Rich Not Getting Richer

[rowyn]

The Wall Street Journal has an interesting article about wealth volatility among the top 1% of income-earners.

The total income of the top 1%—or those earning more than $343,000 in 2009—fell by more than 30% from 2007, according to the most recent Internal Revenue Service data. By contrast, the average income of the bottom 90% fell less than 3% during the same period.

A November Federal Reserve study, meanwhile, found that a third of the people in the top 1% in 2007, as measured by wealth, were no longer in the top 1% in 2009.

I'm not expecting anyone to have a lot of sympathy for the plight of the folks making only $343,000 a year instead of half a million, but I found two things of particular interest. First, the statistics above don't follow the usual narrative of "the rich get richer while the poor get poorer" and they don't conform to perception class immobility: if a third of the top 1% fell out of that group in a two-year span, that also means that a different .33% of the population ascended to it.

Second was the high volatility of that wealth -- most people in the top 1% have most of their eggs in one basket. They are heavily invested in one asset: when that asset -- be it real estate, a single company, a single stock, whatever -- rises, their wealth skyrockets. When it falls, their wealth plummets. They're also frequently highly leveraged, which mean that if the wealth of their main asset plummets, they wind up not just "less rich" but actually bankrupt. (Some of you may recall this nearly happening to Donald Trump in the 90s.)

The author of the article describes this volatility as something to avoid -- it's the typical investment mantra of "diversify, diversify, diversify". If you've got one big asset, sell a lot of it and invest in a variety of other stuff instead.

But the mantra of "diversify, diversify, diversify" is about protecting your existing wealth and increasing it slowly and cautiously. If you were the sort to diversify and be cautious, would you get into the top 1% in the first place? Would you even want to? I mean, obviously if I gave you a choice between $10,000,000 and $100,000,000, you'd take $100,000,000. But if I gave you a choice between a 99% chance of $10,000,000 or a 20% chance of $100,000,000, how many of you would rather go for the $100,000,000? Those are GREAT odds, and if I could play them all day I'd certainly try for the $100,000,000. But if I'm only getting to play once -- $10,000,000 is PLENTY. Another $90,000,000 is overkill. I'm not giving up a shot at $10,000,000 to get it.

My point is -- how much of getting into the top 1% is really just a matter of caring enough about getting richer that you're willing to take huge risks in the hopes of getting there? And if you took huge risks to get there, is it reasonable to expect you to stop taking risks? Are you there because you wanted to reach $X and once you get there, you're done, or are you there because you're addicted to playing the game and you're going to keep taking those risks no matter what?

Comments

[haikujaguar.livejournal.com]

I seem to recall a Donald Trump quote about money just being a way to keep score on the game, which would seem to agree with your point there... that they're chasing something other than money. The thrill of playing for big stakes and winning.

[rowyn]

I can't help but feel that the interest someone with hundreds of millions of dollars has in getting more money is very different from my own. It reminds me of levelling games, actually. Getting better loot because it's fun, not because you need it by any reasonable definition of need.

[velvetpage.livejournal.com]

if a third of the top 1% fell out of that group in a two-year span, that also means that a different .33% of the population ascended to it.

The question then becomes: who are the people who ascended into that range? If they were mostly the children of the people who were still in the same range, then that's not really upward mobility; it's a new generation attaining for themselves what they were groomed from infancy to attain eventually. The other possibility that would indicate very little fluidity in class would be the existence of a group of people whose income fluctuates right around the cutoff point. It doesn't take a huge loss of income to drop out of the 1% if you were less than 50K into it to begin with; how many of the people who dropped out of the 1% were still in the top 2%?

The other question, of course, is: who dropped out? Again, I wouldn't consider a person retiring to a pension of $300K and living off other assets to have dropped at all in social class - but in actual dollar amounts, they'd technically be out of the 1% at that point. I sincerely doubt there were a lot of people who went from 500K to 50K; far more likely that the vast majority of the .33% who were no longer 1%ers were still making enough to make most middle-class people tell them to suck it up and deal. And then there's the human capital: Donald Trump was nearly bankrupt for a while in the 90's, but he certainly isn't now, because he knew people who knew people, and he knew how to work the system to keep the bankruptcy from being permanent.

[level-head.livejournal.com]

Children of successful people are often only indifferently successful themselves; there are lots of stories of people whose kids have "gone horribly wrong," but far more common are those who are just sort of underachievers. Unless the parents' wealth is very large, the second generation tends to dissipate it, and by the third generation it is often gone.

But in very large wealth situations, the children (and their children, et cetera) have become involved in foundations set up to steer that money. Ford, Carnegie, Rockefeller, Packard, and many more along those lines are just this way.

The entrepreneurial wealth creators of those foundations tend to be on the political right or centrist (or uninvolved with politics); the foundations themselves (operated by children and grandchildren) tend to be on the left. There are exceptions; some start out on the left, and some resist the pull in that direction.

There is a subtlety to the article that is not yet discussed. The definition sometimes refers to the top 1% in terms of wealth, and at least one time in terms of income. These are not at all the same; I expect that many in the top 1% of wealth have been massively negative in the last three years. But that sloppiness in the definition makes some aspects bit tricky.

===|==============/ Level Head

[rowyn]

Or just not that interested in being extremely wealthy, for that matter.

I am an underachiever -- I could surely make more money if I put my mind and efforts to it. But I am unconvinced that doing so would gain me anything I really care about having, at a price (of time and energy) that I was willing to pay.

[level-head.livejournal.com]

We are all underachievers, but some of us are better at it than others. ];-)

===|==============/ Level Head

[rowyn]

I think you might be surprised. A lot of businesses worth tens of millions were destroyed when the economy tanked, taking their owner's fortunes with them. But I don't have figures on it, so perhaps their numbers are outweighed by, say,financial sector guys whose salaries were just halved when they didn't get bonuses.