We have a general problem in that people do not consume enough to grow our economy. Now, endlessly increasing consumption sounds bad, but it’s basically required for the economy to keep growing in real terms, since it’s the main component of GDP. Most wealthy people, not even billionaires but lots of run-of-the-mill hundred-thousandaires and petit millionaires, save a lot of their money including their ROI, or at the very least spend money less quickly than they make it.
If people spent money more or said “enough” earlier in their wealth accumulation journey, asset prices would be lower and the economy would be bigger. This is good in a lot of ways because capital goods like land really ought to be inexpensive to allow the economy to grow. Same with stocks. Assuming a constant risk-free rate of return (ie treasuries) it’s actually better for equities to have a lower P/E ratio - it’s cheaper to purchase cash flow.
I think this general lack of propensity to spend, or basically hoarding, is caused by our perpetually low interest rates and also general government policy that is leading to inflated asset prices. But there is also a cultural aspect to it though. There are a lot of “middle class millionaires” these days with $10m+ fortunes who basically don’t spend it. It’s their right to do so, but it’s stifling growth for the reasons I’ve outlined
1. Because birth rates are lower, being directly supported by one's children/grandchildren is no longer feasible.
2. No socialized retirement system. As a result, each individual must accumulate a small fortune in order to retire. Most retirement plans rely on living off of the investment income without touching the principal. Therefore, the amount required to retire is also sufficient for a person to live indefinitely. (Back of the envelope calculation, assuming 3% annual return on investment after inflation, $3M in retirement savings yields about $90k/year perpetually.)
3. Currently, the first $11.18M of an estate is entirely exempt from the estate tax, and the even the top marginal rate is only 40%. At no point would it prevent inheritance of a perpetuity by several descendants.
(1) is a long-term demographic change, and I think it's good overall, in terms of the care and attention children can receive. (2) forces the accumulation of wealth, out of fear of societal abandonment in old age. (3) allows those accumulations to persist across generations. I think that the appropriate spots to break this cycle are at (2), by instituting better social safety nets and retirement care, reducing the incentive to indefinitely accumulate, and at (3) by significantly increasing the estate tax.
Plus, not everyone wants to work to 67 (full retirement age for SS for most workers today). Then, not everyone wants to drop their spending down to that of a median income household.
Combine those factors and social retirement systems aren’t going to be the solution to stop people from saving and investing privately to supplement.
I can’t see social retirement ever being funded to the level of a middle-class retirement; I think it’s a useful safety net to ensure people who worked their whole lives but didn’t save privately don’t starve, but dramatically expanding it is mathematically difficult to fund.
Nope, the max is around $4200 (or, will be in a few weeks). And that's per person. A couple could receive as much as $8400/month.
We have a general problem that our economy doesn't support certain use cases of wealth.
EG, the ECB recently "loaned" EU member states quite a lot of euros. They do this every year, with the amount determined by public deficits. The amount is not determined by the amount of savings in ECB savings accounts. They can loan as much as they need, subject to EU law.
Public surpluses (deposits by EU member states into their national ECB savings account) are not common. The public doesn't make up the difference. There's no auction of ECB bonds before budget season to balance savings and loans.
Banks access funds in a similar way, though the EU chain is more complex that the UK or US'. There are often rules that dictate a balance between savings and access to central bank funds. Basically though, banks can loan as much as their regulators allow them to... for the same reason that states can.
Isn't this evidence that the aristocrats were right? We beheaded them and new aristocrats sprang up in the same place, almost as if there must and will always be people in such positions.
Or possibly it's just a consequence of the kinds of society we've had up till now. Perhaps in [your favorite utopia] it's not necessary nor beneficial.
So, the market should look like "lots o small companies funded by cheap money" but it does not. And is that because Jeff Bezos is basically Marie Antoinette?
Do some people overcome their initial bad luck and generate wealth for themselves? Of course there are some. But it is not "the majority of those with vast wealth." That's head-in-sand silicon valley tech utopia wankery.
I thought the movie Knives Out did a great job of parodying this "Rich people are ENTREPRENEURS that EARNED IT!" idea.
If you count top 10% as wealthy, sure then you need to be wealthy to make it big. A kid with top 10% parents has everything they need to succeed and create a top company. A poor kid doesn't, true, but a poor kid in USA still has everything they need to get to top 10%, and then their kids has everything they need to become top 0.1%. So you are right, this process isn't perfect, but it works in 2 generations, which is still really good compared to historically.
As a poor kid who did this, this is an incredibly ignorant and out-of-touch statement. This is like the socioeconomic equivalent of that Verge PC build.
Generally, after a lifetime of honest, hard work, you'll make it 1, maybe 2 tax brackets higher than your parents. To make it further than that you have to be especially talented, lucky, or both.
I just looked it up: as of 2016, 7.5% of kids born in the bottom quintile make it to the top quintile, so it is indeed possible, though quite rare. [1]
I think your basic sentiment is right, though you'd probably need to insert one more generation: a poor kid has everything they need to make it to the middle class and live a not-poor life, a middle class kid has everything they need to make it to the top 10%, and a top 10% kid has everything they need to become fabulously wealthy.
The poor -> middle class leap is probably more difficult than any of the others.
[1] https://www.economist.com/graphic-detail/2018/02/14/american...
Is 7.5% “quite rare”? That’s around (and between) the portion of the population who is left handed and the portion of the US population that has naturally blond hair, neither of which would I describe as “quite rare”.
7.5% of the bottom 20% make it to the top 20%. In a perfectly fair and equitable society, you'd expect it to be 20%. I wouldn't call this "quite rare," though I would call this uncommon.
But what percentage of the bottom 10% do you think make it to the top 10%? It's probably even fewer.
And to go step further: I'm not convinced the "top 10%" actually has everything they need to become a billionaire. Zuckerberg's parents were both doctors, Bill Gate's dad co-founded a successful law firm, Musk's parents owned an emerald mine in South Africa. These folks almost certainly grew up in the top 5% of household income.
If you need to grow up as a child in a top 5% household to "have everything you need" to start a wildly successful company, what percentage of the bottom 5% make it to the top 5%?
I'll bet you it's indeed "quite rare."
I agree with you but it remains a problematic point. The issue is the power imbalance it creates and outlines.
Because in and of itself, wealth is of little interest. Economy is first and foremost the study of exchanges. If the wealthy stayed amongst themselves with their wealth parked peacefully and little interaction with the rest of the system, you could pretend they didn’t exist and from the point of view of the economy experienced by the majority of the people that would mostly be true. That’s mostly what’s happening actually which is why people don’t riot.
It is both a blessing and a curse because as usual throughout history when an aristocracy arise, their main fear is that the general population realise they are not actually providing that much value and could be dispensed with. That’s why they use the power they own - the ability to put the system out of balance - to lobby in their favour, keep control of the political system and information apparatus in order to keep being able to extract value from the system.
From my point of view, we are in situation which has a lot to do with the Old Regime. Aristocrats used to explain that they could not be dispensed with because they had superior value and were needed to administer and guide while exploiting the collective labours of the population. Modern large shareholders and executives explain that they can’t be dispensed with due to their superior ability to manage and impart a strategy while exploiting the collective labour of their employees tolling for meager wages.