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Why the Rich Keep Getting Richer: The Secrets of Wealth Creation and Inequality



Why and How The Rich Are Getting Richer… in One Minute: Context, Reasons and Consequences

You may have heard the phrase “the rich get richer and the poor get poorer”. But is it true? And if so, why and how does it happen? And what are the effects of this growing gap between the haves and the have-nots?

In this blog post, I will try to answer these questions in one minute, using some facts and figures from reliable sources. Let’s start with some context.

Context

Economic inequality refers to the unequal distribution of income and wealth among individuals or groups in a society. Income is the flow of money that a person or household receives from work, investments, or transfers. Wealth is the stock of assets that a person or household owns, such as money, property, or stocks.

There are different ways to measure economic inequality, but one common indicator is the share of income or wealth that goes to the top 10% or 1% of the population. For example, according to the World Inequality Database1, in 2020, the top 10% of income earners in the United States received 47% of the national income, while the bottom 50% received only 13%. The top 1% received 20% of the national income, while the bottom 50% received only 8%.

Similarly, according to the Federal Reserve2, in 2019, the top 10% of wealth holders in the United States owned 69% of the total household wealth, while the bottom 50% owned only 2%. The top 1% owned 31% of the total household wealth, while the bottom 50% owned only 1%.

These figures show that there is a high degree of economic inequality in the United States, and that it has increased over time. In fact, income and wealth inequality has risen in most advanced economies since the 1980s3, with some countries now seeing levels comparable to those recorded at the start of the 20th century4.

But why and how does this happen?

Reasons

The causes of economic inequality are complex and multifaceted. They include structural factors, such as globalization, technological change, demographic change, and institutional factors, such as tax policies, labor market regulations, social protection systems, and political representation.

Globalization refers to the increasing integration of markets, trade, and capital flows across countries. It can create opportunities for growth and development, but it can also create winners and losers. For example, globalization can increase competition and reduce prices for consumers, but it can also reduce wages and employment for workers who face cheaper imports or outsourcing. Globalization can also increase mobility and diversification of income sources for some individuals or groups, but it can also increase volatility and uncertainty for others.

Technological change refers to the innovation and diffusion of new products, processes, and methods that improve productivity and efficiency. It can also create opportunities for growth and development, but it can also create winners and losers. For example, technological change can increase demand and rewards for skilled workers who can use or create new technologies, but it can also reduce demand and rewards for unskilled workers who are replaced by machines or software. Technological change can also increase access and quality of information and services for some individuals or groups, but it can also increase barriers and costs for others.

Demographic change refers to the changes in the size, structure, and composition of a population over time. It can also affect economic inequality in various ways. For example,

  • aging can increase inequality by reducing labor force participation and increasing dependency ratios;
  • migration can increase inequality by creating disparities between natives and immigrants;
  • urbanization can increase inequality by creating spatial segregation and concentration of poverty or wealth.

Institutional factors refer to the rules and norms that govern how a society organizes itself politically, economically, and socially. They can also influence economic inequality in various ways. For example,

  • tax policies can affect inequality by changing how income and wealth are distributed before and after taxes;
  • labor market regulations can affect inequality by changing how wages and working conditions are determined;
  • social protection systems can affect inequality by changing how risks and opportunities are shared among individuals or groups;
  • political representation can affect inequality by changing how policies are designed and implemented.

These factors interact with each other in complex ways to shape economic inequality over time. They are also influenced by historical legacies, cultural values, social norms, power relations, and collective actions.

Consequences

The effects of economic inequality are also complex and multifaceted. They include economic effects, such as growth, investment, innovation; social effects, such as health, education, mobility; political effects, such as democracy, stability, cooperation.

Economic effects: Some economists argue that a certain degree of inequality is necessary or beneficial for stimulating growth, innovation, and entrepreneurship, by creating incentives, rewards, and opportunities for individuals or groups to work hard, save, invest, and take risks. However, other economists argue that too much inequality is harmful or detrimental for growth, investment, and innovation, by creating inefficiencies, distortions, and disincentives for individuals or groups to work hard, save, invest, and take risks. For example,

  • too much inequality can reduce aggregate demand and consumption by lowering the income and purchasing power of the majority of the population;
  • too much inequality can reduce human capital and productivity by lowering the access and quality of education and health for the majority of the population;
  • too much inequality can reduce social capital and trust by lowering the cooperation and cohesion among individuals or groups in a society.

Social effects: Some economists argue that inequality is a natural or inevitable outcome of individual differences in abilities, preferences, and efforts, and that it reflects the diversity and freedom of a society. However, other economists argue that inequality is a social or political construct that results from unfair or unjust institutions, policies, and practices, and that it undermines the equality and dignity of a society. For example,

  • high inequality can increase health and social problems by increasing stress, anxiety, depression, violence, crime, and substance abuse among individuals or groups in a society;
  • high inequality can reduce social mobility and opportunity by increasing barriers and costs for individuals or groups to move up or down the income or wealth ladder in a society;
  • high inequality can reduce social satisfaction and happiness by increasing relative deprivation and frustration among individuals or groups in a society.

Political effects: Some economists argue that inequality is compatible or conducive to democracy, stability, and cooperation, by creating checks and balances, accountability, and representation for individuals or groups in a society. However, other economists argue that inequality is incompatible or detrimental to democracy, stability, and cooperation, by creating conflicts, grievances, and polarization for individuals or groups in a society. For example,

  • high inequality can undermine democracy and participation by reducing the voice and influence of the majority of the population in political decision-making;
  • high inequality can threaten stability and security by increasing the risk of social unrest, violence, or revolution among the discontented segments of the population;
  • high inequality can hamper cooperation and solidarity by reducing the willingness and ability of individuals or groups to work together for the common good of a society.

Conclusion

In conclusion, economic inequality is a complex phenomenon that has multiple causes and consequences. It is not a static or uniform concept, but rather a dynamic and heterogeneous one. It varies across time, space, dimensions, indicators, perspectives, and objectives. It is not a simple or clear-cut problem, but rather a nuanced and contested one. It requires careful analysis and evaluation, as well as balanced and effective policies.

I hope you enjoyed this blog post. If you did, please share it with your friends and subscribe to The Savvy Wallet for more financial tips and insights. Thank you for reading!

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