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.

30 thoughts on “The coming boom in inherited wealth

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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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