Sunday, September 18, 2011

…Buffet gets WAIT-T!

By kay.e.strong


Warren Buffet, the second wealthiest American, has been a long time proponent of tax reform. Not because it over-taxes the super-wealthy but quite the opposite.  Buffet complains that “a billionaire-friendly” Congress has created a federal tax code that favors ultra-rich investors by taxing investment gains at a lower rate than wage earnings. Eighty percent of government revenues comes from personal income and payroll taxes—taxes borne most heavily by a shrinking middle class.  In his NYT article Stop Coddling the Super-Rich (14 Aug), Buffet writes “It’s time for our government to get serious about shared sacrifice.” Thank you, Mr. Buffet!  What a refreshing acknowledgement that we’re all in this together!

The diehards among us will mount the argument that in America each individual is wholly responsible for his/her own financial fate.  In fact, indolence—or a similar synonym is an oft-cited explanatory variable for the existence of personal poverty.  However, one-dimensional explanations are a poor basis for understanding complex phenomenon.  Take, for example, the Pareto 80-20 rule as a first approximation explaining the wealth distribution emerging naturally from activity in a complex economic system.  According to the 80-20 rule, a skewed distribution whereby 80% of the wealth is owned by 20% of the people is an emergent property arising naturally at the macro-level as a result of collective micro-behavior in a vibrant economy.

Why?  First, recognize that each individual follows a unique path through the game of life with a starting point on the board established by a mixed bag of genetics, parental social-economic status, geographic location and such.  Second, small differences—whether good or bad—in our initial starting conditions affect the final outcome of the game.   These initial differences get magnified over time and our paths diverge sending some twenty percent of us along the path to wealth and riches and the other eighty percent along the other path.  Again, this outcome is an emergent property of a health complex economic system.  So what does the data tell us—are we co-creating a healthy, vibrant economy?

First, a caveat: income and wealth are not synonymous. Income is a flow variable representing earnings, while wealth is a stock variable representing the conversions of unspent income into assets such as homes, stock portfolios and savings. The Census Bureau in the 2010 Poverty, Income and Health Insurance reports that the top 20% of all US households own fifty (not 80) percent of all income with the top 5 percent in possession of a twenty-one percent cut of that. The remaining 80% of American households share the other half.  The Federal Reserve reports that 80% of stock belongs to the richest 10 (not 20) percent of Americans.  Economist E. N. Wolff at New York University has aggregated data on financial wealth in the US.  He calculates that the top 10% (not 20) of households hold more than 80% of total income-producing assets (business equity, financial securities, trusts, stocks/mutual funds and non-home real estate) in the US.  Taken together we now understand how the richest 20% of US consumers account for 40 (not 80) of the seventy percent of all spending attributed to consumers.

According to the data, income shares per se are not as highly skewed as the Pareto rule predicts, however, the concentration of wealth is more highly skewed than expected.  So, what’s happening?  Is this proof of Warren Buffet’s argument? Have the rule of the game been bent in favor of the few?  Has changing the “official” rules of Monopoly in the middle of the game ever favored the rule changer?

I will be eager to hear the sentiment of Congress after the President proposes a special tax on taxpaying millionaires—0.3% of all taxpaying Americans.  Will the mindset of Congressmen remain stuck in the mythical world of Horatio Alger or will they take a first step into a “complex” new world economy? 


Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

1 comment:

  1. So, as it turns out, one of my favorite folks, Robert H. Frank (Cornell) had something to say on the same report (http://blogs.wsj.com/wealth/) just a couple of days ago. And for those who enjoy a good - if faintly disturbing - longer read, I strongly recommend his 2007 book, "Richistan". And I've just ordered his latest, "The Darwin Economy," a brief adaptation of which appeared in the NYT Sunday Business section (9.18.11).
    For those who are still in thrall to the naturalistic fallacy, remember what Mayor Bloomberg had to say Friday about the restlessness of the unemployed.

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.