Should You Be Concerned About Wealth Inequality?

By Brad Thomason, CPA

 

If you follow the release of business books, it is likely that you are aware of a couple of block-busting new offerings:  Flash Boys by Michael Lewis, and Capital in the Twenty-First Century by French economist Thomas Piketty.

On the surface, these two books may not seem to have much in common.  But they both touch on the fact that certain people have a lot more than the average person.  And that this disparity has the potential to lead to some bad things.

This notion of the haves and the have-nots is by no means new.  Opinions vary as whether this is or isn’t a big deal, usually based on the relative position of the person offering the opinion.

The coolness of the bow and arrow notwithstanding, most readers of this blog are going to have a natural resistance to the charms of Robin Hood.  In the matter of stealing from the rich and giving to the poor, most of our readers don’t like which camp they are likely to be thrown into.  And whether you think of yourself as rich or not, nobody wants their stuff taken away.

But I think it’s reasonable to ask if large-scale wealth redistribution is a real concern for most of us, or merely something scary off in the dark.  When policy maker start talking about redistributing wealth, at least on a grand scale, are they really talking about you?  In other words, are you really “rich” within the context of their meaning?

Note that I referenced policy makers there.  That’s to highlight that the definition of rich changes depending on who you ask, and the definition that is the general stand-in from a public opinion perspective is different from the one used by those who really spend time thinking about this stuff.  John Q Public assumes that anyone-with-more-than-me, is rich.  Economists and think-tank-folk know better. 

The American idea of what it means to be rich is still very much tied to images from the first half of the last century.  When we hear the word rich we think of Humphrey Bogart and Cary Grant riding in limousines, and the actresses of the day dressed in elegant evening wear and weighed down with elaborate jewelry.  We think of books like The Great Gatsby.  It’s “champagne wishes and caviar dreams,” as Robin Leach used to croon.  That is to say, we have in mind a lifestyle that goes way beyond what a modern family with a one or two million dollar net worth is living.

In spite of what a blue collar worker from a union town in the Midwest might think, most families who have a million or two put back do not consider themselves rich.  Significantly, neither do most credible policy makers.  Which is to say, if that’s you, be aware that talk of substantial wealth redistribution is probably not aimed at you in the first place.

Even if it is, keep in mind that just because someone is talking about it, it doesn’t mean that it’s imminent.  Just as the have/have-not dynamic has been around for a long time, so has the notion of taking from one and giving to the other.  History doesn’t have much evidence of that happening at sustained levels so severe that it flips the table.  Short of revolutions, wealth redistribution becomes an ongoing, though ultimately tepid activity.  That’s probably because there are some naturally occurring checks and balances in place:  Extreme cases of redistribution start getting into property rights issues, which no group has a stake in watering down (if you don’t have a lot, being able to retain what’s yours becomes even more important than if you had excess).

Another potential factor has to do with the relative value of wealth.  Wealth has historically been viewed as having a major and minor mission.  The minor mission is that wealth is a back-up supply of extra resources that are available to supplement thin times.  But the major mission of capital has always been to produce new capital, in the form of investment returns.

However, if you look at investment returns for most common asset classes right now, they are markedly lower than what was the case in previous generations.  Reasons why this might be the case vary depending on whom you ask.  But what is not up for argument is the fact that rates of return are lower for the most common asset classes.  The implications are clear: those who use capital are simply not paying as much for it as they used to.  When savings don’t earn as much as a person thought they would, it seems fair to ask if the capital itself is as valuable as once thought.  So turning back to our conversation about the possibility of wealth redistribution, it seems plausible that if wealth is viewed as having less fundamental value in the first place, we could see less fervor on the part of those who favor redistribution.  The win they stand to get is smaller if the capital isn’t worth as much; perhaps to the point that the smaller win is less worth the effort of a very vigorous battle in the first place.

Bottomline, talk notwithstanding, if you are an owner of capital today there may be some risk that someone wants to take a chunk of it away in the future.  But the far more proximal risk is return underperformance in the here and now.  One may be a problem someday; but the other is a problem right now for a large percentage of investors, especially those who have stuck to traditional stock/bond/CD allocations and not explored the possibilities available from the various alternative asset classes out there.

Instead of worrying about an esoteric policy movement which may have an impact out in the future, most investors would gain an advantage by shifting that attention to a thoughtful review of current investment holdings, and taking action to explore alternatives for any of their portfolio components which they find wanting.    

You can leave a response, or trackback from your own site.

Leave a Reply