Forget income inequality, look at asset inequality

Both Scott Sumner (guest blogging at econlog) and Steve Randy Waldman going back several posts have some things to consider in the inequality debate. The current debate has been bouncing around along a number of different lines. Is inequality getting worse. Are the steps on the ladder getting wider. Is the US worse relative to other countries on inequality.

One point that isn’t clear enough is that income inequality is the wrong place to look. A better place to look is asset inequality.

Define assets for the moment as anything that either directly throws off cash or increases in value, with more weight towards the former. Let’s call that asset(i). This is NOT the standard definition of an asset. In this definition, many many people only have one asset: their labor. Notice that this cuts across the conventional definitions about where you are on the ladder. Consider a simple example of a lawyer at an established firm. She makes sufficient income from her labor to be considered well off by persons lower down on the ladder. She may own or eventually own her house. She has a car and other lessor goods. Apart from her labor, the only other thing that might be an asset(i) is her house. That may throw off cash in the future as a sale where any increase in value then comes in as part of that sale. (401K etc are left off to keep the example simple.) In this scenario, in most ways this person isn’t significantly different than a person that is much lower on the ladder. The main difference in their income inequality comes down to what they can get as the price of their labor. Greatly dependent on their standard of living either person (the lawyer or someone down the ladder) may have a longer or shorter time from loss of their labor asset(i) to running out of money. Both share the risk and uncertainty of this single asset(i). This phenomenon extends quite a ways up the ladder.

There is a tipping point that happens either purposefully or organically where a given person begins to accumulate different assets(i). In the purposeful example, the lawyer uses some of her income (and likely time) and buys a second house and rents that out or buys a laundromat and starts running that. Now she has a second asset(i). The organic example occurs when a person achieves sufficient cash where it becomes an asset(i) in its own right. For this to be the case, there has to be sufficient cash where the cash itself throws off enough cash to be at the same standard of living. (I’m deliberately confusing the fact that the cash would have to be in some sort of interest bearing or other account/investment to do that). Say the person has 10,000,000 in cash that is earning 1% yearly which is 100K. So labor asset(i) and the other 10,000,000 asset(i),this person also has multiple assets(i). The tipping point occurs when either enough assets(i) get strung together OR one of the asset(i) becomes such a cash machine that the thrown off cash regularly exceeds what the person spends. At this point the asset(i) become self sustaining and unless something changes will continue to add assets(i) – because the cash has to go somewhere.

The different framework becomes clear:
1) Those who have no assets for whom even their labor doesn’t throw off cash. The young, the old, the sick, those without enough skills – note that this generalization is to spark thought about who might fall in the category of no assets.
2) Those for whom labor is their only asset
3) Those who have labor + assets(i) but aren’t self sustaining
4) Those who have self sustaining assets(i)

This highlights where income inequality is the wrong way to look at it. When the discussion turns to the top 1% and/or the top .1%, these are people in the self sustaining assets(i) category. It isn’t interesting to talk about why wealth is accumulating with them. It is self explanatory. If the stated problem is inequality (of income) how do you address that problem? Even with a scalpel sharp imposition of burdens you would only hold the line at inequality. Insufficient burden would continue the increase in inequality, too much burden would decrease inequality with unknown consequences. This assumes that such a burden can be crafted to only impact those in the self sustaining category BUT it never is looked at this way. The normal thinking is to impose a burden on those who have more than some arbitrary amount of income.

Flipping to asset inequality, the problem to solve is how to move folks from not having assets in the direction of self sustaining assets. For those in certain categories of no assets like the young the issue might be obscure such as education about asset(i). For some, the long term sick/disabled it might be guaranteed income. For those without skills it is creating/improving their labor asset(i). That may also be the case for those that have the labor asset(i) but insufficient income to move to other assets(i). (There are a couple important factors in regards to saving or combining labor (sweat equity) in a venture.) Part of the problem space is also the opportunities for asset(i). There are the traditional ways like small business and real estate and how to finance the first step. Also of interest are examples like Airbnb which provides opportunities at a pretty low entry point; renting a room of a house that you are renting potentially becomes an asset(i). Low entry point opportunities are definitely important. Apps are interesting in a similar way (though much tougher entry point).

This isn’t to suggest that the labor asset(i) is in some way insufficient or of lessor standing but if the goal is to reduce inequality than the idea is that a lot more people need to become owners of assets(i) or more people have to have a higher price for their labor.

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