Modern Pensées

Reconsidering theology, philosophy, culture, economics, and politics

Archive for March 2013

A Reply to “Wealth Inequality in America” YouTube Video

with 3 comments

Interesting video. I love infographics.  However, there are a few notable problems with this video:

1.  The difference between earned income and net worth

I think the common man has a hard time understanding when the narrator speaks of wealth – he means net worth. There is a big difference between net worth and earned income.

Many of those folks in the top 10% of that video earned a janitors wage during their lifetime, but they lived well below their means, delayed gratification and invested wisely.  We would not want to dis-incentivize saving or demonize such people.

If we want to speak of inequality, I don’t think that net worth is a good econometric.  Once one has amassed a significant amount of wealth, it becomes significantly easier to multiply that wealth.  Somewhere along the way there is a tipping point.  This is why Universities seek to be endowed and why Harvard is a glorified Hedge Fund (read here).  The most basic tenet of capitalism is compounding money likes to compound more.  Further, some of those top 1% folks have had money compounding for generations – think Vanderbilt’s, Carnegie’s, and Walton’s.  Most of this wealth is from investment income which has nothing to do with differentials in wage.

We’ve got at least 237 years of capitalism (if we date its age by Adam Smith’s, The Wealth of Nations).  That is a lot of time for wealthy families to grow their net worth’s through investment – so this serves to muddy the waters on “economic inequality.”

Kurt Rambis Michael Jordan

2.  The law of diminishing returns – Michael Jordan vs. Kurt Rambis

I would posit that one is not paid for “time.” We often measure our pay by the unit of time, but the reality is we are not paying people for “time.” What we really pay people is for “value.”  Consider Michael Jordan and Kurt Rambis:

When we consider the law of diminishing returns – say Michael Jordan (30.1ppg, 6.2 rpg, 5.3 apg, 2.4 spg, .8 bpg) and Kurt Rambis (10.2 ppg, 11 rpg, 2.1 apg, 1.7 spg, 1 bpg). Rambis had more blocks and rebounds per game than Jordan, but Jordan had 3x the points and more steals and assists. At best, we can say from a “time” standpoint that Michael Jordan (1985-1998; 2001-2003) was 3x as valuable per unit of “time” than Kurt Rambis (1985-1994).

Kurt Rambis made $5,300,000 in his career – an average of $662,500/yr.  Michael Jordan made $90,235,000 – an average of $6,941,154/yr.  At Rambis’ height he earned $1.1 million/yr and Jordan $33.1 million/yr.  I don’t think anyone would have questioned the value that Jordan added and that he “earned” every bit of his 30x multiplier of Rambis’ salary.  Consider that Jerry Reinsdorf  (and the rest of a syndicate) purchased the Chicago Bulls in 1985 for $16 million.  The franchise today is valued between $500 and 800 million.

Now Michael Jordan’s net worth is estimated between $500-650 million because of his other income from endorsements and investments.  I don’t think anyone would argue that Michael Jordan earned every bit of his half billion net worth and justified his wage differential and his net worth differential versus Kurt Rambis.  Three times the production over the same time period is significant – significant enough to justify substantial wage increases.

3.  Every field has its Michael Jordan’s

The late Steve Jobs was brilliant to say the least.  His ideas, attention to detail, simplicity and intuitive design have enriched millions of people’s lives.  His track record at Pixar and Apple are legendary.  We can go on down the line – Warren Buffett, Dale Carnegie, Sam Walton…

All of these people took risks, substantial risks, to become business owners.  For better or for worse the world runs on incentive.  For these folks they took the risk of business ownership onto their own shoulders and built something great.  Why would we want to turn their success stories into an example of injustice.  Many of these folks have made huge philanthropic contributions to humanity and society – arguably having a far greater impact per dollar than the government programs that would have redistributed said wealth.

4.  We all need a market that rewards risk taking… especially all us little people (janitors, laborers… etc.)

There must be enough incentive in a system for people with business ideas to take on the risk of business ownership.  If the potential for upside is not there, people will not take entrepreneurial risk.  Not everyone is wired to take on this kind of risk. That said, all of us wage earners owe a bit of gratitude that someone took on the risk of starting the company you work for.

I would posit that a worker’s wage is worth whatever an employer will pay.  Wage is subject to scarcity in the same way that precious metals, spices, real estate or many other categories.  In the workforce not everyone has the same skills and not everyone adds the same value.  Some people add exponentially more value and have far greater scarcity in their skill set.  The market tends to reflect this in wage’s within a business or organization.

5.  The (potential) myth of the middle ground

I can’t support with graphs and hard data the claims of this point.  I would posit that there is precious little middle ground between socialism and capitalism.  I presume that the narrator’s solution is wealth redistribution through taxation in order to create a more robust middle and lower class.  Cutting half the upside of the top 20% would have a devastating effect on employment.  The effect would almost assuredly be monotonic – ie. cut the upside by half and half as many entrepreneurs attempt to start their business ideas.  The narrator is talking about taking a much larger cut out of top 20% and huge upside out of the top 1%.

Why would we want to take money out of the hands of people who have a proven track record of creating jobs and multiplying wealth?

I just am not sure if the ideal or even perceptive views are even logically possible in reality.  I am not sure there is enough upside for the top 20% to cause them to take their risks in the U.S. markets.  They would move into other markets that have a much better risk/reward quotient.

Conclusion

I think I get the sentiment of something like this video:  Why such huge differences in net worth?  It offends people’s sense of fairness.  I  get the whole objections of people that add little value, do bad/evil things and get rewarded handsomely for behaving badly.  The abuses of Wall Street, large banks and other institutions that have put our financial system at serious risk.

Let’s not throw the baby out with the bath water.  It’s good to know that tremendous upside exists at all.  It makes me want to acquire new skills, more scarce skills and to keep thinking about new entrepreneurial ideas.  It also makes me want to help the lower 40% grow in their skills, how they see themselves, and develop the value that they can add in a business.

%d bloggers like this: