Blog Post

AEIdeas

A timely tweet by Greg Ferenstein reminds me of the 2013 study “Family, Education, and Sources of Wealth Among the Richest Americans, 1982—2012,” (see above chart) by Steven Kaplan and Joshua Rauh (as summarized by the University of Chicago’s biz school magazine):

Some 32 percent of the Forbes 400 in 2011 belonged to very rich families, down from 60 percent in 1982. … Most individuals on the Forbes 400 list did not inherit the family business but rather made their own fortune. Kaplan and Rauh found that 69 percent of those on the list in 2011 started their own business, compared with only 40 percent in 1982. In other words, there are fewer people on the Forbes 400 list who came from an affluent background and eventually took over the family business, such as brothers David and Charles Koch (Koch Industries) and the Walton siblings (Wal-Mart), and more self-made people such as Bill Gates (Microsoft), Warren Buffet (Berkshire Hathaway), Philip Knight (Nike), and Stephen Schwarzman (Blackstone Group), who had an upper middle-class upbringing and eventually built their own successful companies. Kaplan and Rauh also looked at the industries the Forbes 400 belonged to. They found that between 1982 and 2011 many more individuals involved in retail, restaurants, computer technology, and private finance—including hedge funds and private equity—entered the list than before, while fewer were in real estate and energy. Technology has become more important even in companies outside the computer industry—25.5 percent of the businesses run by the Forbes 400 in 2011 incorporated technology in their companies,

up from 7.3 percent in 1982. Most of the Forbes 400 became rich by applying their ideas in industries where new technologies allowed their firms to become very large, say Kaplan and Rauh. Jeff Bezos’s Amazon owes its success to advances in information technology and the economies of scale they provided. The same goes for online brokerage firms such as Charles Schwab. Mark Zuckerberg’s Facebook has a huge network of more than one billion users, leaving virtually no room for competition. Long before online social networks, Microsoft was the master of applying the power of “network effects.”

1) So rather than a story, to paraphrase Larry Summers, of wealth accumulation by the fortunate, the above analysis tells a tale of wealth accumulation through dynamism. I think the difference matters.

2) Still, estimates of wealth inequality suggest a big increase in recent decades. Research by economists Emmanuel Saez and Gabriel Zucman, notes Slate’s Jordan Weissmann, found the top 0.1%’s share has more than tripled, from 7% in 1978 to 22% in 2012.

3) Then again, a new paper by another group of top economists found a less dramatic increase, with the top 0.1% now claiming a 15% share.

4) There is also reason to think that spending inequality is lot less than wealth inequality. Due to taxes and benefits, people have more resources at their command than you might think. New research by Alan Auerbach and Laurence Kotlikoff finds: