Monday, September 20, 2010

Wealth Distribution and The Work Week

In this post I have quite a few links. They vary in political slant and probably somewhat in numerical values, but the overall picture is largely consistent. Often I reference an article rather than the base data because I found the article itself interesting. Sometimes the general articles contain other useful links.

I read a quote a while ago - but cannot find it now. It went something like "Every successful person says they got that way by dint of hard work, intelligence and perseverance. I never met an unsuccessful person who did not blame circumstance and bad luck."

I can interpret this statement in at least three ways, all of which have some truth. One is that successful people work hard and meet adversity with intelligence and persistence while unsuccessful people blame the world around them. A second interpretation is that successful people are likely to pat themselves on the back and attribute to themselves results that may have come from simple luck. A third interpretation is that both sides are correct. Hard work, intelligence and perseverance may be necessary precursors of self earned success. While these traits may be necessary, they are not sufficient. Many people are defeated by events beyond their control.

In my last blog post I requested a 1950 lifestyle in exchange for a work week that corresponds to current productivity compared to 1950 (11 hours per week). With steady increases in productivity it is a reasonable to question why life is as hard as it is and why the work week has not gotten any shorter, and may have gotten longer. I saw an analysis (unfortunately not very good) of hunter-gatherers that estimated they spent about 40 hours a week on survival. That means that in the past 4000 years we have we made no progress on shortening the labor needed to survive. Admittedly "survival" now is much different than 4000 years ago. Life is much more comfortable, longer and, for most of us, less brutish. Still... something seems wrong.

About a century ago an economist named Wilfried Pareto noticed than many phenomena including income and wealth follow what is now called a Pareto Distribution. This is often known as the 80/20 rule and says that 20% of the population have 80% of the wealth/income... The distribution is self similar in that if you take the top 20% it will follow the same distribution. That is, 20% of the most wealthy people will have 80% of the wealth in the wealthy group.

The distribution of wealth is not exactly a Pareto Distribution but it is close, particularly at the high end of the income/wealth scales. This is true in many societies around the globe including medieval Hungary.

When something is this widespread it argues for a common mechanism. This mechanism could be the distribution of brains/work ethic/persistence or it could be something having to do with the nature of economic systems. In 2002 the Harvard Business Review published an article "Wealth Happens" . Simulations based on a few assumptions about money flow show a Pareto Distribution occurring strictly by chance. That is, a few chance events may cause one person to become wealthy while another becomes poor. In their simulations, the basic feedback mechanism was investment. If you gained enough wealth to start investing in things that provided more wealth, you headed up the wealth chain. Wealth is compounding, so the more you have the more you get.

The numbers 80%/20% are really just an example. Different societies have different percentages. Most people underestimate how skewed wealth is and overestimate social mobility (moving from poor to rich or vice versa).

Net worth is the value of everything you own minus all debt. In 2007 the median net worth of a family was $120,000. If this were a stack of $100 bills, it would be a little less than six inches tall. The 400th richest American in 2007 was Kenny Troutt of Excel Communications with a net worth of 1.3 billion. That would be a stack of $100 bills just over a mile tall. Bill Gates topped the world list that year at 59 billion, a stack of $100 bills about 45.5 miles tall.

It is worth a moment to talk about "mean" and "median". In the last paragraph I said the median net worth in 2007 was $120,000. The median is the middle number. That is, if you have 11 different numbers then 5 numbers will be less than the median and 5 numbers will be greater than the median. The "mean" is the average you get by adding up all the numbers and dividing by the total. For the numbers (1,2,3,4, 10000) the median is 3. There are two numbers (1, 2) that are less than the median and two numbers (4, 100000) that are greater than the median. The mean of these numbers is 2002 = (1 + 2 + 3 + 4 + 10000)/5. The difference between the median and the mean is an indication of how skewed a distribution is.

In the case of US family net worth in 2007, the median was $120,000. The mean was $556,380. The Pareto Distribution is quite skewed. If we confiscated all wealth and redistributed it evenly among all families, every family in the US would be around the current 80th percentile of net worth. That is, every single family would be better off than about 80% of the families today.

Before you start the revolution remember the Harvard Business Review article. It indicates that inequality would quickly reassert itself and we would be in the same position as today in relatively short order. Many people would lose almost all their money and a few people would become fabulously wealthy.

Over the past 20 years the US has become less equal in terms of wealth distribution, but the absolute wealth of each class may have increased. That is, the economic pie has gotten bigger so that even though the very wealthy have increased their percentage of the pie, the rest of us still got a little more pie than we used to.

In social mobility there is a general trend for poor families to improve their lot over several generations. In the US it takes about four generations to move from 20% of the average income to about 90% of the average income. There is more social mobility in much of the developed world than in the United States. That is, families pull themselves out of poverty significantly faster in France, Canada, and Denmark than they do in the US.

On a macroeconomic level, measurements indicate productivity and wages are somewhat linked. At and industry level, this correlation does not hold. This can be seen in agriculture. Agricultural production has increased many fold over the past century and a half, but farm wages remain among the lowest of any industry.

I have said that Pareto Distributions of wealth and income probably have some basic underlying cause. That means we will always have a lot of relatively poor people and a very very few fabulously wealthy. However the percentages can and do vary from society to society. I believe that much of the difference is a result of government policy. In a Kleptocracy, 95% of the wealth may be owned by 5% of the population. Social welfare states (most of Western Europe) tend to have less wealth inequality than we have in the US.

The difference between median and mean income in the United States indicates there is plenty of room for increasing the general welfare of people and, at the same time, shortening the work week. The average American worker works 500 hours per year more than the average German worker, yet German quality of life and social security is at least as high. The difference is social policy.

The Pareto Distribution ensures that there will always be a pool of less well off people who may be willing to work more hours or for less pay. Decisions on the length of the work week are political and are based in part on how the populace feels about wealth redistribution. In US politics this topic cannot be discussed rationally. Because structural changes to the economy are likely to further concentrate wealth (possible topic of another blog post) and lack of rational discussion, you can expect to be working even longer hours in the near future.

Thursday, September 16, 2010

Productivity and Lifestyle - Are We Being Shafted?

If we are to believe productivity statistics it should take 11 hours of work per week to have an output that is equivalent to a 40 hour work week in 1950. It should take 23 hours per week to equal 40 hours in 1975.

I am writing this in my house, built in 1956. In front of the house is our single car, a ten year old Honda. Something seems wrong either with the statistics or with my life. Currently I am starting a new business, so I expect to be working a lot without much (any) monetary gain. That said, I have worked at least 40 hours per week for decades and I have never been four times as well off as the equivalent worker in 1950.

There are explanations (aside from the obvious one that I have been shafted for my entire adult life). Mostly these revolve around the difficulty of comparing time periods. On the measurement side, we have shifted from a manufacturing to a service economy. How do you compare my productivity as a software engineer (a white collar position that did not exist in 1950) with that of a mid level manager at a blender manufacturer in 1950. Within an industry we can more easily measure productivity gains, but as one industry becomes more productive, workers are laid off and shift to new industries.

On the consumption side, the goods and services we use have changed drastically. Instead of an expensive, crummy, black and white TV, I have a a big screen high definition TV that I can use to stream movies off the internet. Instead of a single phone line with expensive long distance, we have multiple cell phones and the internet. My 10 year old car is undoubtedly more efficient, comfortable and reliable than a brand new car in 1950. We have several computers in the house all of which are wirelessly connected to the internet.

Despite these difficulties, I personally believe the "we are all being shafted" theory. Honestly, my life is not that much different from life in the 1950's or the 1970s. My house was built in 1956 and has no air conditioning. The heater has changed several times, but is still a natural gas burning central system. My car, while of higher quality, is still just a car. I do not own that many appliances. Those that I do own are of higher quality and probably more reliable than anything available a couple decades ago, but their basic design and operation is essentially the same.

On the working side, I have always worked at a full time job, but these days most households have every adult member working outside the home for wages. In 1950 a primary white collar wage earner would have supported a household on 40 hours a week. Now we need two wage earners working close to 80 hours for my household. On top of that, many of the tasks that used to be someone else's job are now mine. For example, in the grocery store I used to wheel my cart up to a check out lane and someone would ring up my purchases. Now I have to ring it up myself. A business traveler in the 1950s or even the 1970s would have a travel agency - either external or internal - book travel. Now even highly paid executives book their own travel. White collar workers in 1950 or 1970 had secretaries for clerical work, now we do it all ourselves.

I would trade my current lifestyle for a 1950 lifestyle working 11 hours per week. It is true that I enjoy modern conveniences, so I am willing to double my work week to get some of that (computers and the internet). That brings me up to 22 hours per week. Heck, I'll throw in a couple hours for free and make it an even 24 hours of work a week - but that is my final offer.

Don't even get me started on the flying car that all visions of the future thought we would have by now.