
Inequality in Equalland - cperciva
http://www.daemonology.net/blog/2011-01-10-inequality-in-equalland.html
======
ugh
This is a nice demonstration that ‘raw’ inequality data is not very useful.
“X% have Y% of the wealth!” really doesn’t tell you very much.

I’m actually only concerned about the consequences of inequality (which could
be positive or negative), not about inequality itself. What do I care if 1% of
the population have 99% of the wealth if there are no consequences to it? I
certainly don’t want to reduce inequality out of spite.

Statistics that tell me, just as an example, how the wealth of parents
corresponds with the success of their children in school are much more
interesting and reducing inequality probably wouldn’t even be the best
solution for such a problem. It’s not as though all that money in mommy’s and
daddy’s bank account makes their kids magically more intelligent. (But it can
pay for private schools or for private lessons and so on.)

~~~
cperciva
_It’s not as though all that money in mommy’s and daddy’s bank account makes
their kids magically more intelligent. (But it can pay for private schools or
for private lessons and so on.)_

FWIW, numerous studies have found that the vast majority of correlation
between parental income and the academic success of children can be explained
by a third factor: Parental education. Educated parents both earn more _and_
provide far more educational encouragement and assistance to their children.

~~~
lsd5you
I feel that you are omitting genetics as a possible (probable) significant
cause of academic success, which because of the corelation with the parents
own academic success will be hard to disambiguate as a variable.

According to horizon (a main stream medium-high brow documentary series in the
UK), separated twin studies show that as much as 50% of 'measured
intelligence' can be attributed to genetics - which was fairly surprising (not
the figure itself, because it agrees with my own suspicions) but because it
was on a mainstream show. What is more earlier in the show they talked about a
scientist in the 30's (nephew of Francis Galton, forget his name) who had
faked a bunch of such studies and made up numbers. The figure he invented was
30%.

~~~
cdavid
There has been many studies for a long time (several decades) which show that
as far as environment matters, what matters is not so much money, but what is
called in sociology "cultural capital" (not sure it is the right expression in
English). For example, in France (but I guess in other countries as well),
children from teachers succeed much better than children from workers, even
though income is not so much different. The ability to speak well, to dress
well, manners, etc... matters a lot for getting high social status (through
work, etc...), and they are valuable because of the inequality. If everybody
has a certain quality, its value is almost zero, it is the same as resources
in economy.

As for the origin of measured intelligence, I would be surprised about 50 % of
intelligence which could be attributed to genetics if you mean IQ (I don't see
how it would be consistent with the Flynn effect, for once). But I would
rather avoid a discussion on IQ (I don't think it is very relevant to the
discussion, as its correlation with success in modern societies is pretty
weak, once above a minimal threshold).

~~~
lsd5you
I suppose the counter point is that teachers are 'underpaid' for their
intelligence, when compared to workers. There is probably an element of that
since teaching is vocational and most people entering the profession do so in
the knowledge that they will not earn as much. Hence we should not be
surprised that their children do better - for both cultural and genetic
reasons (50-50?).

The original point was about academic success, which is surely more corelated
with IQ than economic success.

~~~
cdavid
I think discussion about IQ, genetics and co are mostly meaningless for
various reasons: the issue is extremely loaded politically, which means it is
difficult to discuss about it with people who has a different opinion, and the
science around it is inconclusive at best (the nature or even the reality of
flynn effect is still debated, for example).

This is not to say it is not interesting, but I would put it in the same camp
as discussion around religion: it is possible to discuss about it, but almost
impossible to do it in a reasonable manner with random people in the internet.
That's why I refuse to discuss it as a matter of principle in most cases with
people I don't know personally.

------
btilly
According to Wikipedia, 87% of the wealth belongs to the wealthiest 20%.
However over 80% of _that_ wealth belongs to the top half of that group. The
figures I am looking at do not break it down farther, but my understanding is
that this same relative relationship holds for the top 5%, 2%, 1%, and so on.

Everyone agrees that some wealth disparity is a good and necessary part of a
healthy economy. But there is a _lot_ more going on here than the
straightforward "some people are older, some people save".

The charts and tables at
[http://en.wikipedia.org/wiki/Wealth_in_the_United_States#Dis...](http://en.wikipedia.org/wiki/Wealth_in_the_United_States#Distribution_of_wealth)
are very interesting. Of interest to many in the HN crowd I direct you to
"Current work status of head". Note the immense disparity between "self-
employed" and all other categories.

~~~
gnosis
_"Everyone agrees that some wealth disparity is a good and necessary part of a
healthy economy."_

Nope.

~~~
InclinedPlane
So you think a high-school dropout who spends his days playing Black Ops
should have the same wealth as a trained surgeon who saves lives in the ER?

No thanks. That idea is brain dead.

~~~
cdavid
That reductio ad absurdum, and most likely not what the OP meant. The idea
that a fair society is one where inequalities are rather low is not exclusive
to extreme left ideologies. How you articulate inequality and justice is one
of the most pertinent way to describe right vs left ideologies, and economics
do not preclude either view (up to a certain degree).

If you read serious works about how fairness and inequality relate in modern
democracy (for example John Rawls), you will realize that the concept is
certainly worth of consideration. Being of a normative nature, it is obviously
a matter of personal judgement and opinion, but the idea that inequalities are
mostly bad by nature cannot be dismissed as naive, stupid or both.

Finally, I have never seen any serious economic work which claim that
inequality was necessary for an health economy. There is a lot of studies
about policies which tried to decrease inequalities with disastrous
consequences, of course, but that's different.

~~~
btilly
Low inequalities and no inequalities are very different.

Suppose that we start with equal wealth. And then I buy and consume a
chocolate bar. Odds are that I'm now happier and poorer than you. Who would
seriously argue that this wealth inequality is a bad thing?

I'm right there with people who complain about the amount of inequality that
we have today. I don't think that it is healthy or productive. But if you
believe in having private property and money, you have accepted that _some_
level of inequality is acceptable.

~~~
cdavid
Well, sure, it is impossible to have 0 inequality if you consider pure
equality, but that's a trivial remark. The notion of equality almost always
makes sense only in a statistical sense (are two values statistically
different), unless you have a discrete observation.

------
stretchwithme
Inequality of outcomes dos not bother me. Injustice bothers me. Unequal
treatment bothers me.

But not inequality of outcomes. There are simply too many variables between
individuals that affect outcomes. Some are randomly assigned at birth. Others
are the result of individual choice.

Even if you eliminated all injustice, however you define it, individual choice
and different ability would still produce inequality of outcome.

------
aneesh
The next step is to decompose the wealth inequality into two metrics:
inequality within an age-band, and inequality due to different life stages. In
Equalland, the former is zero, so all inequality is due to the latter.

So, when you hear that the top 20% have X% of the wealth, keep in mind that
the bar isn't 20%. A better bar is the 64% from Equalland.

------
axiom
Thank you!

As soon as those wealth inequality posts started popping up I've been waiting
for someone to point out the idiocy of lamenting the wealth inequality between
22 yearolds just entering the workforce and 65 yearolds about to retire.

~~~
Unseelie
I'd argue, as a 22 year old economist just entering the workforce, that the
fact that people just entering their retirement hold the most wealth is quite
a social problem.

For instance, the ability of the older wealth to influence politics.

~~~
benmccann
Also, in real life, the generation nearing retirement has much better voter
turnout than the generation exiting college. So not only do they have more
money to influence elections, but they're a more desirable demographic to
cater to due to their presence at the polls.

We see this play out clearly in their ability to influence politics. E.g. they
can vote themselves unsustainable entitlement benefits at the expense of
younger generations.

~~~
bergie
...which is why we probably never get to retire. The weirdly shaped population
pyramid in the Western world can make "maybe Google will buy us" a more
reasonable retirement strategy than retirement funds

------
cperciva
This blog post was inspired by the article and conversation here (especially
pg's comment about income vs. wealth):
<http://news.ycombinator.com/item?id=2039503>

~~~
lotharbot
I'm curious: were you also inspired by my previous posts, or did you
independently develop the idea of "equalland"?

<http://news.ycombinator.com/item?id=1830974>
<http://news.ycombinator.com/item?id=1904114>

~~~
cperciva
I'm pretty sure I didn't see your comments -- at least, I don't remember
thinking about this distinction at all until the article two weeks ago.

Good to see that I'm not alone in thinking this way, though!

------
j_baker
I doubt this is a valid model of economic reality (even as a rough
approximation). I seriously doubt that the average American is saving anywhere
near as much for their retirement as this simulation suggests.

"Nearly half of baby boomers born between 1948 and 1954 and now between the
ages of 56 and 62 are at risk of not having enough money in retirement to pay
for basic expenditures, EBRI reports." - [http://www.washingtonpost.com/wp-
dyn/content/article/2010/07...](http://www.washingtonpost.com/wp-
dyn/content/article/2010/07/14/AR2010071405229.html)

------
bhangi
Note that the "inequality" here is strictly age related -- in other words, if
you live according to prescription, then you too will have that amount of
wealth at a particular point in your life. In other words, everyone has the
same opportunity for upward economic mobility. When most commentators talk
about inequality they're really talking about the lack of upward economic
mobility.

------
monkeypizza
So to summarize, even in an ideal equal world, inequality exists. Just
pointing out that the top 20% owns more than the bottom 20% means literally
nothing, because even in a totally equal world, that is true.

If you introduce random variation into the performance of the stock market,
then the ownership of the top 20% would increase even more!

------
lucasjung
Great post! It provides a good gedanken for sorting out how much inequality
results from age and how much results from other factors.

If you made this scenario a little bit more complex, you could demonstrate how
other forms of "inequality" are based, in part, on age:

1: Have everyone start with equal $50,000 salary at age 22, then get a raise
of $3,000 per year until they hit 65. Everyone would still have equal lifetime
earnings, but you would find significant income "inequality" when looking at
the population as a whole.

2: Instead of a flat $3,000 per year raise, everyone gets a 3.5% raise each
year until they hit 65. This is closer to real life than the scenario above,
and would produce an even more "unequal" income distribution.

------
jdp23
Imagine another country which has government-funded secondary education and
pensions that cover the bulk of retirement expenses. Wouldn't the "necessary"
inequality be noticeably lower in that case?

~~~
cperciva
Actually, no. If the government of Equalland were to pay a $50k/year to each
retired couple, they would need to save less and the entire graph would shrink
vertically -- but the ratios would stay the same.

In fact, in the real world government pensions tend to _increase_ apparent
wealth inequality, since they are usually capped (e.g., in Canada the CPP pays
out a proportion of your first ~$40k/year of pre-retirement income, but
ignores any income beyond that point) -- in order to maintain the same
standard of living post-retirement, the wealthy need to save a greater
proportion of their income.

------
amalcon
This is a good point if you make the assumption that people tend to accumulate
wealth as they age as a rule. I think this is likely, but it has not been
established as a general proposition.

The shapes of individual "wealth curves" will not necessarily be identical.
Here are a few examples to consider:

\- A person who is raised in a middle-class home, and has basically the life
story in the blog post will have a curve similar to that one.

\- A person who is raised in a poor home, is unable to afford college even
with loans, and makes a few bad economic decisions early on, though not so bad
that he cannot pay for them, will have a similar-looking debt event, followed
by little change for the rest of his life.

\- A person who is raised in a wealthy home, goes to college without needing
loans, and is taught from an early age the value of savings and investment
will have a much steeper exponential curve, and a much flatter "retirement
decline".

\- A person who is raised in a poor home, is unable to afford college even
with loans, and makes catastrophic economic decisions will likely either
declare bankruptcy or end up in prison. Either event resets wealth
accumulation to an unspecified negative value (to account for the stigma and
reduced access to various opportunities), yielding a significantly different
curve.

\- A person who is raised in a rich home, with a trust fund, but whose trust
fund was invested in real estate and Bernie Madoff.

\- A person living the Equalland scenario encounters a catastrophic financial
event at some point (illness, crime, failure of an over-leveraged investment
such as a home) and is driven considerably into debt. Servicing that debt will
require either a significant portion of income thereafter or bankruptcy.

\- A person living the Equalland scenario, except that his chosen field of
education is overproduced in his generation, will have a similar curve to the
fourth scenario above. The education debt does not necessarily produce
benefits thereafter.

I do think the Equalland scenario is likely to be most common, but I recognize
that my suspicions are likely influenced by the fact that it is the most
common scenario amongst my peers. I don't think it's a foregone conclusion
that it is the overwhelmingly most common scenario in general, especially with
so many different scenarios resulting in a net wealth loss over the course of
a person's life.

------
asmosoinio
Typo at: "The most indebted households in Equalland &mdash $130,133....",
missing the ;-character.

------
Symmetry
Far more useful than looking at inequality in wealth or even income is
inequality in consumption.

------
maeon3
I would like to live in Equal-land, I could live there, slouch around, work
the absolute minimum and avoid work, and enjoy exactly the same benefits as
those working the hardest to maintain that utopia.

~~~
j_baker
No you don't. Money is a terrible motivator. If the only thing that is keeping
you from working hard is the prospect of making more money, might I suggest
that you've chosen the wrong career?

I'm not saying that Equalland is desirable. I'm just saying that I think
you're overestimating the effect money has on how productive people are.

~~~
johngalt
Can I hire you? Money doesn't motivate you right? Minimum wage, no benefits
and 80hr weeks are required.

~~~
j_baker
Oh, so we're playing the reductio ad absurdum game now? Ok, I'll bite. I'll
pay you $1 million to jump off the Golden Gate Bridge. Wait, what was that?
Money can't motivate you to do that?

~~~
johngalt
Gladly. New meaning to the term golden parachute. Additionally I bet you'd
find that there are people who would take that offer even if it meant their
certain death.

Fyi, reductio ad absurdum is a valid method of argument.

I imagine I'd get a lot more applicants applying to my job post if I paid
$1million vs. minimum wage. You may say money is a terrible motivator, but
people will go through all sorts of horrible things for very small amounts of
it.

~~~
j_baker
Reductio ad absurdum is only valid if the proposition is a binary true or
false proposition. This question involves a matter of degree, not a binary
true or false.

Also, it's important to note that if you posted the job for $1 million you'd
get a lot of applicants, but they wouldn't be happy or last very long. It
turns out that there is such thing as paying someone too much. The reason
being that money is a form of external motivation. Too much external
motivation decreases intrinsic motivation:
[http://en.wikipedia.org/wiki/Motivation#Intrinsic_and_extrin...](http://en.wikipedia.org/wiki/Motivation#Intrinsic_and_extrinsic_motivation)

