Friday, March 4, 2011

The Rich Are Getting Richer? Why?

In the last post I showed that the Rich are getting Richer, so why?  I want to get richer, what are the rich doing, and what can we plodders learn from that?

The graph at right shows INCOME GROWTH, not income. So if I make a million dollars a year, and I get a 1% raise, thats $10,000. If I make $10,000 a year, and I get a 1% raise, that is $100. This makes sense.  When I was young, and made $1.28/hr, and I got a 0.4% raise, and got an extra nickel an hour or $2 per week.

Top income earners get most of the income, and they get most of the absolute income growth.

The  percentage of national wealth controlled by the top sector has increased, but not dramatically.  This fraction has jumped up and down in the last 90 years.

So why are the wealthy making more, it seems that money is making more money. That is capital gains from current investments is the main difference. 

A person can only work 8 to 14 hours a day, but I can have an unlimited amount of money earning more money for me. Once I get some money invested, I just keep getting more -- as long as I don't spend it. I can have an almost infinite amount invested for me. Once you are wealthy, you keep getting wealthy because you are getting more interest or dividends for your money.

Although that makes sense, data on the recent trends in income disagree. They show that individuals in highly paid industries are making more and more. According to Damanick Dantes (which must be a pseudenym), compensation on Wall Street and for CEO's really took off in the 1980's.  Like Dantes I don't have a problem with rich people who work hard and are productive. Further, the people that earn a ton of money this year, are different from last years and next years -- that is there is churn in the top earners from year to year.

The richest people in America started with a wealthy background, but not enormously so. Bill Gates and Warren Buffet became enormously wealthy based on their merit, but had a strong headstart with good educations and access to the family money. In the top 10 richest people in America, six are industrialists who had a large hand in their fortune, and 4 are descendents of Sam Walton.

What seems to be happening is the computer technology is allowing better management and better efficiency creating better returns to entreprenuership. I'd say better returns to capital too, but interest rates are at record lows right now.