Wealth Disparity, Myths, and Realistic Solutions

In a previous entry, The 90% Tax Rate Myth, I promised to discuss income inequality and offer actual solutions that don't involve merely "redistributing wealth" via taxes.

Michael Moore recently attempted to rally support for unions in Wisconsin with the following:

"Four hundred obscenely wealthy individuals, 400 little Mubaraks -- most of whom benefited in some way from the multi-trillion-dollar taxpayer bailout of 2008 -- now have more cash, stock and property than the assets of 155 million Americans combined."

If you want one examination of this claim, which is accurate statistically, you can read PolitiFact's analysis. The story is posted as Michael Moore: 400 Americans Have the Wealth

Now, I want to go beyond the nonsense of Moore and some of his misleading implications.

You want shocking? Most of the super-rich were not born that way. According to a 2005 New York Times analysis, 60 percent of Americans move up or down one full income "quintile" each decade. Only a quarter of the middle class stays in the middle class over a ten-year period. Nearly half of all people in the top quintile "fall out" of the top during a decade. They are replaced by men and women from the lower quintiles!

For an interesting graphic of these trends see: 2005 Class Mobility Analysis

The Forbes 400 do have a combined net worth of $1.11 to $1.27 trillion. And, yes, the bottom 60 percent of households have a net worth under $1.22 trillion according to several sources, ranging from the IRS to the Census. So, on the face of it Moore's statement is accurate and indicates an astounding wealth gap.

But is that the entire story?

First, did the Forbes 400 make their money from Wall St. bailouts? Some are investors, definitely, but many of the richest Americans are not involved in banking or investing as their primary activities. Using the Forbes website (http://www.forbes.com/wealth/forbes-400) you can study what these men and women actually do to earn their wealth. Fewer than half of the Forbes 400 are in the "investor class."

Of the top ten, only Warren Buffet (#2) is primarily an investor. Two are computer software pioneers. Four are from retailing giant Walmart. One is media titan Michael Bloomberg. And yes, there are the Koch brothers, who own energy and natural resource companies.

Even after you leave the top ten, you don't find many bankers. You find tech giants listed repeatedly (Google, Dell, Amazon, Microsoft, Apple, eBay, and so on), along with candy makers (yes, the Mars family), publishers, and supermarket chains. You can't forget the entertainment media, either, with names like Lucas, Saban, and Winfrey.

Did George Lucas or Oprah make millions ripping off the "little guy" Michael Moore champions? Seriously, Mr. Moore, do you believe Ray Dolby scammed us with some sort of bailout for movie soundtracks? Oprah Winfrey must have a strange idea of schemes, too, since she spends a lot of time giving away her wealth. Bill Gates also seems to be more than willing to part with wealth to help the world. He might have played to win in the tech industry, but he seems to care a lot about the Gates Foundation and his legacy.

Most people don't realize that in 2010 U.S. households had a total net worth of $54.9 trillion. That means the "super-rich" have 2.3% of the nation's wealth. Or, another way to look at it is that 97.7% of U.S. wealth does not belong to the Forbes 400.

So where is the wealth? With the "upper" and "upper-middle" class, technically, that 40% of households with incomes from $55,331 to $157,176. Yes, the "fourth highest" quintile starts at $55,331, which is not exactly super-rich. The top, top 5% starts after $157,176, but most of the U.S. wealth falls within the narrow range of households earning $55,000 to $150,000 a year.

What this means is that the poorest 60% of Americans are way behind their fellow citizens. But, there are some correlations Moore and others should not ignore (but they often do):

• 86% of the wealthiest households are married couples.
• 20% of the poorest households feature a married couple.
• $56,000 is the median income for a person with a bachelor's degree.
• $19,000 is the median income for someone without a high school diploma.
• $36,000 is the median income for someone with a two-year college degree or technical certification.

The basic formula for reaching the upper-middle class (or better): get a degree, get married (and stay married), exercise, and avoid "bad" habits (smoking, drugs, heavy drinking).

Yes, education is the key to upward mobility. Education, education, education. And stable relationships seem to help, too.

I know it sounds simple, but it is. If we can get students through high school, we've already increased their annual income by 50% or more. If we can get students into two-year colleges and technical schools, we can move them into the middle-class or better. That's how important education is. There's nothing, not one thing, more predictive of future success than earning a college degree.

Now for the bad news: nothing predicts college success more than having parents with high school diplomas. Parents without diplomas are likely to have children who do not finish school. And if you do not finish high school, you're at risk of lifelong poverty. Parents with college degrees tend to assume their children will attend college. We need to make at least community college and tech schools the assumed minimum for all students.

If you want to end poverty, you don't redistribute wealth, you invest in education. It is the one thing I believe we must never cut, on a per-student basis. Per-student funding does mean schools with declining enrollments lose money. Some cities are shrinking, and they will have to cut education spending along with everything else.

How do we invest in education wisely? That's something I'll explain in yet another future post. Hint: I believe in some dramatic, even drastic reforms.