The coming boom in inherited wealth

This is an idea that has popped up before in relation to UK Housing Wealth (sorry can’t remember the ref.) The upshot was that the inheritors in this case were largely late middle-aged, for demographic reasons, but were also generally already well-off. You tend to leave your stuff to members of your family after all.

It should also probably be noted in this context that “the debt burden that we leave to our children and grandchildren and blah blah blah”, which forms the basis of about 50% of deficit bellyaching newspaper articles, is the same thing as this inherited wealth, for the most part.

Re: Rattner’s point being wrong:

You and Rattner are talking about different things. His point is that income inequality has increased dramatically due to the greater demand for highly educated and skilled workers in the US and the simultaneous shrinking demand for less educated middle-skilled workers in the US. Your point is that this will lead to future generations where wealth inequality is more a function of inheritance than earnings. The two points are entirely compatible. Of course, your prognosis is more contingent on future policy decisions than his diagnosis is.

It should also probably be noted in this context that “the debt burden that we leave to our children and grandchildren and blah blah blah”, which forms the basis of about 50% of deficit bellyaching newspaper articles, is the same thing as this inherited wealth, for the most part.

And the next time one of our fine journalists in the “liberal media” explains this simple fact to readers / viewers will be the first.

The current glut of grads in the OECD world is another factor which with accelerate the problem of inherited inequality due to the profusion of internships (making tea at daddy’s office) and other forms of nepotism in a saturated job market.

More likely, our descendants will fight bravely to the death for the entertainment of the 1%, with the sole surviving victor of each Game being awarded membership in the 1%.

I remember reading a book called Being Black, Living In The Red by Dalton Conley; one of the points he repeatedly stated was that a huge driver of the black/white wealth gap was that African-Americans receive far less inherited wealth than whites even in the same income groups.

There is also an article by Kai Wright, “Upward Mortality,” about the author’s father, who went from being an affluent physician to living on nothing but Social Security at the end of his life due to chronic health problems. Wright notes that this is sadly typical of many African-American families.

I agree with John’s post that “we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood than for the current recipients of high incomes” and wonder if this will also increase the current wealth divide between whites and blacks (and probably Latinos as well). Conley’s book mentions that many whites don’t even realize how much inheritances and gifts from parents are crucial to their upward mobility (or even staying in the same bracket). That parents will help them out and older relatives leave inheritances is taken for granted.

It should also probably be noted in this context that “the debt burden that we leave to our children and grandchildren and blah blah blah”, which forms the basis of about 50% of deficit bellyaching newspaper articles, is the same thing as this inherited wealth, for the most part.

So all we really need to do is tax Peter to pay Peter, and the debt will unwind with little effect on the nonfinancial economy? That seems almost too good to be true, except for being politically impossible.

Capturing “93%” of new income doubtless is a demonstration of skill of a sort, but how much of that comes from developing and applying technology to actual problems is open to question. From here it looks more like the 1% amass their piles by application of economies of scale and manipulation of public opinion. Doesn’t sound to me like a bright spot.

Somewhere long ago I read somebody who divided the workforce into Workers, Craftsmen, Managers, Academics, probably others. One point was that Craftsmen, who are people who work directly with technology in skilled and innovative ways, are capable of a comfortable living (better off than Workers), but they are under a ceiling. If you want to get rich, be a Manager; don’t waste your time in science class.

The follow-on generation will occupy the name-brand schools, but they have much less incentive to be actually educated. I suppose we are in for a few decades of dilettantism (space tourism?) before the next cycle gets underway (in the best case). Some good art could come out of that …

“the rapid growth of new American industries — from technology to financial services — has increased the need for highly educated and skilled workers”

This claim exists only to further feed the Higher Ed. Bubble. It hasn’t been true in at least 10 years (and I have the grad school debt and unemployment checks to prove it).

It’s important to recognize that the claim that “those at the top were more likely to earn than inherit their riches” depends on a somewhat peculiar choice by Piketty and Saez in handling the data. Their top fractiles are not the top 0.01, 0.1, 1, etc. percent by income, but rather the top 0.01 etc. percent by income excluding capital gains. This is clearly stated in their papers but it is almost never noted, as far as I can tell, by people who cite them.

The reason for doing this is that realized capital gains (what the tax system sees) are lumpy and may vary for a given household quite a bit from year to year. So using total income might exaggerate the share of capital gains by overrepresenting households that happened to have large realizations in that year. This is a legitimate concern, but there is also a danger that if wage and capital gains income have different distributions — and it’s clear they very much do — then this procedure runs the risk of systematically understating the share of capital gains income (and of other capital income, to the extent that it is more closely correlated with capital gains than with wages.) It is not at all clear to me that the distortion that Piketty and Saez have fixed by excluding capital gains from their ranking is greater than the distortion they have created.

If you look at the raw data from the IRS (or the summary on my blog), you will see that the wage share of the actual top fractiles ($10 million income is approximately the cutoff for top 0.01 percent) is much smaller than that reported by Piketty and Saez, in the range of 20-25 percent rather than over 50 percent.

Now, their correction may be appropriate; it all depends on how lumpy capital gains actually are. But it’s possible that their correction is systematically understating the capital share of income at the top, and overstating the wage share. At the very least, people who cite this stuff should be aware that it is NOT a description of the actual top incomes as reported by the IRS. And excluding capital gains from the definition of the top fractile especially problematic for recent decades as the share of capital income distributed as capital gains rather than dividends has risen sharply.

As for the post here, I think John Q. is exactly right.

I will settle for entering the top 50% of US earners. ;-)

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

Given the US’ performance in Cartagena this past weekend, perhaps the world will be spared.

@5, both good points, but I must correct because vast numbers of Americans don’t realize this: Medicare does not pay for nursing home/long-term care — it’s Medicaid. It would be nice if that fact were stressed to all the Tea Partiers who want to get rid of Medicaid as a hand-out to the poor.

@Joshua I agree. Unless you’re already from the upper middle-class, the risks of doing any kind of degree that doesn’t lead directly to a job are very high. And there’s a further catch that some degrees sound vocational but actually aren’t – in Australia for example, most jobs in media are filled through contacts, or on the apprenticeship/cadetship model, while university degrees in media/journalism have a lot of theory, and not much that promotes actual employability.

@John Quiggin

Yes I accept that the evidence suggests that grads are still in a better position than non-grads in the labour market, but there seems to have been a significant longitudinal fall in the employment prospects for new graduates – in the context of rising tuition fees in some OECD nations. Furthermore, the increase in the volume of graduates being churned out by the university system does seem to have created a glut of applicants for certain professions such as academia and law. As Joshua states in 30 there seems to be a large cohort of graduates for whom university attendance was of marginal benefit before the great recession. Post-recession this group finds itself in unemployment (25% of UK university leavers unemployed 6 months after graduation according to latest figures) or waiting tables, significantly worse off than many of their peers who took a vocational route.

I thank the FSM that my daughter is a chemical engineering major. And is at a university that requires co-op (practical work experience) for all engineering majors, and has an excellent track record of placing them with co-op employers (who often end up offering them their first “real” job.) And has a generous scholarship that, together with the income she can expect from co-op employment, minimizes her need for borrowing. I feel for the millions of kids (and their parents) who are not nearly so lucky.

JW Mason@ 22: I’ve always thought that these studies of the top end had issues from looking at only one year. Does the data exist to track income returns on families over a multi-year period to see who is in the top 0.1% or whatever over a 5 year time horizon?

And one of the tricks is to grandfather in cuts, so that the people currently receiving (or soon to receive) won’t be hurt.

Won’t be hurt, that is, until the next election cycle, when the right whips out the ‘you don’t have it, so why should they’ slogan, which is really effective.

Whether the current generation of the wealthy can avoid losing their wealth in boom-bust asset fluctuations is beyond my ken. What is clear is that more people, including people of modest means, are using financial/estate planning attorneys to shelter assets from taxation. That includes avoidance of medicaid liens on property and inheritance taxes. Keeping grandma’s house in the family even as she qualifies for medicaid can make a large difference in whether a family can maintain a middle-class lifestyle or send kids to college. (The really rich, Mitt Romney comes to mind, can have large incomes from capital gains and pay no more than 15% in federal taxation on that income. Truly sophisticated estate planning can drop taxation down to almost nothing.)

To engage in advance planning for tax avoidance requires both an awareness of the possibilities and the available money to pay a lawyer to do the necessary work. The ability to engage in asset protection can be expected to increase inheritance inequality.

39: “In this case, there’s a good argument that reward correlates with social rank more than anything else.”

Agreed. IMHO there’s a slightly more general empirical observation about this: why is it that “bosses” are almost always paid more than the people they oversee? Of course, economists will trot out all their theories about marginal productivity. Given how bad most managers are (in my experience), I find that hard to believe, and a simple “social rank” explanation much more compelling.

A sneaky one too.