The coming boom in inherited wealth

As everyone who has been paying attention knows, the news on inequality is nearly all bad. Not only has inequality increased dramatically in the US, but intergenerational economic mobility is declining[1]. And, where the US leads, the rest of the world looks likely to follow. The top 1 per cent lost more than most during the crisis of 2008-09 but, as Stephen Rattner reports here (drawing on work by Piketty and Saez), that was just a blip. A stunning 93 percent of the additional income created in the US in 2010, compared to 2009, went to the top 1 per cent, and there’s no reason to think things were much better in 2011 – average real earnings have fallen yet again, and employment growth, though positive, was still modest. Wealth inequality is also high, though it has not increased as much as income inequality.

The one bright spot mentioned by Rattner is that ” those at the top were more likely to earn than inherit their riches”. Since I’m already noticing that point popping up in the places you might expect to see it (can’t find a link right now), let me point out that Rattner’s explanation, that “the rapid growth of new American industries — from technology to financial services — has increased the need for highly educated and skilled workers” is wrong, and that there is every reason to expect a boom in inherited wealth.

The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations of wealth to be bequeathed.  More generally, starting from the position of relatively (to earlier periods and to the current one) equal income and wealth that prevailed between about 1950 and 1980, growing inequality of income must precede growing inequality of wealth, since wealth is simply the cumulative excess of income over consumption (and US high-income earners have not been notable for restraint as regards consumption). 

So, given highly unequal incomes, and social immobility, 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. That will include direct transfers of wealth as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.


fn1. More precisely, since intertemporal comparisons are difficult, the chance that a person with parents at the top (or bottom) of the income distribution will end up in the same or a similar position is now higher in the US than in Europe, whereas, until at least the  late 20th century there was good reason to think that the oppositewas true.

Posted via email from John’s posterous

30 thoughts on “The coming boom in inherited wealth

  1. The question is what political conclusions Americans may derive from these facts?

    The Republican Right attracts large numbers of downwardly mobile whites who appear to view supporting the plutocracy as a badge of membership of an exclusive club, while on the other hand the Occupy movement appears to be incapable of achieving any significant political outcomes.

    Accordingly, the relationship between underlying conditions and popular consciousness does not appear to conform to any pattern that would please the democratic left

  2. Another great article summarising world-historic economic tendencies. Nobody does it better.

    A couple of ad hoc points, largely in support of the concentrated wealth heritability thesis:

    1. Real estate property seems to occupy a larger share of overall wealth holdings, at least in the top decile, if not the top centile, of the wealth distribution. This is a hangover from the great property boom. Realty is fairly illiquid (solid) form of wealth, thus likely to be transferred in toto through estate inheritances.

    2. Household sizes are smaller (1.76 children) so average inheritances per trophy child will be larger.

    3. The economic system continues to evolve to reward financial distributive, rather than industrial productive, professions. Such as lawyers, financiers and various other bean counters. It is easier and more profitable to be among those who cut the cake rather than those who bake the cake.

    4. Automated digitalisation will evolve from artificial to autonomous intelligence. This will slowly whittle away the income earning opportunities of the broad middle of the income earning pyramid. Thus income power will gradually shift from the middle-income makers the to the high-income owners of digital intellectual property.

    5. Assortative mating among high IQ couples will tend to funnel human capital endowments into dynastic lineages. This will further concentrate wealth accumulation and nepotistic tendencies.

    Post-modern liberal economic systems will continue to evolve in the direction that Marx predicted, with an increasing share of income flowing to those involved in the production for exchange, rather than use. Likewise the polarisation of wealth will continue as the institutions involved in this trading economy become the proprietary interest of companies like Goldman Sachs. The increasing prevalence of high-frequency trading and “flash crashes” are an ominous portent.

    Truly, we are evolving into a zombie economy, without consciousness or conscience.

  3. Possible solution may be to increase the income tax free threshold whilst introducing an inheritance tax. Especially given the tax breaks offered on superannuation.

    IANAE – perhaps there have been some studies?

  4. I can add a further ad-hoc point: There is a negative relationship between wealth and the number of children people have which would increase inequality even if there were no other differences.

  5. The key to figuring out how wealth came to be so concentrated is to follow the family money.

    The post-war constraints on sensational concentrations of wealth largely came from the combination of pre-modern institutions – the Church, the Army, trade unions – with modernist ideologies, principally nationalism and socialism. Post-modernity seems to have swept the lot away or rather corroded them all into so much dust.

    In its place we have some kind of elite liberal consensus ostensibly committed to a level playing field. In fact a meritocratic free-for-all leads rapidly to dynasticism through a combination of economic tactics and ethnic door-openings. A casual survey of the change in family composition of the Forbes Richest 400 repays instruction. The WASPs have obviously lost a lot of ground.

    Follow the family money.

  6. A typo I think:

    “there were NO comparable accumulations of wealth to be bequeathed”

  7. It seems that economic crashes function to increase wealth inequality. Since this it what the super-rich want, I don’t they are concerned about crashes. An inner clique might even be engineering them in ways designed to increase their wealth.

  8. @Ikonoclast

    The experience of the 1929 Crash and 1930s Depression contradicts this observation. Roosevelt’s several economic and social program’s reduced quite markedly wealth inequality, as did the long bear market and the fact that 20% of US banks failed taking their depositors’ funds with them.

  9. ” those at the top were more likely to earn than inherit their riches”.

    I understnd the above quoted inference is based on tax return data. (Rattner’s referenced article). If this is indeed the case, then the word “earn” does not allow a distinction to be drawn between wealth redistribution within corporations (including public shareholders) and payment for personal work. For example, it does not allow a distinction between the personal wealth created by an innovator (say in the IT industry) and the personal wealth created by ‘managers’ – at various levels – to gain from ‘productivity improvement policies’, as measured in financial accounts, by means of reducing the work force (“head culls”) and financial engineering involving share options and capital structure decisions (increased leverage).

    It seems to me inherited wealth is less of a problem – history is dotted with examples of the children of the super rich squandering their inherited wealth very ‘efficiently’.

  10. The view here in Australia is quite depressing, but not because of the constant wind-back of taxes on wealth, from death duties to capital gains to superannuation to subsidies for health and education to the soon to be enacted sprogging bounty for the middle class.

    No, it is the fact that the Greens have just started their post-Bob life with a discussion on the economy which is totally couched in the terms of their opponents. So when, to quote the SMH coverage of his speech yesterday, Mr Bandt says that the “Greens believed in balancing the budget over the course of the economic cycle.” you know that they are really putting out a great big sign that says ‘kick me’ to an ideologically hostile plutocracy.

    Of much more interest is the likes of Jean-Luc Melenchon in France, who is polling much better than the Greens here. He first makes the argument that our societies have never been as productive and wealthy as today and then goes on to put forward practical steps to rectify misdistribution, including a 100% tax on earnings over $450.000, full pensions from the age of 60, reduction of work hours and a 20% increase in the minimum wage; and that the central bank (our Reserve) should lend to governments (ie, our States) at 1% as they do for their banks.

    I realise this is slightly off topic, but unless our country can produce a politician who can speak to these issues outside the current policy straightjacket, then, however gained, from inheritance, rent seeking or maladministration, the flow of wealth will continue in only one direction.

  11. “I understnd the above quoted inference is based on tax return data.”

    If so then the real situation must be even more diabolically lopsided since the rich can hire clever accountants to obscure their real income.

  12. @Katz

    I’ll attempt to wriggle out of it. If a capitalist crash is followed by major social and political reform then wealth inequality may decrease. If it is followed, as has been the case since the 1970s for recessions big and small, by the intensification of free market dogma and neoliberal policy then the capitalist economy, of its own operations, produces accentuated inequality in the “recovery” after crashes.

    In any case, this recovery is a dead cat bounce. Aside from internal factors, the world economy has reached, and indeed overshot, the limits to growth.

  13. @James

    Yes, the fact that Greens have started mouthing the same spurious, orthodox economic dogma as “the other side” shows their lack of any real intellectual underpinning in political economy not to mention lack of intestinal fortitude.

    From “balancing the budget over the course of the economic cycle” its only a hop and a skip (for some) to the pro-cyclical policies now advocated by Abbott and Gillard.

    A balanced budget (individual or over the cycle) should never be a goal in and of itself. Rather, a socially healthy economy should be the goal. This means making full employment (sans frictional unemployment of about 2%) the real goal.

  14. Several thoughts.

    Inheriting versus earning wealth. Wealth other than real estate is always “re-earning” itself. “it takes money to earn money”. Invisible in the original assumption is the fact that what is more commonly “inherited” is the “means” to earn money. All too often just the knowledge that money can be “made” and witnessing the process is sufficient to ensure ascention to the 1% without quantifiable “inheritence”. Contacts, too, (connections in old money speaK) are “inherited” and do not appear in the body of statistics, yet can guarantee success for a privileged son, an option not available to a “commoner”.

    So this feeds back to Jack S’s reference to Marx. “the people”, I argue, are best able to protect themselves from exploitation by being entrepreneurs themselves, each and every one. Socialism is not the only solution to capitalist exploitation, there is the also the option where every person is a business in their own right and they cooperate selectively to engage in more ambitious projects. By this method exploitation is uniform and equal, which means that there is no negative exploitation impact (in principle at least). The flaw in this arrives in the form of unfair bargaining, the achiles heal of Work Choices.

    * The main point is hinted at by JS’s point 5.

  15. @Ikonoclast

    But that is the interesting question.

    Why did one major crisis of capitalism (1929-37) generate a not inconsiderable raft of reform whose effect was to reverse inequalities in wealth, while another (2007-?) generated responses that preserved and then privileged plutocracy?

    Clearly, there are many who dissent against Geithner’s nostrums, but they have proven to be incapable of achieving political traction.

  16. @Katz

    Why did one major crisis of capitalism (1929-37) generate reform and another reaction? I can’t figure it out to be honest. I have lots of theories but no certainties. The program to wind back reform has been in motion since about 1970. It’s a long period of reaction. Over 40 years. The modern weapons of domination from military arms to mass media propaganda and corporate influence are far more sophisticated now and under the control of the plutocrats.

  17. Rattner: “The only way to redress the income imbalance is by implementing policies that are oriented toward reversing the forces that caused it. ”
    Hmm.. given your mantra on education that would mean reducing the High School graduation rate back to 40% from the 90% it is currently, reducing the college rate back to 10% from its current 30%. ..
    John, I am disappointed. When I heard that you were Australia’s leading economic thinker I was excited.
    Naah, just another rusted-on leftie!

  18. @Ikonoclast
    The social and economic effects of World War 2 need to be considered. Roosevelt’s policies through the 1930’s were variable and at time contradictory. The USA needed the massive Keynesism of WW2 expenditure to fully recover from the Great Depression. The social effects of the shared experience of WW2 may have been the “glue” that allowed a more equal and distributive model to be dominant till the mid 1970’s. Is there anything on the horizon that could have a similar effect?

  19. Richard

    Yes. Climate Change. However it will not play out through the next 60 years in the same way as the depression, and will only have some of the post WW2 rebuild. There is no “reset” feature to Climate Change. There will be massive events that exterminate groups of people in different areas at different times, but each event will leave permanent environment and community scaring, and each event will be worse than the previous one. Progressively the original population will be depleted, then restored from migrating but transient peoples. Government policy will be entirely reactionary and therefore less predictable. Resource depletion will add another layer of change.

    That is what I am expecting.

  20. @Ikonoclast

    Don’t forget that Nixon (of all people) asserted “we are all keynesians, now.”

    The problem is that during the 1970s the policies pursued in the name of Keynesianism initiated inflationary expectations that destabilised markets and provoked capital flight.

    Keynes himself would not have claimed these policies as Keynesian. I don’t think it can be argued that a fully-fledged alternative to Keynesianism sprung into existence.

    Rather, there emerged a set of piecemeal responses to crises that gradually coalesced into a systematic repudiation not of pseudo-Keynesian excess, but of Keynesianism itself.

  21. re Ernestine’s point at 10 above, anyone who thinks that inherited wealth automatically self-destructs ought to look at eg David Cannadine on the English aristocracy, or Chinese lineages, or any modern study of the ancien regimes in Europe. They don’t. The odd idiot scion stands out, the quietly-tightening grip of the wealthy disappears into the background. Even now, ownership of land in England is very concentrated. It takes a revolution or a really determined and continued political assault to break ownership loose from inheritance.

  22. “Why did one major crisis of capitalism (1929-37) generate reform and another reaction?” No doubt there are plenty of other reasons, but I think the biggest is the timing of the crash relative to elections. When Roosevelt came to power the Republicans had not only been responsible for the policies that caused the crash, they had done nothing to help for three years. They were utterly discredited, giving him a relatively free hand to address these issues.

    On the other hand, half the job losses in the lesser recession occurred under Obama, so ridiculous as the claim is, his opponents could argue his policies were responsible, and get away with blocking most of the moves he tried to make, taking more radical action off the agenda, at least for the moment.

    Meanwhile, the Euro has made it hard for individual European nations to pursue more independent agendas, leaving the world without many examples of alternative approaches within the OECD.

  23. On the other hand, half the job losses in the lesser recession occurred under Obama, so ridiculous as the claim is, his opponents could argue his policies were responsible, and get away with blocking most of the moves he tried to make, taking more radical action off the agenda, at least for the moment.

    What were these alleged stymied “radical” actions? I don’t think that this reading of the Obama administration’s response to the GFC is supported by evidence. On the contrary, Obama accepted Geithner’s proscription of privileging the large financial institutions on the basis of the principle “Too Big To Fail”.

    I think there is something in the argument about the timing of the crisis in relation to the US electoral cycle but that it is important not to overstate it.

    Rather, I would argue that the US corporate elite had taken control of the policy-making institutions of the US. Obama simply did not possess a Rooseveltian Brains Trust to counter the intellectual hegemony of the US corporate elite.

  24. Peter T is wrong, he needs to understand that the English gentry was all but destroyed as a social group in the late Victorian early Edwardian period. I suggest he reads chapters41 and 42 of A N Wilson’s “The Victorians” where the full story is presented.

  25. andrew leigh co-authored an interesting paper showing that after 1960 a one percentage point rise in the top decile’s income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year.

  26. Another very good piece JQ. Lowi first wrote “Two roads to serfdom” back in 1987. It seems we are now quite some way down that second road, with no obvious way of turning back.

  27. hi @James
    you’re right, my remark was tangential & obscure to the point of incomprehensible, less of a comment & more of a snort; i owe you an explanation.

    when you said (i paraphrase) “the view here in Australia is quite depressing … the Greens have just started their post-Bob life with a discussion on the economy which is totally couched in the terms of their opponents … of much more interest is the likes of Jean-Luc Melenchon in France” i recognised a name i’d met off the beaten path. then when you outlined some of the the options proposed by melenchon in france i thought (my snort) nor are we likely to, given his radical ideas & growing popularity are reason enough for the powerful who control our english language media to want his ideas heard as little as possible. and so our greens will not likely be confronted with or have to publically respond to constituents asking what about the ideas of melenchon in france?

    i’ll elaborate: we live, imo, in a sea of english language media & are rarely encouraged or assisted by these media to know about the economics & politics of non-english speaking developed countries, on an ongoing basis. our english language media are owned & influenced by people like murdoch, et al. who have a vested interest in suppressing mass knowledge of alternatives to economics & politics as usual. you can’t move the horizons, they tell us, you must play by the rules as inherited, which are stacked in favour of the powerful, you can’t change anything really important or fundamental. and further, the economics & politics they report are reported as if they’re the only economics & politics in town, or are the normative economics & politics through which other people’s economics & politics are presented for our understanding or partial understanding. i’ve heard there are also interesting options being explored in argentina in response to the economic crisis, but we’d never hear about them & how they’re working out there, on an on-going basis, enclosed as we are in an anglophone cone of dis-information.

    rather than inform us of them, our media serve more to filter out from our purview the stories of non-english speaking developed countries, especially so when these stories present novel economic & political options to english speaking people otherwise unaware of them. we here in australia are fed instead a sustained diet of minutiae about american state level politics & presidential primaries, on an on-going basis, as a matter of course, this year, like four years ago, and all the years before & in between. we are told more about the weather in america, on an ongoing basis, than the economics & politics of germany or france, outside their electoral cycles. so i’m not surprised the greens & their supporters are like other australian political parties & their supporters in not canvassing options, like melenchon’s, that are from outside the domain of “allowed thinking” & from non anglophone sources.

    now i’m just sounding off; i expect to find i’m more or less an outlier in this opinion. but there you have it. i hope that’s clarified my remark enough that perhaps your incomprehension now can shift over from “what did he say?” to something more like “he said that?
    yours, striving ever for clear expression,
    alfred venison

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