The Bermuda Triangle of Wealth

October 9, 2018 10:25 AM

"The promise, the deal, was almost unheard of: “work hard, work smart, create value for society, and you’ll become wealthy, your own master for all eternity.” The slave works for his owner. The indentured servant for his master. The communist for everyone. The American for himself. It’s a powerful idea, a powerful motivator, and a powerful system. [...] And they make perfect competitors. For those who have forgotten their first Economics lecture: Perfect Competition: 'In a perfect market the sellers operate at zero economic surplus…This equilibrium will be a Pareto optimum, meaning that nobody can be made better off by exchange without making someone else worse off.' Oh. Right. That sounds fun.
posted by kaibutsu (28 comments total)

god that’s all so well-reasoned and bleak.

one thread a couple of days ago has a brief derail about guessing what things that are considered socially acceptable now will be considered abhorrent in the future, or in a hypothetical good future.

my guess is: the “earning” of passive income. people these days go around all talking about passive income like it’s a thing we should all strive to make, instead of as a form of parasitism wherein capital-holders skim the cream off of the earnings of people who do worthwhile things.
posted by Reclusive Novelist Thomas Pynchon at 11:02 AM on October 9, 2018 [12 favorites]

There are different forms of passive income. To me, a musician who can live off of royalties is not the same as someone who can throw hundreds of millions into a bank and live off of the interest.
posted by reductiondesign at 11:17 AM on October 9, 2018 [10 favorites]

"Sinful" passive income, or usury, is an ooooold concept. It's often seen as the root of anti-antisemitism during the middle ages. I can't suggest this book enough. It looks at the history of using wealth disparity for profit across most of world history. Really great.

Also, I'm thinking of going back to college in my mid-30s. Am I actually insane?
posted by es_de_bah at 12:01 PM on October 9, 2018 [8 favorites]

This blog post is one of the better 'shit be fucked up' econ articles I've seen. Overall, there's a good bunch of evidence that something strange is happening, and the economists seem not to really be sure what it is. For example, check out this really good Planet Money podcast in which they crash a central banker's conference to try to find out why fed interest rate changes don't seem to be doing very much.

URSTADT: He started by looking at how all these giant new companies like Apple and Facebook and Amazon have been concentrating all of this power in their markets.

VAN REENEN: But I think what's really surprised me when I first started looking at this is that this increase of concentration hasn't just happened in those high-tech markets - but you also see happening in the majority of other markets that you look at.

ROMER: You've got retail...

URSTADT: Shipping, banking, health care...

ROMER: Airlines, insurance, utilities - all consolidating.

VAN REENEN: It's actually happening across a wide range of sectors of the American economy.

URSTADT: And all of these big, new companies - it might be that they're what's making the lever act funny.

ROMER: We see this in essentially three ways. The first way is pricing. The Amazons and Walmarts of the world - the one thing they all do really, really well is offer low prices.

URSTADT: Which we like - but those low prices are messing with how central bankers should even understand what inflation means.

ROMER: Back in Paul Volcker's day, prices going down might have meant that economy was in trouble. But now, it might just mean these giant companies are getting more and more efficient.

URSTADT: The second way Van Reenen says that the giant companies are making the economy act weird is through borrowing. It used to be to become a giant company, the important thing was to build the best factories and buy the newest machines.

ROMER: But these days, the way you win as a company is by owning the best version of what economists call intangible capital - things like patents and software. [...]

ROMER: Right, it's not about the trucks; it's about how you move the trucks. And this is how it ties back to borrowing. Another way that the interest rate lever is supposed to work is by making it cheaper or more expensive for businesses to grow. But companies may not need as many loans to build factories and warehouses that they used to.

URSTADT: And that means that the lever won't work on businesses the way it used to.

ROMER: The third way Van Reenen says big companies might be messing with the levers is wages.[...]

VAN REENEN: So, you know, think about, say, Google. Google dominates search. You know, everybody uses Google everyday to search for things. [...] So it creates this kind of virtual circle that's kind of chicken and egg, whereby if you can get be a kind of a bigger kind of platform, you can kind of win almost the entire market.

ROMER: As consumers, we're actually being pretty well-served by all these giant companies, at least for now. But by all of us picking Amazon to be the company for buying everything, we're actually changing the job market and how much workers get paid.

[followed by a long discussion of monopsony, just because]

posted by kaibutsu at 12:42 PM on October 9, 2018 [10 favorites]

Kill your masters.
posted by Token Meme at 12:52 PM on October 9, 2018 [5 favorites]

We need a complete map of where allthe billionaire bunkers will be after the collapse. For reasons.
posted by Artw at 12:55 PM on October 9, 2018 [5 favorites]

There are different forms of passive income. To me, a musician who can live off of royalties is not the same as someone who can throw hundreds of millions into a bank and live off of the interest.

That's the difference between living off of labor (regardless of when that labor happened) or living off capital.

I'm not 100% against income from capital if there are mechanisms in place to prevent it from making rich people exponentially richer at the expense of everyone else. Profit sharing and employee ownership of companies can act as something more like a royalty than a rent. Public funds could pay dividends as a form of UBI (as in Alaska).
posted by Foosnark at 1:02 PM on October 9, 2018 [3 favorites]

I'm not 100% against income from capital if there are mechanisms in place to prevent it from making rich people exponentially richer at the expense of everyone else.

Just for a start, the fact that capital gains are taxed at a lower rate than regular income has always seemed positively batshit insane to me.
posted by mstokes650 at 1:48 PM on October 9, 2018 [13 favorites]

It's true. The banks DO look up your skirt and see any hidden wealth, and then they find a way to take it. I have seen it in action, had it happen to me.
posted by elizilla at 1:51 PM on October 9, 2018 [3 favorites]

Trump wants us to goose step our way back to mercantilism, yet at the same time throws sand in Jeff Besos face and signs NAFTA 2: Electric Boogaloo. I just...dunno.
posted by Brocktoon at 2:00 PM on October 9, 2018

Extremely interesting article. Thank you for linking it. Just a few days ago, I was chatting with a good friend about how it feels as though income inequality is widening into this yawning chasm between people who have financial security as a safety net and people without savings who are one mistake away from tragedy. I posited that if you started at the right tier of the class hierarchy, you could stand a good chance of moving up a class if you were able to get an education and continue the work that your parents began. However, since income inequality has risen and the cost of simply existing in today's world has also increased unrelentingly, it seems quite possible that if you don't "make it" to a certain level of wealth by a point in time, you will miss the train, so to speak. Your children might be able to make the jump if you save and invest for them, but you most likely have lost your chance. This article happens to touch on a lot of the thoughts I had during that conversation, and it's enlightening to see it presented in this manner.

The part near the end of the article where Conrad asks "What's the solution?" and answers it with "Get rich or die trying" rings very true to me.

"The only enemy is your failure to beat the median quickly enough and by enough standard deviations."

Just have to beat that median quickly so you end up on the "right" side. His link to dollar auctions seems particularly apropos considering how expensive college tuition is, and how real wages over time have only increased for holders of bachelor's degrees or higher, and has dropped for everyone else. Even if it sinks you to your eyebrows in debt, it's still incredibly worth it to have a degree than to not. Unsympathetic inelastic demand.
posted by Iron Carbide at 2:02 PM on October 9, 2018 [2 favorites]

That's the difference between living off of labor (regardless of when that labor happened) or living off capital.

IP is capital. And in a digital age it is an incredibly difficult kind of capital to justify. It is not scarce and distribution is as close to free as anything except air ever has been.

I assume we're all on board the "artists should get paid" team here, but don't let the battle lines of the American culture war blind you to what capital is or how purely uber-capitalistic the idea of intellectual property is.
posted by Infracanophile at 2:22 PM on October 9, 2018 [12 favorites]

Adding all those up, the bottom of that range is $980,000 in cash for one-time expenses and it tops out at $2,000,000.

Everyone should start from zero.
posted by the man of twists and turns at 2:24 PM on October 9, 2018 [15 favorites]

This is such an excellent article! It sheds so much light on the why our background levels of financial anxiety are so high: "I'm making good money, my career is progressing, I'm doing everything right, so why do I feel so stretched?"

We are so fucked!
posted by qxntpqbbbqxl at 2:26 PM on October 9, 2018 [4 favorites]

Great article, but one thing confused me. The author mentioned multiple times that you can pay student loans pre-tax if you're in a certain income bracket. I'm paying off loans right now, so this is of interest to me. However, I'd never heard about this pre-tax payment business before, and I can't seem to find any information on it right now. Is this real? Can anyone link to some info on how to do this?
posted by One Second Before Awakening at 3:05 PM on October 9, 2018 [3 favorites]

I think it's probably referring to the student loan interest deduction. It maxes out at $2.5k, though.
posted by kaibutsu at 3:59 PM on October 9, 2018

Also, I'm thinking of going back to college in my mid-30s. Am I actually insane?

No way! Go for it!*

*Says the person who went back for an MS at 25 and again for a PhD at 37, effectively hacking my lifetime earning potential apart with a machete.
posted by gurple at 4:19 PM on October 9, 2018 [2 favorites]

Very good post.

Some higher education leaders are very nervous about the creaking noises being emitted by the overall economy, especially when they keep raising discount rates, especially for schools below #223 and #168.

The elite campus, though, are depending on the 1% and subsections thereof for more gifts and more children.
posted by doctornemo at 5:04 PM on October 9, 2018

I have a friend who asserts that the revolution is her retirement plan. she’s like “and it’s a shitty plan, but it’s the best one available to me.”
posted by Reclusive Novelist Thomas Pynchon at 5:07 PM on October 9, 2018 [14 favorites]

This resonates with me quite strongly.
posted by Anticipation Of A New Lover's Arrival, The at 6:21 PM on October 9, 2018 [2 favorites]

There are different forms of passive income. To me, a musician who can live off of royalties is not the same as someone who can throw hundreds of millions into a bank and live off of the interest.
* * *
That's the difference between living off of labor (regardless of when that labor happened) or living off capital.

No it's not. If the musician stops working and lives off royalties from a product they produced long ago, they are living off capital they own, not labor.

I think the moral intuition stems from the feeling that the musician produced the capital they are living off of more-or-less by themselves and the person with hundreds of millions did not. But also (assuming non-inherited wealth) it's likely a combination of extreme luck, talent, effort and ambition for both. If you think it's OK for a musician not to work anymore it's at least worth think why someone who makes money from non-musical talent is different.
posted by mark k at 10:35 PM on October 9, 2018 [2 favorites]

Royalties come from the sale of product.
posted by dng at 3:06 AM on October 10, 2018

@dng As can increases in value in stock ... the holding of stock is capital; the holding of rights to music is capital (literally 'intellectual property').
posted by auggy at 6:57 AM on October 10, 2018 [1 favorite]

In economics, inflation is a sustained increase in the price level of goods and services in an economy over a period of time.” And that is exactly what our CPI measures, and it says 2%, which means inflation isn't the driving force behind this problem

There are multiple different types of inflation. Some are good (wage inflation), some are bad (price inflation without wage inflation). This is pretty easily explained by the idea that our government doesn't generally try to manage inflation. IE:, they don't really do much when housing costs rise or when food costs rise in specific areas. They could, but they don't. He sort of gets at this by breaking down the components of CPI, but not quite.

They are specifically managing median (general) wage inflation, at or below 2%, so it perfectly makes sense that wages are barely growing. They have a 2% growth cap.
posted by The_Vegetables at 9:18 AM on October 10, 2018

I would like to comment on the Musician vs the someone who can throw around hundreds of millions and this article. Both this article and the view that there are different kinds of passive income do not address what seems pretty important here and that is that there is no sense that what makes this economic cluster so daunting is that there is no sense of anything beyond the individual.

The moral question of whether or not a musician's income from royalties is superior to a hundredmillionaires income from bank interest seems sort of beside the point. In both cases the owner of the capital lives in a vacuum with no responsibility to others, no one else in society has a claim to the income they are receiving, the relative moral standing seems to be really about some idea of fairness that has to do with having earned the income somehow, and the idea that out sized returns on your labor time are somehow not fair. This is a matter of perspective, we all know the occasional outrage that crops up when pro athlete pay is trotted out.

I feel like there is the same besides the pointedness in the article. All of it's arithmeticing ignores the larger question of whether or not "merit," as we generally use the term, is a good way of sorting out the goods of society. I feel strongly that there was a period of time in the 20th century when American culture was not so unable to imagine collective solutions to problems.

Now we are reduced to a kind of social nihilism where it is as if the last ship is leaving and it is either him or me that gets on it. I believe this is why the gig economy gets so much traction, every person a capitalist. This is why I find personal finance distasteful, the geeking out on small differences between mutual fund fees and the whole "financial independence and retire early" phenomena feels like capitulation to a "I've got mine, fuck off and die" mindset that I really hate.

Mind you I do not believe in communism or some perfect world and maybe this is the world we will live in because it is so much more interconnected and there is no way to sustain the social impulses that must be rooted in us from hunter gatherer days in a wholesale way. However I don't think it was this bad before and it kind of depresses me how much I read that seems to be, if not comfortable with what is happening, than sort of oblivious of what is.
posted by Pembquist at 12:26 PM on October 10, 2018 [1 favorite]

Never expected to see Gul'Dan in an economics essay but it was more than appropriate usage there. Other than that brief moment of surprise, this was an incredibly bleak but real outlook. I have a deeper understanding of how fucked I am now. My proposed solution after this and before is the same however, the guillotine and rich heads a-rollin. If being rich becomes deadly, people might think twice about trying to become so.
posted by GoblinHoney at 1:33 PM on October 10, 2018 [1 favorite]

It's a bit late to make a substantive comment but the specific math in this article is often horrible. To the point that it is either profoundly ignorant or deliberately dishonest. For example:

538 wrote in 2014 that “the average american hasn’t gotten a raise in 15 years” — and note that if inflation was a constant 2% for 15 years, overall prices would have risen (1.02^15) = 35% over that same time period. If wages are flat and expenses are up, we might expect median net worth to be flat-to-down.

The linked article is talking about wages in constant dollar terms. So overall inflation is already taken into account for both income and expenses. You can't use nominal dollars for expenses and inflation-adjusted dollars for income and then compare income and expenses. It's just wrong.

"Until I do the math on another 4 years of 8% rent increases (100 * 1.08^4 = 136%) — and realize that I need a 36% increase in income over that same period just to stay flat on nominal take-home savings."

This is wrong. To keep take home savings constant you'd need a 36% increase only if rent was 100% of your salary (which of course kind of makes the whole savings idea moot.) What the 36% increase would do is keep the rent at the same proportion of your income, but your savings would significantly increase.

I see this second one is called out in one comment, he admits it's wrong and tosses in other numbers to show life is tough. Well, he's right about that: Bay Area rents are horrible. But there's a lot of similar conceptual sloppiness throughout the article. As a cri di couer fine, but I would discourage people from putting weight on any part of the actual analysis, charts and FRED data notwithstanding.

- - - - -

This comment's going to be too long but I want to add a second point that applies specifically to the top quintile or decile or so, presumably including the author and his Stanford MBA friends.

The math of compounding works both ways and it applies to salary too. If you start with a high (say, $100k) salary and it is growing even just a little faster than your expenses, you may feel like you have no spare cash through your twenties. Rent and student loans are your major expenses. Then add in kids, increased 401(k), a 529 plan, and a mortgage and you're still so strapped that you don't even notice those crippling payments of your twenties are now a minor proportion of your income. It's the same through your thirties and even early 40s.

But where you actually are when the kids finish college is: No student loans, an expensive and appreciating house, kids you've given like $200k or more as a gift (ie, tuition), and a really big income with very manageable expenses (and in California low property tax). Your are in fact rich and have been for a while, but kind of snuck up on you because, as the author says, people don't understand compounding. You don't need to be ahead by that much in your early career for the compounding to pay off. The cutoff for this experience seems to be, as I said, around the top 10% or 20%.

Tricking rich people into thinking that *they* have it really hard is a great accomplishment of the meritocracy and helps keep tax breaks like mortgage deductions and 529 plans that help the poor less or not at all in place. That people are in denial about this and want to blame the 1% or .1% (who admittedly are the villainous masterminds as opposed the henchmen) I think really hurts the political dialogue and impacts the ability to do broader solutions.

If this post isn't long enough for you, I would recommendDream Hoarders for more on this themes.
posted by mark k at 7:30 PM on October 10, 2018 [2 favorites]

revolution is her retirement plan. she’s like “and it’s a shitty plan, but it’s the best one available to me.”

This is a big sentiment right now.
My peers and I are in our 20s and have some guaranteed super because Australia, but they tell us that they're going to keep raising the retirement age as we near it and we know the world will we be several degrees warmer and radically different before we get there.

It doesn't make you want to plan for a white picket fence and half-acre, even if they're still very desirable.

Then again, I know this sentiment and behaviour is common in youth, and sometimes regretted. I'm told every generation fears they'll be one of the last. Nonetheless it's hard not to have a smoke 'em while you've got 'em" attitude from this perspective.
posted by AnhydrousLove at 10:35 PM on October 10, 2018 [1 favorite]