The anxieties of the rich
“What’s it like to have too much money?” Vanity Fair asked recently. “Very stressful.” The problem, it seems, is that even the humongously rich grow tired of just buying stuff. If you already own a dozen houses, a 13th is unlikely to make all that much of a difference. The same goes for sports cars, private jets, yachts, diamond necklaces and anything else you might care to splurge on.
So, after a while, you stop worrying about quantity and begin obsessing about quality: “What you need is to have not just the most but the very, very best,” writes A.A. Gill in the magazine, “ … a slightly better loafer, a pullover made from some even more absurdly endangered fur.” The name for this concern? Perfection anxiety.
Sadly, perfection anxiety is not the only worry creasing the botoxed brows of the super-rich. A few years back, there was the financial crisis, which threatened to knock a hole in their fortunes. And, more recently, there’s been what Paul Krugman calls the “Piketty Panic,” the tidal wave of publicity surrounding a new study that warns of a return to Victorian-era wealth divisions in our societies. We’ll come back to that in a moment, but, first, what about the crisis – did it hurt high-earners?
It did, says a new paper (pdf) from the OECD, but not for long. In nine OECD countries for which data are available, the top 1% of earners saw their incomes slide by 3% in 2008, followed by an even bigger fall of 6.6% in 2009. But as the incomes of high earners tend to be very responsive to economic swings, these sorts of declines in a recession aren’t such a surprise. Indeed, by 2010, the worst was over: The incomes of the top 1% rose by 4% while pretty much everyone else’s stagnated.
These temporary dips also didn’t do much to alter long-term trends. Top earners’ incomes remain at historic levels in many OECD countries, confirming a trend that has been developing for around three decades. In effect, what’s happened is that, as the economic pie grows, top earners have been taking an ever bigger slice of it. In the US, for example, the share of pre-tax income wending its way to the top 1% more than doubled since 1980, hitting 20% in 2012. There were notable rises in other (mostly) English-speaking countries, too, notably Australia, Canada, Ireland and the UK. More surprising, the 1% in traditionally egalitarian economies like Finland, Norway and Sweden also saw rises in their share of income, although at around 7 to 8% they were well behind US levels.
Not much of this will be unfamiliar to anyone who’s been following the debate over rising income inequality. But in recent weeks, discussion has been focusing on another side of the debate: wealth – rather than income – inequality. That might sound like hair-splitting, but the difference matters. To simplify greatly, income represents your earnings, typically from your salary or wages – think of it as a flow. By contrast, wealth is a stock – it’s the accumulation of income in your bank account that you haven’t frittered away, as well as your assets.
In the debate over inequality, income attracts most of the attention because it’s the best indicator of people’s ability to put food on the table and pay the bills. But thanks to Thomas Piketty, author of Capital in the Twenty-First Century, a 700-page economics tome that’s crashing the top of the bestseller lists, wealth is now also getting a lot of attention.
Piketty argues, in effect, that the gap between the super-rich and everyone else will increasingly be driven by wealth, rather than income (definitions of wealth vary, but Piketty broadly equates it with capital). To explain: Much of the justification for the rising gap between the super-rich and everyone else in recent decades revolves around the idea that they essentially deserved to earn their fortunes – Bill Gates created software that everyone wanted, and reaped his rewards.
But in future, the super-rich may be more likely to inherit their fortunes, rather than earn them. That’s because, argues Piketty, the rate of return on capital, typically around 5%, will outpace economic growth, these days often no more than 2%. So instead of worrying about gaps between those on high salaries and those on low salaries, in future we’re more likely to be concerned by the division between those on salaries and those with inherited wealth. Sounds familiar? Yes, it’s the world of Jane Austen all over again.
To say that Piketty’s book has been getting noticed would be an understatement: Martin Wolf calls it “extraordinarily important”, while the World Bank’s Branko Milanovic calls it “one of the watershed books in economic thinking”; others are less complimentary, criticising the data for being too thin to support the conclusions or accusing Piketty of promoting “soft Marxism”.
Whether you agree with his findings or not, there’s no doubt that the attention given to Piketty’s book, and to research by others, including the OECD, on inequality only underlines growing concern about the impact of rising divisions on our societies and economies. Anxious times, indeed.
Inequality will be under discussion at OECD Week(5-7 May 2014), which will see publication of a new report, “All on Board: Making Inclusive Growth Happen”. Watch out also for sessions at the OECD Forum on inclusive societies and jobs and inequality.
We’re all free to be poor (OECD Insights blog)
OECD work on inequality
Divided We Stand (OECD, 2011)
Growing Unequal (OECD, 2008)