January 9, 2018   4 mins

Politics – and the media’s coverage of politics – is full of words that I’m not sure are universally understood. Especially problematic are pairs of words that describe related but distinct concepts. For instance, I’ve heard prominent politicians confuse ‘debt’ with ‘deficit’, and ‘energy’ with ‘electricity’.

Another example is ‘income’ and ‘wealth’ – terms which are often used interchangeably in everyday language, but that have distinct meanings when it comes to economic policy. This is especially important when it comes to the issue of inequality.

Wealth inequality is the subject of piece by Christopher Ingraham for the Washington Post. He kicks off with a helpful definition:

“Wealth, often described as net worth, describes how much stuff you actually have: It’s the value of your assets minus the value of your debts. If you have a $250,000 house but you still owe $200,000 to the bank on it, and you have no other debts or financial assets, that means your net worth is $50,000.”

His key point is that, in America, wealth inequality is even greater than income inequality – and that the problem is getting worse:

“The wealthiest 1 percent of American households own 40 percent of the country’s wealth, according to a new paper by economist Edward N. Wolff. That share is higher than it has been at any point since at least 1962, according to Wolff’s data, which comes from the federal Survey of Consumer Finances.

“From 2013, the share of wealth owned by the 1 percent shot up by nearly three percentage points. Wealth owned by the bottom 90 percent, meanwhile, fell over the same period. Today, the top 1 percent of households own more wealth than the bottom 90 percent combined. That gap, between the ultrawealthy and everyone else, has only become wider in the past several decades.”

Polling shows Americans don’t actually want a perfectly equal world in which everyone has an equal share of the nation’s wealth (imagined by Christopher Ingraham as 100 slices of a pie):

“On average, respondents said that in an ideal world the top 20 percent of Americans would get nearly one-third of the pie, the second and middle quintiles would get about 20 percent each, and the bottom two quintiles would get 13 and 11 slices, respectively.

“In an ideal world, in other words, the most productive quintile of society would amass roughly three times the wealth of the least productive.”

In reality the top 20% have 90 slices of the pie. With just 8 for the next quintile, 2 for the middle quintile and nothing for everyone else. The distribution of wealth has become steadily more unequal in recent decades, but even if the trend were reversed, how likely are we to achieve the “ideal world” described above?

The answer is very unlikely, because the underlying dynamics of wealth tend towards inequality.

For a start, richer people not only have more income to save they are also in a position to save a greater proportion of their income. Their consumption levels are generally higher too – but not so high as to mop up that extra income, leaving a surplus to be saved. In theory, the rich could just spend, spend, spend, but, in practice, most people’s appetite for consumable items is limited. As for splashing out on luxuries like expensive jewellery or second, third or fourth homes – those are too are assets and therefore add to wealth, not consumption. Therefore, any given level of income inequality will normally produce a higher level of wealth inequality.

Another factor is that wealth levels are age-dependent. The longer you live, the more time you have to pay off debts and accumulate assets. You can have a much higher income than your parents, but if they’ve paid off their mortgages and paid into pensions for decades longer than you have, they’ll have a great deal more wealth. What we should be concerned about isn’t how much wealth people have at a particular point in time, but how much opportunity they have to accumulate it over a lifetime. The failure of increasing numbers of young people to gain a foothold on the housing ladder, or to accumulate savings, is therefore a matter of grave concern.

On an even longer timescale, inheritance allows wealth to be passed down from generation to generation, raising fears of permanent, ‘dynastic’ inequality. However, the evidence shows that most family fortunes are lost within three generations, a long-term equalising force. Of course, this requires that government policy doesn’t go out of its way to create safe havens for the assets of the wealthy.

Assuming we don’t want to resort to draconian methods like flattening the income distribution, asset confiscation through wealth taxes or the return of sky-high death duties, we need to craft policies that channel the way that wealth ‘naturally’ tends to accumulate and dissipate. This has to start with the aggressive incentivisation of basic levels of saving – it should be much easier to save part of a modest income than a much higher one. We must also do whatever it takes to enable everyone in regular employment to own their homes. Finally, we need a tax system that pushes higher levels of wealth into economically productive and/or socially useful investments – and out of speculation in ‘low risk’ assets like land.

After all, what’s the point of rich people if they won’t risk the money they can afford to lose?

Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.