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Home > Social Issues
Wealth Happens
by Bob Powell, 1/1/04
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See my comments and diagrams below and the article, Wealth Happens  (pdf), which describe the path dependence dynamic; it inexorably leads to extremes of wealth and poverty. Anyone who has played the game, Monopoly, has experienced the reality of this dynamic. Further down, as noted in the addition just below, is data showing the effect of this dynamic and then the "conservative" economic policies that favor the wealthy and put the dynamic on steroids.

Added 7/15/14: Because the cards are stacked so heavily against you, you're incredibly unlikely to win the game. But you -- optimistic dolt that you are -- think you will!!! John Oliver explains the odds: virtually nil.

John Oliver Puts His Finger on the Reason Income Inequality Is So Prevalent in the U.S. , Jul 14, 2014

Think about it. If you join others in a game of Monopoly after they already have Boardwalk and Park Place, what do you think your chances are of winning the game?

After you join, everyone is playing by the same rules, so how can you complain? That's the problem when you join in the economy when everyone else has the vast majority of the wealth. And when the "same rules" are rules that are against everyone who works for a wage. See Why Unions and a Minimum Wage are Necessary, 5/14/14.

Added 7/17/09: Data on Income & Tax Distributions and The Data & Why It's Happening. The dynamic is playing out quite nicely in real life; see the graphs. Described in the second link are many of the policies that favor the wealthy and drive  the vast majority of people into poverty.

Added 7/18/09: Reflections on a statement by Dr. Adrian Rogers.

First, some brief comments:

It's not always the smartest or the most efficient who win at the game, Monopoly. It's that those who first get ahead tend to get even further ahead and those who first get behind tend to get even further behind. [For another reason so many are in poverty, see There's no 'free market' for Labor.]

In a Harvard Business Review (April 2002) article, "Wealth Happens," Mark Buchanan describes from a complexity theory perspective that disparities in wealth happen due to natural dynamics, even when everyone starts out with equal ability and resources. Extremes in the distribution of wealth are greater when capital gains taxes are lower (for obvious reasons) and when sales taxes are higher (introduces "resistance" in the flows between individuals, impeding a leveling of wealth).

The dynamic he describes is called "path dependence" in system dynamics and "success to the successful" in systems thinking. It is the result of two interacting positive feedback loops. This article describes the dynamic and gives examples. See other structures in this file on the Systems Thinking Archetypes & Examples.

Here are causal loop diagrams, the structures, that lead to and illustrate this important dynamic.

This is the Generic Structure, which is a combination of two reinforcing feedback loops. Once one entity (person, product, organization, company, or country) gets ahead, it's easier to get even further ahead because better performance provides more resources and a greater ability to improve performance. A "figure 8" path through this structure is also a reinforcing loop.

Example for "good student" performance over "bad student" performance. Once a student gets ahead, the student tends to get more attention, which allows faster progress. This is experienced relative to employees in organizations as the "halo effect."

Example for how monopolies grow from increased market share. The end result is to reduce competition overall as experienced by anyone who has played the game, Monopoly.

This file has been modified to also contain:
The Sons Also Rise By PAUL KRUGMAN, The New York Times, November 22, 2002
The Apple Falls Close to the Tree By ALAN B. KRUEGER, The New York Times, November 14, 2002

For Richer By Paul Krugman

Related to this dynamic, Paul Krugman wrote an article, For Richer, for the NY Times Magazine (10/20/02, 8094 words) on how "the growing concentration of wealth has reshaped our political system: it is at the root both of a general shift to the right and of an extreme polarization of our politics." Toward the end, he describes “… the possibility of a self-reinforcing process” where “economic policy increasingly caters to the interests of the elite …” This is the same dynamic as the "growth machine" described in The Tangle of Growth

Relative to what he describes, appended are brief explanations of:

  • - The Rules of the Game: An excerpt from the textbook, Business Dynamics, Systems Thinking for a Complex World, by John Sterman of MIT. The excerpt describes this self-reinforcing feedback process.
  • - The Growth Machine: The reinforcing process that occurs and promotes urban growth.

The Tax-Cut Con By Paul Krugman 

September 14, 2003, NY Times Sunday MAGAZINE DESK
Cutting taxes doesn't benefit the middle class, it doesn't create jobs or growth and it doesn't give Americans the country they want. Counting the cost of a 25-year crusade. 7242 words

Data on Income & Tax Distributions - Appended 7/17/09

Added 9/27/10:
Americans Vastly Underestimate Wealth Inequality, Support 'More Equal Distribution Of Wealth': Study by William Alden 9/23/10. Excerpt:

... The report (pdf) "Building a Better America -- One Wealth Quintile At A Time" by Dan Ariely of Duke University and Michael I. Norton of Harvard Business School, shows that across ideological, economic and gender groups, Americans thought the richest 20 percent of our society controlled about 59 percent of the wealth, while the ... real number is closer to 84 percent.

More interesting than that, the report says, is that the respondents (a randomly selected 5,522-person sample, reflecting the country's ideological, economic and gender demographics, surveyed in December 2005) believed the top 20 percent should own only 32 percent of the wealth. Respondents with incomes over $100,000 per year had similar answers to those making less than $50,000. ...

As the new Forbes billionaires list, released Wednesday, testifies, the richest Americans are getting richer, even as the country as a whole gets poorer. After 2005 income inequality continued to balloon.

Income inequality is worse than back in 1929 just before the Great Depression. No matter how much one cuts taxes for the wealthy and corporations, there will be no investment or jobs in the absence of demand. With the astounding success of "flow up" economic policies, no wonder there's no demand and the economy is collapsing. The "conservative" goal of destroying the middle class is well underway.

Another paper: Summary for the broader public "Striking it Richer: The Evolution of Top Incomes in the United States", updated July 2010

Income Share of Top 10% over time

Note that in the 90s the wealthy did enormously well even with higher top marginal tax rates passed with no Repbulican votes. See Republican false predictions of the disaster that would cause ... predictions they're now repeating with the expiration of Bush's game-the-system-using-reconciliation tax cuts, cuts they themselves set to expire. If there's a tax increase, Republicans will be responsible for it.

Income Share of Top 1% over time

Added 9/12/10: Another paper
Income Gap Between Rich and Poor Is Highest in Decades, Data Show
Chart Showing the Wealth Gap

Note 6/23/10: In Praise of Shared Outrage March 16, 2010, Cognition
Shared outrage can help reverse today's extreme inequalities.

"We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all." These were the words of Lord Brian Griffiths, Goldman Sachs international adviser, when he spoke at London's St. Paul's Cathedral last fall. With inequality at historic levels here in the United States and around the world, it's a reassuring message we all might wish to be true.

Unfortunately, scientific research reveals a sharply different reality: inequality is a driving force behind many of our most profound social ills. The Equality Trust reviewed thousands of studies conducted by the U.S. Census Bureau, the World Health Organization, the United Nations, and the World Bank. Consistent patterns emerged, both between and within countries. Inequality is associated with diminished levels of physical and mental health, child well-being, educational achievement, social mobility, trust, and community life. And it is linked to increased levels of violence, drug use, imprisonment, obesity, and teenage births. In short, Lord Griffiths' claim--despite the venue--was a self-serving fiction. ...

Note 3/17/10: Social Immobility: Climbing The Economic Ladder Is Harder In The U.S. Than In Most European Countries by Dan Froomkin, 03-17-10

Is America the "land of opportunity"? Not so much.

A new report from the Organization for Economic Co-Operation and Development (OECD) finds that social mobility between generations is dramatically lower in the U.S. than in many other developed countries. ...

The Data & Why It's Happening

Note 9/26/14:

From America Out of Whack by Thomas B. Edsall, 9/23/14 ... excerpts

... The September Federal Reserve Bulletin graphically demonstrates how wealth gains since 1989 have gone to the top 3 percent of the income distribution. The next 7 percent has stayed even, while the bottom 90 percent has experienced a steady decline in its share. ...

The question is: Why don’t we have redistributive mechanisms in place to deploy the trillions of dollars in new wealth our economy has created to shore up the standard of living of low- and moderate-income workers, to restore financial stability to Medicare and Social Security, to improve educational resources and to institute broader and more reliable forms of social insurance?

I disagree; that's not the appropriate question. The question is why do we have such maldistribution in the first place and tax policies that put the path dependence dynamic on steroids. Below is why!

One of the bright spots in the national economy – the growth in high skill, well-paying jobs – came to an end in 2001. ...

Beaudry theorizes that it was in 2000 that advances in technology and automation, in trade, especially with China, and in the outsourcing of American jobs abroad came together to produce an inflection point.

The net result, Beaudry said, is that a significantly smaller fraction of the population benefits from growth.

That's for sure! See Job Loss Data Tables: National, Colorado, Colorado Springs since their peaks.

Strong majorities, ranging from 58 to 65 percent of those surveyed in emerging nations, agreed that corporations pay their fair share of taxes, help achieve equality and encourage the government to treat citizens fairly. In developed nations, less than half of poll respondents held these positive views.

Too many believe corporations should not pay taxes. Here's why Corporations Should Pay Taxes

Here are charts from Congressional Budget Office data (in the file found on the right: "average after-tax household income") that show how effectively income has flowed to the top (you can get the Excel file and reproduce these graphs for yourself). Values are in 2006 dollars. (At the revised link above, I had to try downloading the file twice before it would work (?). Data originally found at http://www.cbo.gov/publications/collections/taxdistribution.cfm, but that link is now broken.)

This is relevant to the proposal to tax the Top 1% to 7% to pay for public option health insurance. From 1979 to 2006, real income of the lowest quintile (Bottom 20%) increased by 11%. The income of the Top 1% grew by 256% ... and they already made 23X as much in 1979 ... in 2006 it's 73X.

This has NOT happened by accident. Government and Federal Reserve policies have all fed the "poor get poorer and the rich get richer" dynamic. These policies have put the path dependence dynamic on steroids. Here are some of them:

  • Reductions in income tax rates for the wealthy.
  • Taxes on capital gains and dividends at 15%, but a top marginal income tax rate at 28%; this penalizes returns from working for a wage compared to returns from investment and speculation. "Time is money!" and people should pay no more taxes because they invest their time to make money than from investing money to make money.
  • Hedge Fund Tax Loophole allows hedge fund managers to claim their income from a percentage of hedge fund profits at a 15% capital gains income tax rate rather than the normal maximum 35% income tax rate on ordinary income. This is a commission income and not income from profits from the sale of stocks or real estate, which should also not have a lower rate.
    See also: Tax breaks for billionaires: Loophole for hedge fund managers costs billions in tax revenue: This "exemption, however, makes little sense: in economic terms, the fund managers (also known as investment advisors) perform a professional service, much like lawyers or doctors, and receive remuneration for their labor."
  • Tax deductions that are worth more for higher incomes and worth little to nothing for those of low and modest income.
  • Social Security taxes on every wage dollar earned, starting with the very first dollar (no deduction) and then having that money spent to provide tax cuts for the wealthy. See David Cay Johnston on tax cuts for the very, very wealthy were paid for by increasing Social Security taxes: "How the 2003 Bush Tax Cuts were paid for."  
    • Reagan increased the SS tax by 77 percent to, ostensibly, finance not only current retirees, but also pay in advance for future retirements. They planned for the baby boom ... or told the lie that they were doing so.
    • Reagan went on to spend the SS dollars collected and provide tax cuts for the very wealthy. SS is only in trouble because "conservatives" (of both parties) are thieves.
    • Alan Simpson, on Obama's Social Security commission, however sees Americans on Social Security, the victims of this theft, as the "lesser people". See his outrageous & ignorant comments.
  • National policy by the Federal Reserve that assures more people than jobs to depress wages ... note the Fed is a private corporation owned and run by banks, not government.
  • Offshoring of jobs (low-wage, low-tech, & high-tech) that put Americans in competition with extremely low-wage & slave labor, which drives down wages at the bottom, but provides obscene rewards to the executives that destroy (rather than create) jobs.
  • Higher "fees" for many public services that disproportionately affect those with lower incomes.
  • Higher local and state sales taxes that also disproportionately affect those with lower incomes. Sales taxes also introduce "resistance" in the flow of money among individuals, impeding exchange and a leveling of wealth.
  • Businesses that benefit from growth subsidies that redistribute growth-industry costs-of-doing-business onto the public at large. See Colorado Springs: A Broken Region and The Growth Trap.
  • The inevitable and natural "path dependence" dynamic described above that drives the "rich get richer & the poor get poorer" dynamic. Progressive taxation is necessary to prevent this runaway dynamic from driving most of the population into poverty.

These are the real "entitlements". The disparaging use of the word "entitlements" like Social Security & Medicare ignores that people have paid into the programs for decades and by virtue of that are *entitled* to the benefits.

Yes, some will gain more from these programs than they've paid in, but part of living in a civil society is not having people die of hunger and without medical care ... especially when many are in such a condition because of policies like those described just above.

A major problem is that too many ignore the flaws in laissez-faire capitalism and attempt to address them with band-aids like welfare, rather than going after the root causes and reversing government policies, such as those above, that concentrate wealth at the top.

Government does not "spread the wealth", rather it "concentrates the wealth". Many have bought into the lie that reversing policies that "concentrate the wealth" amounts to "spreading the wealth".

The same disconnect applies relative to "trade". Suggestions that we end the "reverse protectionism" that drives corporations to offshore jobs, destroying lives and the U.S. economy, is characterized as "protectionism." Quite insane. See comments on protectionism at Trade Truth #3: 'Trade' Talking Points.

Added 2/18/11: This article makes these same points. Here is an excerpt:

The real effect of 'Reaganomics' by Dean Baker 7 February 2011
Ronald Reagan promoted the idea that conservatives prefer to leave the economy to the market. Nonsense – we've been gulled

... In reality, the right uses government all the time to advance its interest by setting rules that redistribute income upward. As long as progressives ignore the rules that are designed to redistribute income upward, they will be left fighting over crumbs. There is no way that government interventions will reverse a rigged market. For some reason, most of the people in the national political debate who consider themselves progressive do not seem to understand this fact.

To take the most obvious example: fighting inflation has come to be seen as the holy grail of central banks – a policy that it is supposed to be outside of the realm of normal political debate. On slightly more careful inspection, the inflation-fighting by the Fed and other central banks is actually a policy that is designed to ensure that the wages of ordinary workers do not grow too rapidly.

When central banks jack up interest rates to tame inflation, the CEOs at Goldman Sachs and JP Morgan won't be out on the street. The people who lose their jobs will be factory workers, store clerks and other less privileged workers. Raising unemployment among the group of less educated workers keeps their wages down. In other words, controlling inflation is about making sure that the wages of less educated workers don't rise relative to the wages of more educated workers. And the central banks have a licence to push as hard as they like in this direction.

Incredibly, the vast majority of progressives go along with this central bank squeeze. They accept the absurd notion that this upward redistribution by the central banks is simply apolitical monetary policy and agree not to criticise the central bank. As a practical matter, there is nothing that Congress could plausibly do in the way of downward redistribution that would offset the upward redistribution from the Fed's tightening.

This is not the only policy lever that progressives are happy to turn over to conservatives. The exchange rate has enormous impact on the relative wages of workers who have been subjected to international competition through trade policy. If the dollar is overvalued by 20-30% against other currencies, then this is giving a subsidy to foreign producers relative to domestic ones of this magnitude. ...

No wonder our economy is collapsing from depressed demand.

It's not that some, even many, people are not irresponsible. They are. It's just that that's not all that's going on. The policies above actually drive people into poverty by putting the "path dependence" dynamic on steroids. Once driven into poverty many lose hope of ever getting out; they can't pull themselves up be their bootstraps when they have no boots.

When the conditions aren't right for people to thrive, too many won't. See A Gardening Analogy.

This chart shows that the top 20% have done pretty darn well compared to everyone else.

Real Average After-Tax Inome for all Quintiles

"Conservatives" are apoplectic at the thought of raising taxes on those with adjusted gross income exceeding $280,000 a year for an individual and $350,000 for a couple filing a joint return. The household income chart below indicates that would be about the top 6% or 7% that have done about twice as well as the Top 20% and really well compared to the Bottom 80% of households.

Real Average After-Tax Inome for all Quintiles plus Top 10%, 5%, & 1%

The charts just above and below clearly illustrate that the further to the top, the better households have fared.

Real Average After-Tax Inome as a Percent of 1979 Income for all Quintiles, adding Top 10%, Top 5% and Top 1%

Note that those in the bottom four quintiles actually experienced income reductions during the Reagan years.

Here's a summary of how these income groups gained from 1979 to 2006:

Income Group      Gain      Factor better than lowest Quintile
Lowest Quintile     111%       1.0
Second Quintile     118%       1.6
Middle Quintile      121%        2.0
Fourth Quintile      132%        2.9
Highest Quintile     186%        8.1
All Quintiles           150%        4.7
Top 10%               212%      10.4
Top 5%                 243%      13.3
Top 1%                 356%      23.8

So the Top 1% did 24 times as well as the Lowest Quintile.

The chart below contains two of the series above to show how the Top 1% has made out really well even compared to the top 20%. This is well-described in Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) by David Cay Johnston, 2007.

Real After-Tax Income of Top 20% and Top 1%

Compensation has not kept pace with productivity. In 2004 compensation would have been 68% higher had compensation growth kept up with productivity growth. People who work for a wage aren't taxed too much, they're paid too little!

Productivity Up, Compensation Lagging. Analysis by Jared Bernstein of U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis data. Compensation of the bottom 80 percent of the U.S. workforce has lagged productivity since the mid-1970’s.

It's not that those with lower incomes are overtaxed; it's that they're underpaid due to all of the factors noted above. This is consistent with "conservative" philosophy as described below. The idea is to keep those with lower incomes in poverty to enlist them in the war the wealthy wage against taxes.

In fact, the Average Income of the Top 20% has come to exceed the Total of the Average Incomes of the Bottom 80%.

Real After-Tax Income for Top 20% and Total of Average of After-Tax Incomes of the Bottom 80%

Both these pale compared to how well the Top 1% have done. The CBO doesn't show the data, but the Top 0.1% have even done much better than the Top 1%.

Real After-Tax Income for Top 20% & Top 1% and Total of Average of After-Tax Incomes of the Bottom 80%

These graphs are striking, but the real situation is even more disproportionate.

  • The graphs are adjusted for inflation, but the government, controlled by the economic "right", has tampered with the inflation numbers to make them only a fraction of what's the real case. Think for yourself over the last year ... the inflation numbers haven't been all that bad ... but the prices of much of what we buy have gone up enormously.
  • Much income at the top, especially that of the top 1%, is hidden offshore.

But you'll hear that the Top incomes pay the lion share of the taxes ... and disproportionately so. Sob, sob ... Oh! ... the unfairness of it all! 

And it is true. The graphs below show the ratios of the Share of Federal Tax Liability to After-Tax Income Share. They show that the ratio has declined for all income quintiles, except for the top quintile, which has come back to about where it was in 1979. (The Share of Federal Tax Liability data is available at the same CBO link as above.)

Ratio of Share of Federal Tax Liability to Share of After-Tax Income for all Quintiles

But there have been declines in the ratio for the Top 5% and especially for the top 1%.

Ratio of Share of Federal Tax Liability to Share of After-Tax Income for Top 10%, Top 5% and Top 1%

So though it's true that taxes are proportionately higher on the wealthy, it's reasonable for at least four reasons:

  1. You can't get blood out of a turnip. Increased taxes on the wages of those with lower incomes, incomes that have been depressed for decades (see the productivity and compensation chart above), won't yield much.
  2. As noted above, much individual and corporate wealth has been hidden offshore.
  3. These show "Federal Tax Liability" ... but state and local tax liabilities, as well as fees for public services, have increased dramatically and had major impact on those with lower incomes 
  4. Without progressive taxation, income and wealth will continue to flow to the top; see Wealth Happens. This is what happens because of the "natural law" of path dependence, which is why conservatives have elevated the fact that this happens to be the "hand of God" in action.
    See quotes at The Conservative Mind ... for example that Poverty is part of the "eternal order of things ... which never can be removed by legislation." This is the exact same 16th century thinking of Niccolo Machiavelli.


Reflections on a statement by Dr. Adrian Rogers

I received a statement in e-mail, by a Dr. Adrian Rogers, that illustrates the thinking and profound ignorance of the "conservative" mind. The title, Dr., must be from a degree in theology, perhaps honorary (?) as I cannot find a reference to the accomplishment on Wikipedia or his website. Here's the page with the quote (absent the last sentence) on his website where you can also listen to the audio. Contents of the e-mail:

What a profound short little paragraph that says it all

"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."
~~~~ Dr. Adrian Rogers, 1931    [... this should be: 1931-2005]

This little paragraph doesn't "say it all" at all. The issue isn't legislating "the poor into freedom" or "the wealthy out of freedom". In fact, "conservatives" have a profoundly limited concept of "freedom".

The wealthy have very effectively influenced government to "legislate vast numbers into poverty" and themselves into wealth by the policies outlined above. This is America; if you want to know why something is as it is ... follow the money.

Dr. Rodgers' statement is entirely consistent with the beliefs of Jeremy Bentham, a conservative philosopher who asserted that human actions are guided purely by pleasure and pain, and nothing else. From Greenspan's Fraud by Ravi Batra, p. 51:

"The practical outcome of this doctrine," assert economists Hunt and Sherman, "was the widespread belief at the time that laborers were incurably lazy. Thus only a large reward or the fear of starvation and deprivation could force them to work." In economics jargon, peasure became utility and pain became disutility. The economists came to believe that everyone tries to  maximize utility and minimize disutility.

But the creed that laborers would offer little labor unless goaded by hunger led the latter-day classical economists to oppose labor unions and minimum wage laws. This is because if government or union actions raise wages above the subsistence level, workers would withhold their labor, so output and profit would decline.

Therefore, classical economists believed that wages should be kept as low as possible. This, they argued, would also keep workers fully employed, because low wages induce companies to hire more workers, ensuring a high-employment economy. ...

This underlies "conservative" beliefs to this day. It ignores, of course, that employment is governed by Federal Reserve policies; see why at There's no 'free market' for Labor and What determines unemployment anyway? Fed policy that promotes worker insecurity.

Dr. Rogers was a conservative, an author, and three-term president of the Southern Baptist Convention. According to Wikipedia:

He was first elected to this post on a platform of biblical inerrancy, and under his leadership, the denomination shifted sharply rightward, firing liberal and moderate seminary professors, as well as requiring all employees of the denomination's seminaries and the national office to affirm their adherence to the Baptist Faith and Message, a document which Rogers later (when he was no longer president) succeeded in significantly revising. ...

Imposing loyalty oaths helps suppress tendencies toward Heresy. Damn those "liberal and moderate professors" anyway.

By the way, I was raised Southern Baptist and have personal experience with their dysfunctional beliefs.

URL: http://www.exponentialimprovement.com/cms/wealthhappens.shtml

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