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Vanadium 50
#1
Oct30-11, 08:34 AM
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I've read a lot of posts, and think it might be helpful to point out some facts that I think would help clarify people's arguments.

1. Income is not wealth. Using one as a proxy for the other is like using velocity as a proxy for position. A small disparity in income, acting over time, becomes a much larger disparity in wealth.

2. Demographics matters. Over the course of a lifetime, people's income and wealth changes. Typically, income rises slowly and wealth less slowly over one's career, peaking just before retirement. At that point, income drops substantially and wealth decreases more slowly. Statistics that are not age-corrected can be highly misleading.

Because of this, a plot of an income percentile (or quartile etc.) does not track a given cohort of people. People move into and out of that percentile. This is even more true for wealth than income. Statements like "such and such percentile gained/lost such and such" do not tell you anything at all about what is happening to individuals. This is even more true for wealth than income.

Additionally, there has been an increase in the number of illegal immigrants to the US. Illegal immigrants make up about 7% of the population (according to the Bear Stearns remittances study), up from about 1.5% fifteen years ago. Today this group makes up a large chunk of the bottom decile in both wealth and income; that was much less true in the past. Any study needs to clearly state how this was treated for it to be interpreted.

3. Accounting is important. Perhaps this is best illustrated by example. Bob taught in the public school system and has just retired. He has a $40,000 a year pension. Joe taught at a private school system and has just retired. His 401(K) is returning $40,000 a year to him. Otherwise they have the same assets. Who is richer?

In most studies, Joe would be considered about a million dollars richer than Bob, even though their standards of living are identical. This is solely due to how we usually calculate wealth - we include defined contribution plans and exclude defined benefit plans. As the fraction of people with defined contributions plans instead of defined benefits plans rises, the calculated wealth disparity will rise, even if the standard of living disparity stays the same.

I hope people will take this into account, and will use this to make arguments like scientists, and not like cheerleaders for their favorite team.
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