The Driver of Wealth Inequality

post by Vox · 2019-02-06T20:42:53.368Z · score: -19 (6 votes) · LW · GW · 6 comments

With regards to wealth inequality, the structure of the American machine as it currently operates appears to be broken.

Compounding interest, that process by which wealth grows over time, was once said by somebody somewhere to be the eighth wonder of the world, and well might it be.  However, differences in relative rates of compounding ability between those who are wealthy and those who are poor can result in a dangerously widening divide as time ticks onward. From the income perspective those who are wealthy, financially literate, and have the time/energy/experience to act gain significant competitive advantage in the compounding game through, among other perks, education, downside protection, tax mitigation, and the ability to pay for skill (lawyers, money managers, tax accountants) than those who are not financially literate. As just one example, with capital gains tax being at a much lower rate than salary tax you have those who derive the majority of their income from capital gains able to compound at a much faster rate than those who must cede a larger portion of their income to the government.  Just as $0.01 doubled each day will set you up with a little over $5mm by the end of the month, so that small difference in taxable income will, over time, compound to a very much larger sum.

On the costs side, those who are already wealthy pay a smaller percentage of their income in costs (food, living, healthcare) than those who are poor and already paying 30-50% of their income as rent and living paycheck to paycheck.  The price of a banana, a beer, or a visit to the dentist will not materially change commensurate with your wealth, and putting aside money for a nest egg in this high-percentage cost situation is significantly more difficult.

These add up to an incredibly inefficient system whereby the bounty from a surging economy is funneled upwards.  As their wealth proliferates, an already ludicrously wealthy subset of the population becomes steadily more so.

That said, it's important to point out that the structure isn't necessarily the fault of those who have been rewarded by its setup. Certainly, many wealthy individuals feel they have done their due diligence to properly understand the financial system, to hire the best accountants, lawyers, etc, and are only being compensated for shrewd decision making, back breaking, and risk taking. After being rewarded for such behavior, it becomes the smart thing to do; to grow and incubate the nest egg in offshore bank accounts instead of pouring that money back into the American economy like their middle and lower-class counterparts.  This is even more “common sense” if your field and your daily exposure is already in finance, in management, or in running a business.

In this age, as shareholders look for ever increasing revenue and income, corporations (whose gains flow to investors and financially savvy shareholders) must increase prices for those that consume their products while keeping costs down in the form of suppressed worker wages and even complete automation of those jobs where possible. This is additionally catalyzed by the development and deployment of AI in markets.  In today's American paradigm, it's easy to see that those who are already wealthy reap the majority of the economic reward, while those who are not bear the brunt of the economic costs.  In this system, savvy compounding drives the wedge ever deeper.  Hopefully there will be some way to address this divide before inequality tears our American dream apart.


Comments sorted by top scores.

comment by Dagon · 2018-05-10T14:56:36.131Z · score: 13 (4 votes) · LW · GW

I don't see how this relates to rationality. I can't tell what conclusions you're drawing or advice you're giving, but I suspect I'd disagree if I knew.

comment by Elo · 2018-05-10T18:39:00.487Z · score: 5 (1 votes) · LW · GW

I agree with Dagon and I had a comment that didn't post.

Without a concluding paragraph this seems like just politics.

If there is a problem as you say, how do we fix it? If we already agree about the problem we can stop talking about it and think of solutions now.

comment by ialdabaoth · 2018-05-09T23:45:06.735Z · score: 3 (2 votes) · LW · GW

Who would benefit from addressing this divide, rather than accelerating it? What power do those people have, compared to the people who benefit from accelerating the divide?

comment by Vox · 2018-05-10T08:54:34.969Z · score: 1 (1 votes) · LW · GW

Also, this is my first post so I’m entirely unfamiliar w/ the format. If I’ve done something wrong, or am out of line (wrt votes), please let me know as I’m just generally excited to have found this community and don’t want to detract :)

comment by CronoDAS · 2018-05-11T19:50:14.128Z · score: 17 (4 votes) · LW · GW

We generally try to avoid discussing politics here.

comment by Vox · 2018-05-10T02:52:10.243Z · score: -7 (2 votes) · LW · GW

People who could benefit from addressing the divide are fringe politicians (Bernie, Trump) seeking to appeal to a large base (where #s of votes can be more important than campaign contributions) and going up against a $-driven establishment, social activists looking for support for their cause, etc.

Basically any situation in which numbers of people can be more valuable than money alone. Media, even. Those looking for social power over monetary power. Additionally, those looking to preserve social stability (as extreme wealth inequality can lead to revolutions)

It’s true that those benefitting from maintaining the status quo have significantly more monetary power as a result of their competitive compounding advantages. That being said, we’re seeing powerful people beginning to address it for social reasons (Larry Fink being an interesting one). Those that realize the stability of the system, and their hold on it are threatened by exacerbated wealth inequality. This in addition to those altruists who are legitimately upset by money being funneled to a small subset of the population.

I think the problem is interesting because it can’t properly be addressed without understanding the fundamental underlying problems in the system’s configuration. When the stability of the system is threatened, it forces those who’ve been lifted up by it to examine their own success and the programming of their motivations from birth. The American Dream sells us on happiness and self actualization through the accumulation of wealth. However, the “torch the fields” accumulation of wealth without regard for societal impact or inequality seems to be causing mass unhappiness and impedes self actualization by effectively mass-enslaving people for the benefit of those already most effective at compounding. It only gets worse as margins are squeezed tighter and tighter, and as corps become increasingly desperate to meet arbitrary return targets.