The spoils of income inequality

On July 13, 2012, a Tumblr blog by the name of “Rich Kids of Instagram” started sharing public Instagram photos from the rich and sometimes famous. Every picture showed how the wealthiest enjoyed spending their money and the many adventures brought on by the good ol’ American dream. The site’s popularity spawned a reality TV show called, “Rich Kids of Beverly Hills.”

When I first saw photos from “Rich Kids” — driving in their brand new Ferraris and drinking Dom Perignon through glass AK-47s — I got mad.

“Look at how much money they spend on themselves, when there’s poverty, starvation, and war,” I thought.

We are talking about kids that grow up with American Express Centurion (“Black”) Cards and know that their parents have a total net worth in the hundreds of millions or billions of dollars. They spend money without care — because they needn’t have one. Their money is safe for many generations to come. This excess and desire for luxury goods and travel is nothing more than a symptom of years of compounded income inequality. And a select group are getting really rich in the process.

The takeaways:

1. Buy a fast car
2. Drink expensive liquor
3. Make sure everyone around you is beautiful and knows you’re rich

Your stock portfolio and plutocracy

In 2005, I was in the middle of high school — loathing every minute of it. I never read. I didn’t get along with most of my teachers. I was mister average. I don’t think most of my teachers would remember me. The only thing that seemed to set me apart was a fervent inclination towards the stock market.

My interest developed after my late grandfather had bestowed a couple classic stocks to our family. I tracked these stocks religiously and would constantly check the newspaper for stock market updates. I remember depositing money into an investment account. I needed my parent’s custodial permission. Underage, I wasn’t supposed to trade alone, but I did. I constantly had to lie to brokers for trades to go through (“Yes, I’m Mr. Adult Lustgarten, and I’m the owner of this account…”). Commissions ate up my profits, but I loved every minute of it.

Later that year I was exposed to the single-greatest financial paper I’d ever read. It was authored by three Citigroup employees: Ajay Kapur, Niall Macleod, and Narendra Singh. Only 16 years old, you couldn’t pay me to read The Odyssey or my European History textbook, but here I was passionately reading a paper entitled, Plutonomy: Buying Luxury, Explaining Global Imbalances. I was a total weirdo.

Basically, plutonomy is a fancy word for saying that a select few wield a disproportionate amount of influence and power over the economy. As the authors pointed out, “Plutonomies have occurred before in the sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S.” They posited that this was happening again.

“We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization [emphasis added].”

The authors argued that, “The World is dividing into two blocs — the Plutonomy and the rest.” They stated that the rich were getting richer and that had deep consequences to consumption. Effectively, the rich would make up “a disproportionate chunk of the economy.”

The authors’ premise was that investors could predict profitable companies based on their target audiences. For example, a wise investor — when accounting for greater plutocracy and income inequality — would be able to make more money in companies that catered to the rich.

The takeaways:

1. Accept that income inequality exists and is growing — do nothing
2. Learn how to make money from it
3. Invest in companies that cater to the wealthy (i.e., Citizen, Coach, LVMH, etc.), while the middle class disappears

Thomas Piketty and a desire for systemic change

In late April, I started reading Thomas Piketty’s masterpiece. The book title, Capital in the Twenty-First Century, is a nod to Karl Marx’s Das Kapital (in case you haven’t had the time to read the near-700-page text, check out my 5-minute guide to Capital). Piketty was nicknamed “Marx 2.0” by Time Magazine.

Economists have long created mathematical formulas to predict financial events, but Piketty found that these methods were inherently flawed. Piketty explained that much of economics deals in a hyper-theoretical world, which is removed from history and doesn’t account for individual actors. For him, this was an opportunity to make economics a truer social science — blending sociology, psychology, history, and economics into one tome.

“For far too long, economists have neglected the distribution of wealth, partly because of Kuznets’s optimistic conclusions and partly because of the profession’s undue enthusiasm for simplistic mathematical models based on so-called representative agents.”
–Thomas Piketty

Capital is just another exclamation point in a long list of those calling for income inequality action — across political parties and professions. As noted, even financial analysts acknowledge plutocracy and income inequality when the differences can be exploited for extra profit.

Now that Piketty’s book is atop much of the world’s bestseller lists, it is attracting a growing number of critics.

With patronizing polarity, Forbes’s Avik Roy wrote, “The American Left has worked itself into another one of its frenzies about income inequality.” After a cursory glance at Piketty’s Capital principles, Roy taunted readers by saying, “Is it really so great to live in a country where everyone is equally poor?” Unfortunately, this appeal to consequences is but a mere distraction from the content and character of the book’s concerns. Of course we don’t want to live a world that’s equally poor — Piketty never advocated for this dystopian, communist world.

Roy’s argument is partisan and illogical, but more evidence-based concerns have risen since then. The Financial Times issued a scathing critique of the book. The author, Chris Giles, says,

I discovered that his estimates of wealth inequality – the centrepiece of Capital in the 21st Century – are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air.

These discrepancies between what Giles calculated from Piketty’s data led him to report that Capital’s biggest fault is in reporting greater than expected income inequality in Britain. Giles contends that Piketty “cherry-picked data” to make it seem worse.

As any ethical professor and scholar would do, Piketty tailored a response to these claims. His rebuke suggests that he made adjustments to data because statistics and economics is highly variable and interpretable. Essentially, The Financial Times calculated differences in their models because they chose different measures of estimation; even then, there was still growing income inequality.

The takeaways:

1. There is growing income inequality, globally
2. In many places, we have returned to near-Gilded Age and pre-Great Depression times for inequality
3. Piketty’s statistics hold up upon closer inspection

Now, will we do anything to change this?