Practitioners of a new statistical discipline called Econophysics have produced the curve above, showing US wealth data plotted logarithmically. They claim the richest 0.1% of the population’s income is described by Pareto’s Law — meaning that if you’re born into that kind of money, you’ll only get richer, no matter what you do. And they claim the poorest 99.9% of the population’s income is explained by Boltzman’s Law — describing random movement of gases in an enclosed area, and meaning that even if you’ve struggled up to the left end of the green curve, you’re far more likely to then get poorer than to make it to the 0.1% elite.
A recent survey in the UK shows that, between 1995 and 2005, the average net wealth of 18-to-24 year-olds remained at zero, that of 25-to-34 year-olds fell from $3000 to $995, and that of 55-to-64 year-olds tripled from $50,000 to $150,000, although their total debts actually rose during that period.
In the US, reports USA Today, all of the increased wealth since 1989 has accrued to those 55 years of age or older. Like in the UK, the big losers have been those who are now 35 to 50. This generation doesn’t look poor — they have as much stuff or more than previous generations at the same age, but their debts are astronomical. They are horrifically vulnerable to an interest rate spike (even a small one like the one that has, along with the US housing crash, created the current credit crisis). The disparity is expected to increase, and accelerate.
At a recent financial executives conference in Toronto, Peter Bernstein, one of the world’s most distinguished economists told the (mostly older) crowd that income and wealth disparity posed the largest single threat to economic security and political stability in affluent nations. The people I spoke to afterwards said they didn’t believe him. I wonder why.
I watched a program a couple of years ago that showed an astonishing correlation — community-to-community, region-to-region, country-to-country — between wealth disparity and violent crime. This is nothing new, as anyone in a country with a high Gini index like Brasil (or, now, the US) can tell you.
I’ve also reported on this blog that the belief that hard work or education is the road to upward economic mobility is a myth. The chart above demonstrates that if you’re born rich, you’re destined to get richer, and if you’re not, well, you’re in for a lifelong struggle with at least a 50% chance of actually ending up poorer for all your efforts.
Put these all together and you have a tinder keg. There are only three things keeping it from blowing:
So when the economy unwinds, will the poor overcome their ignorance and shame and rise up in mutiny against the old rich elite that has hoarded 100% of the benefits of economic development for a half-century? Especially since for the most part this elite is also disproportionately responsible for the activities that has created global warming?
It seems unimaginable, doesn’t it? It just isn’t in the psyche of Americans, Canadians, Europeans to rise up in civil war, is it?
Your answer to these questions will depend on how well you have studied, and learned, the lessons of history. I suspect Peter Bernstein’s answers and mine are the same. He stole the show, andall he got was polite applause. What will it take for us to learn?
Category: Understanding Economics
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