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Wednesday, February 20, 2013

Wealth Inequality in America: Young versus Old

We have a problem of inequality of wealth distribution in America, and the problem is increasing.  The issue is not simply that the wealthiest 1% control too much wealth; rather, the problem is the distribution of wealth between the young and the old.   In a variety of ways, the young are suffering financially compared to previous generations.  Young people have less wealth, earn lower wages, pay higher taxes, and face higher education costs and higher unemployment than the previous generation.  Furthermore, the young will inherit the government debt incurred by their parents.  In this context, 22 percent of American children are growing up in poverty, defined as family income providing less than half of basic necessities.  Forty-five percent of American children are growing up in low-income households.

In America, it has always been expected that each generation would provide a better life for the next generation.  In our time, we have failed.
Let’s look at the distribution of household wealth in America. 
Wealth in America is concentrated among the middle-aged and elderly.  Eighty-nine percent of national wealth is held in families aged 45 and over.  Families under the age of 35, raising young children, hold less than 3% of American wealth.  
Young families did not begin the decade with a lot of wealth.   Median family wealth for families under 35 hit a peak at $16,000 in 2004, but declined to $9300 by the end of the decade.
Most of America suffered financial losses through the Great Recession.  But young families suffered the most severe decline in net worth.  Changes in Median household wealth, representing typical families, are shown in the chart below.  Household wealth was reported in constant 2010 dollars, adjusted for inflation.

Wages and salaries have been in a relative decline since the 1960s, as a greater share of GDP has accrued to owners of capital, and a smaller share accrued to workers.   As we saw earlier, financial assets are concentrated in the middle-aged and elderly, who are receiving a larger share of GDP, while the working youth are receiving a smaller share.  The following chart shows wages and salaries as a percentage of GDP, in constant 2005 dollars.
Wages and salaries also declined disproportionately for the young in the last decade.

I hope to add to this post in the coming days and weeks.
Further considerations are the distribution of income, payroll taxes supporting the elderly, unemployment and the cost of education.
Survey of Household Net Worth

US Census Statistical Abstract

US Census Bureau Publication:  Income, Expenditures, Poverty and Wealth

22 percent of children are in households beneath the poverty level, defined as $23,000 income for a family of four, or less than half of what is needed to meet basic expenses.   45 percent of children are living in low-income households.

Monday, February 11, 2013

Vladimir Putin and Julius Caesar

Here is something of a slightly lighter character for this blog.

A number of years ago, a traveling exhibit of Roman statuary came to one of the major museums in Houston.   Among many other beautiful statues, there was a long line of busts; the head and shoulders of many of the Roman emperors.  At the beginning of the line was Julius Caesar.

As I stared at the head of Julius Caesar, I had a strange feeling of familiarity about the face.  It was the face of someone contemporary, someone famous.  Finally I had it!  Julius Caesar resembles Vladimir Putin!  Or, alternatively, Vladimir Putin resembles Julius Caesar.

Take a look.
Vladimir Putin                       Julius Caesar
To me, there's a resemblance:  the high forehead, the slight hollow in the cheeks, the slight twist to the mouth, as if he is waiting for the right moment to say something.

The resemblance raises another question; whether people come in archetypes.  To me, it seems that certain patterns among people recur, perhaps controlled by groups of genes which are inherited together.  Sometimes, physical appearance, abilities, personality, attitudes and gestures occur as a correlated set.  We recognize these archetypes in our humor, in our dramas, in our cartoons.   We look at a new colleague and say silently to ourselves, "Oh, no, not again.  One of THOSE."

Perhaps evolution selected certain patterns which persist in populations today.  A small, near-sighted man, introverted, patient and clever with his hands, might have been a flint-knapper, making arrowheads and spear points for the clan.  Large and strong men, courageous and far-sighted, might have been the hunters.  A woman with sharp mind and memory, and fascinated with plants might have been a healer.  And ambitious, authoritarian leaders have been a part of mankind as long as people have organized themselves in groups.

Tuesday, February 5, 2013

The Net Worth of America

Total personal wealth in the United States in 2010 was about 58 trillion dollars.  That is our net worth.  That’s everything:  houses, farms, real estate, bank accounts, stocks and bonds, mutual funds, cars; net of all liabilities, debts and mortgages.   This number is important, because it gives us a relative measure to other big numbers, for example, the national debt, or the unfunded liabilities of the Social Security system.   Incomprehensibly big numbers become comprehensible when we can compare them to other big numbers of the same order of magnitude.   And our net worth is a useful yardstick for recognizing when other big numbers are absurd.

Our total net worth is fairly easy to calculate.   I took the number of households according to the age of the Head of Household from the 2010 Census.  I found the mean and median net worth according to the age of the Head of Household from survey data published by the Federal Reserve.  From the mean figures, we can see the total wealth by the age group, and from the median figure, we see the wealth of a typical family.  My estimate of the $ 58 trillion total net worth of the United States compares favorably to the $50 trillion  published by Harvard in 2004, and $ 54 trillion published for 2009 in Wikipedia (but unreferenced).   By comparison, global household net worth in 2000 was estimated at $ 125 trillion, adjusted for purchasing power (calculated from data in Davies, et al, 2007). 

The household net worth figure includes the value of most of American businesses, through ownership of stock and mutual funds by individuals, including 401k and other retirement plans.  It does not include the value of trusts, churches, non-profit organizations, co-operatives, and pension funds; or the net worth of local, state and federal governments; or of publically owned infrastructure.   But for this discussion, let’s consider that household wealth represents the net worth of the United States, and disregard the possibility of selling Alaska back to Russia, or Louisiana back to France.

Distribution of Wealth by Age
Wealth in America is concentrated in middle-aged and elderly households.  About ninety percent of the wealth in America is held by people over 45 years old.   About sixty-five percent of the wealth is held by people over 55, and thirty-three percent by people over 65 years old.  A chart shows the mean and median distribution of net worth by age of household; the wide separation between the mean and median lines indicates the skewness of the distribution of wealth in America.

The median net worth for young families (< 35 years old) is $9,300, less than one-third of the global average household wealth ($33,800, Davies et al, 2007).    The deteriorating economic condition of many families can be seen by comparing the median net worth by age across through the first decade of the century.  The 2008 recession had a significant impact on family wealth in all households except the most elderly.

The concentration of wealth in older households has consequences for children in America.  Households headed by people under the age of 35 have the lowest net worth, and of course, these are the households raising small children.  Twenty-two percent of American children are living in households below the poverty line, which is defined as having less than half of the income needed to cover basic expenses.  Forty-five percent of American children live in low-income households.

Net Worth of America, by Comparison to Other Big Numbers
We can compare a few other economic numbers to the $ 58 trillion in household wealth, which provides a yardstick for seeing the significance of other big numbers.
  • United States' externally held ("publicly held") debt is about 12 trillion dollars.   Including government debt held by other government agencies (representing the Social Security trust fund), the total US federal debt is about $ 16 trillion, or 27 percent of our total net worth.
  • The total value of publically traded stocks, representing the market value of all major companies in America, was about $ 12 trillion in 2010, or about 20% of household wealth.    Total market value of all stocks today is about $ 16 trillion.
  • The United States currently has a negative net international investment position.   Foreign interests hold a net $ 2 trillion dollars of American wealth, greater than the assets which Americans own overseas.
  • The United States money supply (M2) is about $ 10.4 trillion.   This measure of money supply has increased from about $ 7.7 trillion in late 2008, and increase of $ 2.7 trillion.  The increased money supply is largely a result of the Federal Reserve program termed “quantitative easing”.  
  • The Wall Street Journal recently published an article by Republicans Chris Cox and Bill Archer, which claimed that unfunded liabilities for Social Security and Medicare are accruing at a rate of $ 7 trillion per year.   According to Cox and Archer, unfunded liabilities for these programs now total about $ 87 trillion.  If correct, the unfunded liabilities of these programs befitting senior citizens greatly exceed the total net worth of all households in America.

Survey of Household Net Worth

US Census Statistical Abstract

US Census Bureau Publication:  Income, Expenditures, Poverty and Wealth

Wealth Inequality: Data and Models
Marco Cagetti, Federal Reserve Bank of Chicago; University of Virginia

World Distribution of Household Wealth, Davies, J.B., et al, University of California, Santa Cruz, 2007.
Year 2000 World Household Net Worth, 3.7 billion adults, average net worth $33,800, adjusted for purchasing power.   Calculation shows global net worth of 125 $ trillion, adjusted for purchasing power.

22 percent of children are in households beneath the poverty level, defined as $23,000 income for a family of four, or less than half of what is needed to meet basic expenses.   45 percent of children are living in low-income households.

Chris Cox and Bill Archer, WSJ, Nov. 28, 2012
The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion.