collapse and violent default proceedings occurs. All this stuff happens inside of a span of a generation. How many inheritances are going to happen? One way or another, not much.

Other aspects of socio-economic import deserves more attention.

Why is there a dichotomy between earning and inheritance? Are lottery winnings earned or inherited?

No strengthening democracy by itself isn’t (look at India) but strengthening democracy under certain distributional contexts (ie more responsive to the poor – so by extension strengthening unions, developing a functioning judicial system etc) is more what I was getting at.

” “[T]oday’s super-rich mostly come by their wealth through work, rather than via inheritance.” ”

It seems to me that the income earned by these super-rich – and the highest “earnings” Rattner refers to – shouldn’t properly be categorized as income from labor, but instead should be categorized as income from capital. The people who “earn” these high incomes do so through control of the uses to which capital is put. An essential element of the ownership of something is its possession and control, and it seems to me that if you derive income from the possession and control of capital, that is capital income.

When someone invests in a hedge fund, the general partner isn’t managing the investment. It effectively owns it, subject to an obligation under the partnership agreement to pay the money back to the investor with an agreed return. It’s little different from him buying the investment on margin. Only the legal obligations to his investors have changed. But in no sense is the income earned by the general partner “labor income.” Certainly it’s not tied in any sense to the quantity or quality of the effort made by the general partner. It’s income goes up based on the size of the investments that are made – the amount of capital it controls – rather than the amount or quality of the labor. What it earns is capital income.

I think a lot of what people categorize as labor income is really capital income. And I think that the ratio of capital income to labor income is probably significantly higher than most people would recognize.

The Russian oligarchs are all “self-made entrepreneurs”, i. e. they looted their billions on their own, with their own hands, with no help from daddy (except most were well-connected with the old apparatchiks but that’s a detail). So nothing wrong with that.

Really, our American super-rich are not so different from the Russians. They “earned” their fortunes the honest way, by stealing. They deserve our admiration.

“Why is there a dichotomy between earning and inheritance?”

Because untaxed inherited wealth ultimately leads you to Uday Hussein.

This is why we need a ceiling beyond which an individual cannot ‘earn’ money. It would free them up to do other things, if they want. If one couldn’t earn beyond a hundred times the median income – 5 million I think that comes to – then they could slack a bit, not maneuver companies into profitable disaster, or maybe even take to the arts, or fishing, or literary criticism.

Roger,

The median income for a single person is roughly 27K. It’s a bit over 50K for a household. The household measurement is misleading in a way. Many people conflate that with an individual’s income, but a household can include more than one income.

Orwell thought a 10 – 1 ratio fair. I think 4 to 1 is better. Ironically, that’s roughly the top to the middle scale for public sector work — give or take. It might be a tad more than that, perhaps 5 – 1, but it’s close.

Again, I have no problem with people being compensated well for their own work. But A CEO or a business owner, if she or he has employees, is paid for their work and their employees’ as well — and that comes out of the pocket of those employees. That is immoral and should be illegal.

There is also the distinction between the small shop owner who is both capitalist and worker at the same time. They deserve more leeway, as they generally work side by side with their employees, and put in the sweat on the proverbial shop room floor. But someone who is strictly a capitalist does not engage in labor with their employees. He or she pays them to produce a commodity in order to make more money, with their labor being a commodity as well, which he or she has bought. When they make 300 times or 1000 times or 10,000 times as much as their employees, they cheat them — the greater the ratio the more they have cheated them.

Again, this should be illegal. It is immoral and unethical. But in our day, too many don’t see this, just as they don’t see the insanity of worshiping a god who would slaughter every man, women, child, animal and insect, etc. etc. save for a few, out of a sudden fit (Noah’s Ark). If they take the bible literally. It makes sense that those who see their god as having “the right” to do this would also see their boss or another’s boss as having “the right” to pay themselves hundreds or thousands of times more than their employees. It’s all basically coming from the same mentality . . .

roger gathman’s argument is an interesting one, though I wonder what’s actually desirable about forcing all highly-motivated earners to “slack a bit.” So somebody screwing around with hedge funds might look like a good target, but what about somebody else who uses their fortune as a counterbalancing force? It’s not at all obvious that Bill Gates’ connections and money are going to waste.

Note that this is, at worst, just a lifetime’s worth of potential horribleness, as it’s not about inheritance yet. Somebody who uses their wealth perversely, rather than wisely, would still provoke attempts to clip their wings, but the issue seems to be more about what they actually try to do with their money. The reason that inheritances are such a big deal is that they lead to all kinds of terrible behaviors like rent-seeking. But surely there are kinds of political activism + money that don’t qualify as rent-seeking and are even positive.

I agree with your statement that other organizational structures could possibly achieve similar ends – but as usual I’m not sold on the plausibility of it happening.

(Didn’t say anything about Steve Jobs, who strove to appear allergic to charitable thoughts – although soon after he died the whispers of his secret philanthropic tendencies quickly emerged. His company has, at least recently, followed that public example strictly.)

The point is that by cutting down on inheritance you make a sizable dent in the problem, which is a promising start. We don’t need a razor-thin margin here, just a win. Some of the other obvious solutions seem unable to discriminate between preventing abuses, and punishing people with drive and genuine instincts to do good. I don’t think that forcing everybody with charitable impulses directly into democratic politics is necessary or desirable, for instance, even with the example of the Koch brothers.

#48 Some of the other obvious solutions seem unable to discriminate between preventing abuses, and punishing people with drive and genuine instincts to do good.

But if only the rich can do ‘good’, then what we get are the acts that the rich think are ‘good’. Which is going to represent the views of a narrow and insulated elite.

Incidentally I’ve seen the results in both the US and the social democratic countries in W. Europe. The latter have better outcomes in all areas for most people. We do actually have alternatives in the real world. I realize the US is ridiculously parochial, but still.

BadJim,

Sorry, but it’s not bullshit. It is mathematically impossible for you to make millions if you also pay fair wages to your employees. It. Is. Impossible.

As in, if you paid them their share of what they produce for you, there could never be enough left over for one or two people — or a few more beyond that — to accrue millions. And I’m factoring in a return on your capital investment as well. No single human being, if they have employees, can account for enough input, enough hours worked, enough time on the job, etc. etc. on their own, to warrant millions in compensation, unless their employees are making nearly that much, which, of course, never happens. (Currently, the average CEO makes 300 times more than his or her rank and file. That number was 20 to 1 in the 1950s, and 25 to 1 in the 1960s . . . . And in Fortune 100 companies today, the ratio is 1000 to 1. Larry Ellison recently made more than 10,000 times his rank and file, etc. etc.)

If, OTOH, you are a sole proprietor, and you manage to make millions by doing the work yourself? That’s an entirely different matter. But even there, the massive gap between what you make for your time at work, and what a nurse or a teacher or an EMT worker makes is obscene***.

***The next great “civil rights” movement should be about class and vocation discrimination. Along with protections against race, ethnicity, gender and sexual orientation discrimination, a sane, humane, just society will have laws making it illegal to wildly privilege certain occupations over others . . .

Plume, in your world how and why does innovation and risk happen? Or doesn’t it matter? My main problem with the Wall Street and big company rich is that they have neither innovated Nor risked for their money. That doesn’t change that big money should, can and will be taxed.

JG

Here’s a review by Jeff Madrick of one of those recent books. From the NYROB:

The Entrepreneurial State

Mariana Mazzucato is the author.

You know I have missed you Plume. Glad to see you commenting again.

Thanks, MPAV . . .

Roger,

4-1 may be too low. But I’d say greater than 10-1, which was Orwell’s ratio, is too high. So we’re talking somewhere in between. As mentioned, however, that 4 to 1 isn’t as radically low as it may sound. The federal government, for instance, is pretty close to that, give or take. Major department heads make in the 200 – 250K range, and rank and file are in the 50-80K range. So 4-1 or 5-1 is pretty much the norm. Local and state gov have a lower top end and rank and file, but fall roughly within that range as well. And most private sector non-profits aren’t greatly above that ratio. Executives are making in the low six figures, with rank and file in the 50 – 80K range — depending upon region. You occasionally have large non-profits with seven figure execs, but that’s not the norm.

Anyway . . . the key, really, is shifting the decision-making from the ruling class to all of us. There is just no way that if we decided wages and prices democratically, that we’d see a hedge fund manager, for instance, making billions while teachers average 50K. There simply isn’t any logical justification for such a grotesque gap . . . . especially not if we look at compensation through a “social good” lens. The teacher, the nurse, the EMT worker, etc . . . would, in that case, make more than the hedge fund manager.

Plume @60

” The teacher, the nurse, the EMT worker, etc . . . would, in that case, make more than the hedge fund manager.”

For that to happen all you need is redistribution – all the before mentioned serve the general population, the latter the plutocrat. This is quite simple really, the market serves not those with needs, but those who pay. If you want to reorient the market, reorient the ability to pay.

Obvious troll is obvious.

I’m interesting in one aspect of Plume’s comments, which is the ceiling of “earned income”: if you like, the Chris Rock threshold between “rich” and “wealthy”. If the rumours are true, Dr Dre will become the first billionaire rapper from selling a shareholding in a business, not from making or producing music. Whatever David Beckham earned per week — and it’s quaint that the British press still treats footballers like people who receive weekly wage slips, while American sports more appropriately talk about multi-year multi-condition contracts — it’s nothing compared to the money that becomes available if he takes ownership of a sporting franchise, or the net worth of the Glazers.

Nathanael,

Good points. I see it as “theft” as well. That said, I think another problem with the system is the idea that stockholders are the owners. Generally speaking, people who hold stock do so for very short time periods. They’re short-timers, and the deck chairs are changed endlessly.

To me, it makes far more sense that the workers and locale own the company, and decisions are made via true, participatory democracy, horizontally, rather than a few making the decisions from the top down.

Ideally, at least for me, towns and localities would “own” all businesses, with workers in those various companies having operational control, while following guidelines set by localities, then regions, then nationally . . . . The further out you go, the broader the guidelines. As in, specifics and particulars are left up to workers and localities, and we go from the particular to the general as we move outward, with a constitutional framework and democratic discussion/decision-making as umbrella, etc.

Given the above, I can’t see the possibility of massive inequality ever taking hold. With socialism from below, rather than socialism from above, as Hal Draper divided the two in his Two Souls of Socialism . . .