For Richer for Poorer.

As probably many of you know, there is a cloud hanging over the future of the US and many other countries, the cloud of wealth concentration. There is nothing in life that will not be affected by this phenomenon. It obviously affects our allocation of resources and  it will have tremendous influence on who gets what. It would affect the relations between the social classes and could lead to social unrest if we allow the fissure between the haves and have nots to increase. The following is only one part of an excellent article that speaks to this issue.

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Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes

Oct 13th 2012 | from the print edition of The Economist

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IN 1889, AT the height of America’s first Gilded Age, George Vanderbilt II, grandson of the original railway magnate, set out to build a country estate in the Blue Ridge mountains of North Carolina. He hired the most prominent architect of the time, toured the chateaux of the Loire for inspiration, laid a railway to bring in limestone from Indiana and employed more than 1,000 labourers. Six years later “Biltmore” was completed. With 250 rooms spread over 175,000 square feet (16,000 square metres), the mansion was 300 times bigger than the average dwelling of its day. It had central heating, an indoor swimming pool, a bowling alley, lifts and an intercom system at a time when most American homes had neither electricity nor indoor plumbing.

A bit over a century later, America’s second Gilded Age has nothing quite like the Vanderbilt extravaganza. Bill Gates’s home near Seattle is full of high-tech gizmos, but, at 66,000 square feet, it is a mere 30 times bigger than the average modern American home. Disparities in wealth are less visible in Americans’ everyday lives today than they were a century ago. Even poor people have televisions, air conditioners and cars.

But appearances deceive. The democratisation of living standards has masked a dramatic concentration of incomes over the past 30 years, on a scale that matches, or even exceeds, the first Gilded Age. Including capital gains, the share of national income going to the richest 1% of Americans has doubled since 1980, from 10% to 20%, roughly where it was a century ago. Even more striking, the share going to the top 0.01%—some 16,000 families with an average income of $24m—has quadrupled, from just over 1% to almost 5%. That is a bigger slice of the national pie than the top 0.01% received 100 years ago.
This is an extraordinary development, and it is not confined to America. Many countries, including Britain, Canada, China, India and even egalitarian Sweden, have seen a rise in the share of national income taken by the top 1%. The numbers of the ultra-wealthy have soared around the globe. According to Forbes magazine’s rich list, America has some 421 billionaires, Russia 96, China 95 and India 48. The world’s richest man is a Mexican (Carlos Slim, worth some $69 billion). The world’s largest new house belongs to an Indian. Mukesh Ambani’s 27-storey skyscraper in Mumbai occupies 400,000 square feet, making it 1,300 times bigger than the average shack in the slums that surround it.

The concentration of wealth at the very top is part of a much broader rise in disparities all along the income distribution. The best-known way of measuring inequality is the Gini coefficient, named after an Italian statistician called Corrado Gini. It aggregates the gaps between people’s incomes into a single measure. If everyone in a group has the same income, the Gini coefficient is 0; if all income goes to one person, it is 1.
The level of inequality differs widely around the world. Emerging economies are more unequal than rich ones. Scandinavian countries have the smallest income disparities, with a Gini coefficient for disposable income of around 0.25. At the other end of the spectrum the world’s most unequal, such as South Africa, register Ginis of around 0.6. (Because of the way the scale is constructed, a modest-sounding difference in the Gini ratio implies a big difference in inequality.)

Who Is Rich?

Wealth is often confused with income although they are different concepts. Wealth is a stock, it measures what has been accumulated as of a particular point in time. Income on the other hand is a flow, it measure the rate at which ones income flows in a certain period of time, say a year.

As is to be expected wealth is much more concentrated than income in the US. The results of the 2010 census confirmed what many have feared for a while. The top 20% of wage earners get 49.5% of all wages in the US while the lowest 20% of the labour force has to settle for a miserly 3%. If these figures are not jarring enough then please note that the top 1 % of Americans receive 24% of income when in 1915 the top 1% took away 18% of income.What is most disturbing about this disparity is the fact that a large proportion of children are caught in this unforgiving circle of poverty. It is estimated that 37% of the children in the nation are covered by Medicaid.

If you guessed that wealth is even more inequitably distributed then you would be right. The latest studies suggest that the top 20% of Americans own 85% of the wealth in the land while the top 1% claim 35% of the wealth of the nation. As the above figures suggest the bottom 80% of the Americans have to split the remaining 15% of wealth, and yes that means that the bottom half have no net worth .

The recent discussions regarding whether the Bush tax cuts should be renewed and if so for whom is very much related to the income and wealth distribution in the US. Some politicians favour making the tax cuts permanent while others believe that the tax cuts should be renewed only for those households making up to $250,000 a year. The popular rationale for this income level is that people who earn this much are not wealthy. But a quick examination of income distribution reveals that households whose annual income is $250,000 belong to the topd 2.5% of all Americans. Are we suggesting the there is no difference between those that make $50,000 per year and those that make five times as much? I am afraid that we are suggesting just that.
So what do you think? What income level qualifies an individual to be privileged?