An Economics Question
Explaining extreme inequality in wealth
Yesterday I listened to a very interesting and important discussion between my favorite public intellectual, Paul Krugman, and his guest Gabriel Zucman, who may be the world’s leading expert on economic inequality. Both men see economic inequality as a threat to democracy. The burgeoning levels of inequality in wealth, in particular, raise the specter of oligarchic governance. (I would say “plutocratic,” but “oligarchy” seems to be the more fashionable usage.)
At one point Krugman asked his guest how it was that the concentration of wealth in the hands of fewer and fewer very rich people has proceeded even more rapidly than the growth in inequality in incomes. Zucman gave a rather complex, multifaceted answer without mentioning what I would think must be the most basic and obvious explanation for why inequality of wealth outpaces inequality of income: rich people save more than non-rich people. Ordinary folks spend a high proportion of their incomes on basic necessities, and have relatively less left over to save. Rich people can save and invest more. Leaving aside the question of inheritance, wealth surely represents the accumulation of savings and the fruits of investing those savings. But if you save and invest more, you accumulate more, that is, you become still wealthier relative to people who cannot save as much as you. So, even holding inequality in incomes constant, we would expect wealth to become more concentrated. This proposition seems to me so obviously correct and basic that I am baffled that two superstar economists didn’t think to mention it.
Am I missing something? Can somebody help me out here?
I haven’t listened to their dialog but it occurs to me that the different nature of expenditures by plutocrats and ordinary folks plays a role. If an ordinary person spends on groceries, gas for the family car, electric bill, etc., his wealth decreases. If a plutocrat buys a yacht or a fourth home in Monaco, it’s still an asset on his balance sheet and his wealth does not go down. It may even go up.
I think neither of those guys have tried to quantify your obvious point. It would take breaking down sources of income flow into securities, real estate, and other forms of income-generating investments. At one point, I'd seen some work done along these lines for the influence weekly influxes of wage-worker IRA and 401(k) deposits had on stock markets. But I've seen nothing on the more narrower focus of how use of disposable income has produced similar influences.