Friday, December 20, 2013

a note on wealth inequality

Income inequality is complicated enough-- in terms of measurement, etc.-- where inferences about inequity are risky (ignoring the strength of tastes and preferences about [true] inequality). But inferences about the inequity of wealth inequality are even more difficult.

Here's a way to illustrate one factor:  Imagine that half of the population makes $40,000 (the A's) and the other half (the B's) makes $80,000 per year. (First, note that you'd have significant income inequality but no poverty!) Assume that half of each group spends everything they earn (without building significant equity) and the other half spends 90% annually. The resulting wealth distribution would be interesting...

Half of the A's and half of the B's would have no wealth. Half of the A's would have significant wealth. (Assuming a 5% real interest rate, they'd have about $500,000 after 40 years.) Half of the B's would double the wealth of the wealthy A's and be millionaires. You'd get tremendous wealth inequality with relatively little wealth inequity.


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