News How Accurately Do Income and Wealth Statistics Reflect Reality?

[John Creighto]

The $20/hour minimum wage demand floated by some in the Occupy Whatever protests is another example of complete equality of outcome, as distributing that wage across the US labor force would eat up the entire $7.8 trillion in US annual income.

Might be doable without much tax changes if you cut a lot of government administration costs. That is do it with a negative income tax. Of course I’m only speculating but I’ll try to work out the numbers later.

 

[mheslep]

Might be doable without much tax changes if you cut a lot of government administration costs. That is do it with a negative income tax. Of course I’m only speculating but I’ll try to work out the numbers later.

The point is at that level of minimum wage nearly everyone must be paid the same, from the late Steve Jobs to the 16 year old on the first job: the $7.8 trillion national income distributed at $20/hour=$40k per year is 195 million people in a country with 205 million working age adults.

 

[LaurieAG]

Ok...what is your reason for posting them?
...
I've seen a lot from the OECD that bothers me, where it appears the organization allows an ideology to influence them to try to force the data to connect their favored ideology to their stated goal.

The Australian old age poverty rate was 39% and second last behind South Korea.

 

[Vanadium 50]

The Australian old age poverty rate was 39% and second last behind South Korea.

Which is maybe a good example of the points I was making.

OECD measures poverty by income, not wealth. A person who has a comfortable retirement nest egg and is drawing it down will appear poor. A person who has the same standard of living from a pension will not.

The fraction of people in poverty in old age, according to OECD's metric, is a function of the number of people in old age. Imagine I have two countries: one with 20% of the people in old age (however it is defined) and one with 10%. Assume that the income distribution of old people is the same in the two countries, as is the income distribution of non-old people. Because retirees have less income than workers, the median income is lower in the group with the 20%. Therefore, the fraction defined as poor in the 20% is smaller.

I think most of us would agree this is not a desirable feature in the definition of poverty.

 

[apeiron]

Inequality still trending. Pew reports...

The wealth gap between younger and older Americans has stretched to the widest on record, worsened by a prolonged economic downturn that has wiped out job opportunities for young adults and saddled them with housing and college debt.

The typical U.S. household headed by a person age 65 or older has a net worth 47 times greater than a household headed by someone under 35, according to an analysis of census data released Monday.

While people typically accumulate assets as they age, this wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.

http://www.aim.org/newswire/us-wealth-gap-between-young-and-old-is-widest-ever/

Of course, what this actually means is that today's young can expect to be super-rich when they get old as by then the going disparity should be 470 to 1 or sumpthing.

Another sharp observation is the old get the lion's share of welfare too. Result!

“It makes us wonder whether the extraordinary amount of resources we spend on retirees and their health care should be at least partially reallocated to those who are hurting worse than them,” said Harry Holzer, a labor economist and public policy professor at Georgetown University who called the magnitude of the wealth gap “striking.”

Paul Taylor, director of Pew Social & Demographic Trends and co-author of the analysis, said the report shows that today’s young adults are starting out in life in a very tough economic position. “If this pattern continues, it will call into question one of the most basic tenets of the American Dream — the idea that each generation does better than the one that came before,” he said.

 

[Vanadium 50]

That is what I would expect to happen as people move from defined benefits plans (pensions) and into defined contributions plans (401K's and similar).

It is also what I would expect during a housing price slump. A 35-year old with the typical low US savings rate has essentially all his wealth tied up in one asset: the home.

The more interesting statistics is that when this 35-year old becomes 65, under what assumptions does his standard of living exceed, lag or equal the present day 65-year-old.

 

[Jimmy Snyder]

While people typically accumulate assets as they age, this wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.

Actually, apeiron didn't say that, it was a quotation from another source. How do you adjust a ratio for inflation?

 

[John Creighto]

Inequality still trending. Pew reports...



Of course, what this actually means is that today's young can expect to be super-rich when they get old as by then the going disparity should be 470 to 1 or sumpthing.

Another sharp observation is the old get the lion's share of welfare too. Result!

Well, what has happened. Is it that older people got richer or young people got poorer?

 

[LaurieAG]

Which is maybe a good example of the points I was making.

Hi Vanadium 50,

I don't think its because they are sitting on nest eggs as many have been forced back into the workforce due to the GFC and the destruction of their hard earned wealth.

The following is a letter to the editor in todays Australian newspaper.

Without wishing to comment adversely on pay rises for social and community workers, I am sure that there are many self funded retirees living on half the wage of $40,000 a year who would love a job earning that much instead of sitting at home checking their spreadsheet to see their savings dwindle down to nothing.

 

[Vanadium 50]

I don't find a letter to the editor a good counter-argument that differences in the way accounting for retirement plans is done need to be corrected for when drawing conclusions about how things have changed in 30 years.

 

[russ_watters]

Well, what has happened. Is it that older people got richer or young people got poorer?

Both, with the caveat that (as is part of the purpose of this thread), you need to be careful characterizing "rich" and "poor" based on net worth. Particularly when it comes to variation by age, net worth doesn't have a good correlation to the dictionary definition or the US measure of poverty. In other words, young people are taking on more debt, but that doesn't necessarily mean they are living poorer lifestyles.

 

[LaurieAG]

I don't find a letter to the editor a good counter-argument that differences in the way accounting for retirement plans is done need to be corrected for when drawing conclusions about how things have changed in 30 years.

At least it wasn't an editorial or a feature.
This was in the Australian context where we had universal pensions and they are now being phased out and substituted with mandatory superannuation that is currently 12% of an employees wage. The rate had gone from 3% to 9% over the past 15 years so most of the people around the changeover have not only contributed less than they would have liked but have lost a fair portion on the stockmarket because that's where the Super funds invest.

 

[John Creighto]

In other words, young people are taking on more debt, but that doesn't necessarily mean they are living poorer lifestyles.

Can you substantiate this with a source? I guess for people under 35 wealth isn't the best measure of prosperity but I can't expect the youth now to be significantly more prosperous given the large payments they must make on student debt. The fact that so many are forced to live at home could be a sign of not having the money to independently have a decent standard of living.


I'll concede that wealth statistics could be somewhat misleading now because when the Baby boomers start drawing down their retirement savings asset valuations will likely fall.

 

[russ_watters]

Can you substantiate this with a source?

Sure. While the wealth gap has doubled since 2005, the average incomes of the young have only dropped somewhere on the order of 8% in 10 years: http://www.usatoday.com/news/nation/census/2009-09-17-young-people_N.htm

Note that both of these are uselessly short time periods, though.

I guess for people under 35 wealth isn't the best measure of prosperity but I can't expect the youth now to be significantly more prosperous given the large payments they must make on student debt.

I didn't say they were any more prosperous, much less significantly. Particularly in a recession, the young get hit harder, with higher unemployment and underemployment (due to not getting hired after college).

 

[Vanadium 50]

I suspect that the wealth gap since 2005 is a consequence of the drop in home prices. Younger people are more highly leveraged and tend to have a higher fraction of their assets in their homes.

During the slide in prices, even though I lost more in absolute terms than my neighbor, I lost less relatively than her: I had more equity so less leveraging, and I had a more diverse asset allocation.

 

[Astronuc]

Some numbers -

http://www2.ucsc.edu/whorulesamerica/power/wealth.html

 

[SixNein]

Some numbers -

http://www2.ucsc.edu/whorulesamerica/power/wealth.html

nice

 

[Garth]

I found this diagram from xkcd fascinating: money.

Especially relevant to changing relative wealth and the present resentment with big bonuses etc. is under the 'dollars' section 'Worker/CEO pay comparison' comparing 1965 rates with 2007 (adjusted for inflation).Garth

 

[MarcoD]

Meanwhile, in Europe:

Banks are benefiting from a European Central Bank subsidy that could reach 120 billion euros ($158 billion), enough to pay every bonus at financial firms in London for the next 24 years at today’s levels. -- Bloomberg

Uhm... Okay?

 

[nitsuj]

Those are issues with the stats themselves. Of equal concern to me is the common implication that wealth inequality is a measure of/proxy for poverty. This comes largely from the fallacy that wealth is a zero sum game: "the rich get richer while the poor get poorer."

You're saying the deffinition of poverty is floating? I get that a $$ value is assigned, but the standard of living assigned for "poverty" hasn't change has it?

The rich do get richer, the poor grow in population. (i.e. population "get poorer")

I'd say nearly by definition it's not a fallacy, rich people don't put the money back into the system, and in the important areas. There is only so much a single person can consume, the rest is literally keeping the monies out the other people's pockets.

Upto about 60k annual or so it's a standard of living issue, after that value, it's fun and games. It's no wonder the dicotamy between ideals of poor people & rich people in this context is what it is.

The fallacy is in rich people's greed for wealth; specifically the line "I've earned it.". It's a meaningless objective/argument to someone who is hungy, in need of healthcare or to poor to become sufficiently employed (educated).

I want to point out, in case it's not transparent, that I'm comparing those in poverty to those with say wealth in the 10's of millions & up, where the gap is blatant. Like I said, after a relatively low level of income, it's fun & games, trully. So a simular comparison could be made between those in poverty and those of mediocre income.

Said different, I see no moral issue with "I have to take the bus", and someone who happened to get in on an "sure win" IPO drives a ferrari as a result.

 

[WhoWee]

You're saying the deffinition of poverty is floating? I get that a $$ value is assigned, but the standard of living assigned for "poverty" hasn't change has it?

The rich do get richer, the poor grow in population. (i.e. population "get poorer")

I'd say nearly by definition it's not a fallacy, rich people don't put the money back into the system, and in the important areas. There is only so much a single person can consume, the rest is literally keeping the monies out the other people's pockets.

Upto about 60k annual or so it's a standard of living issue, after that value, it's fun and games. It's no wonder the dicotamy between ideals of poor people & rich people in this context is what it is.

What is the definition of poverty in the US?

 

[nitsuj]

What is the definition of poverty in the US?

It is "floating"! wow, in that case, I agree with russ_watters a bit more.

What a capitalist approach!

lol, reading about poverty, it appears there is "Absolute Poverty" (education / healthcare / food ect) and relative poverty (my neighbour is a millionaire, why not me!).

Sorry I assumed poverty meant below some standard of living, based on basic human needs, and not on how well off you are compared to the neighbours. The latter is clearly independent of morals, assuming you are not in "absolute poverty".

Poverty is a really bad term for that context, the deffinitions between "Absolute Poverty" & "Relative Poverty" are completely different morally.

 

[russ_watters]

Yes, it is an odd and surprising phenomena that often times, the measure of poverty has little to do with standard of living.

 

[Vanadium 50]

This is also a problem with comparing poverty rates over time, as the definition and buying power have both shifted over time. Today, the fraction of families below the poverty line with multiple televisions is twice what it was for all families in the 1970's.

While this tells you something about poverty trends, it also tells you something about the price of televisions.

 

[DoggerDan]

Some things have become more expensive over time in terms of constant dollars. Others have become much cheaper. Our first color television, for example, costs $380 in 1970. In today's dollars, that's about $2,200. It was a 17"! You can't even find a comparable TV today, but a 17" TV/Monitor will run you about $150, or about $27 in 1970's dollars.

Bread, meanwhile, costs about the same in terms of constant dollars.

A more accurate way of comparing prices, however, is as a percentage of the average income, provided.

 

[Bacle2]

Some of the parameters that seem to separate rich neighborhoods from poor ones here in NYC are:

1)Access to a safe neighborhood: crime rates are higher in lower-income areas.
Same with access to safe parks. This can also be seen as a mental-health issue.

2) Access to fruits, vegetables and overall quality food. See mostly junk food, few
fruits, vegetables available in poor areas. I had to travel a good amount to find
something other than fried chicken, BK, or one of the fruit-and-vegetable stands that
are so common on wealthier areas. Markets carry mostly sugary and heavily-processed foods in poor areas.

3)Access to quality education at the high school level. This has to see in part on how education is funded. Some private schools offer college-level courses to high school-level kids (I tutored a few of these kids myself). I think few would argue that those taking college-level courses in high school has a significant advantage over those who do not.

Would most agree that all should have reasonably-equal access to all of the above ( if so, we can discuss how to accomplish this)?

 

[russ_watters]

Would most agree that all should have reasonably-equal access to all of the above ( if so, we can discuss how to accomplish this)?

Depends on what you mean by that. In the US, there are no restrictions on population movement, so by one measure, access is already equal.

There is also the cause-effect problem: quality neighborhoods are quality neighborhoods because quality people live there.

 

[Jimmy Snyder]

There is also the cause-effect problem: quality neighborhoods are quality neighborhoods because quality people live there.

Depends on what you mean by that. I'm sure Berney Madoff lived in a quality neighborhood.

 

[Bacle2]

Depends on what you mean by that. In the US, there are no restrictions on population movement, so by one measure, access is already equal.

There is also the cause-effect problem: quality neighborhoods are quality neighborhoods because quality people live there.

There is the effective restriction of affordability: rents are significantly higher in the better-served areas.

Do you seriously believe most people would not move to an area with better schools for their children, etc., if they could?

And I doubt you can argue a child growing in poorer areas should take-on the burden of improving the areas him/herself. Maybe you can ask for an adult to do so (still, easier to do when you have a top-level education and the access to powerful people that comes from studying at an elite school) but not a child.

Maybe some of the residents could do more than they now do, but this still seems like an unfair situation. Try living in one (if you haven't yet) like I did for a few years and you'll see. See what it is to worry about being mugged when you're coming home. Or see how it was decided that many of the the dirtiest and noisiest activities where dumped in your area of town, etc. Basically, your access to a lot of the things (most consider) make life better , is restricted in comparison to others. It makes a difference over the longer run,believe me.

There is still an element of personal responsibility, maybe in organizing, but the situation seems unfair nonetheless.

( And, for the sake of accuracy, there are (effective-de facto) restrictions in movement; ask my international student friends, who cannot move out-of-town unless they get a transfer to another school, or else spend many months changing their status (if they lose their status, they're not in compliance). And still they pay around 10X tuition. No wonder they all tell me they wish they had gone to Canada instead--see where else we'll get our next supply of scientists and enterpreneurs. Same goes for many other non-resident immigrants.

You may argue this is not unfair; I'm just stating this as a fact (tho I do not believe it is fair.))

 

[SixNein]

Depends on what you mean by that. In the US, there are no restrictions on population movement, so by one measure, access is already equal.

There is also the cause-effect problem: quality neighborhoods are quality neighborhoods because quality people live there.

Well there are economic limits due to scarcity.

But I think the problems we have are more due to the high inequality we have. Inequality is a decent measure of how the rewards system is working in our economy. If we have too much equality, people are not properly rewarded for their efforts; as a result, they lose incentive to do more. If we have too much inequality, some people are over-rewarded for their efforts leading to unrewarding for others for their efforts due to scarcity of resources, so incentives to do more is removed here too.

Since most people accept the argument about equality, I'll will skip it and go into more details on high inequality.

1. Economics is about managing limited resources of scarcity.
2. When people are over-rewarded for their work, other people will be under-rewarded for their work because of the limitation imposed by scarcity.

For the purpose of argument, let's pretend there exists a pie, and all Americans are competing for a slice of it. Suppose a Janitor does a great job cleaning, and he or she is over-rewarded for his job by being given half of the pie. Everyone else in America must not complete for the remaining half of the pie. Suppose an actor does a good job in a movie, he or she is over-rewarded with half of the remaining half of the pie. The rest of America must now compete over 1/4 the pie. Now suppose a great scientists cures cancer, creates an amazing new type of battery, and just does amazing stuff in general. The most he could be rewarded is 1/4 of the pie since 3/4 of the pie is already given out through over-rewarding people. And this is despite the fact that his work is much greater than theirs. In a basic nutshell, over-rewarding is just as bad as under-rewarding. Both high equality and high inequality lead to the same thing: a bad economy.