Theron Aiken

Sample Identification Paper

English 101

28March2005

The Inequitable Distribution of Wealth

Everyone has heard the expression that “the rich get richer, and the poor get poorer,” but no one really takes this idea to heart, takes action on it, gets outraged about it or writes to his representatives to ask what they are doing about creating a level economic playing field in the United States. Disillusionment, distrust and, perhaps, naiveté leave most of us asking hopelessly, “what can be done,” and quietly accepting this basic inequality as the American way. We live in an extremely rich country—the richest in the world—and yet very few citizens share in this country’s wealth. Perhaps because we enjoy a relatively high standard of living, we tend to overlook inequities, and perhaps we just don’t want to know where the money goes. But when we follow the money, we find that the actual wealth of the country lies in the hands of a very few.

“How few?” we might ask. Estimates vary, but the top 1% of the population controls about 40% of the wealth of the country. Conversely, the bottom 40% of the population controls only about 1% of the wealth. Also, the top 10% of the population controls about 80% of the wealth. One would expect that in a democratic society the economic balance would place the bulk of wealth in the hands of the majority of the society while the amount of total wealth would decline towards the richest and the poorest ends of the spectrum in the shape of a bell curve, but instead the graph of the United States’ distribution of wealth is skewed drastically toward the richest few. The following chart illustrates the vast inequity in wealth in the United States.

            This phenomenon of the control of wealth being skewed toward a small percentage of the population is also a global occurrence. For example, Iraq, Saudia Arabia and Russia experience the same inequity but with a greater amount of wealth being controlled by even fewer people. All of this was first formally identified by Vilfredo Pareto, an Italian engineer who turned to economics. Pareto observed that if one were to list all of those in a population worth, for example $10,000, and then do the same for $20,000, $30,000 and so on, he would find that the number of people in each category would diminish and would do so by a constant factor. While the factor may vary from one country to another, the factor within a given country will remain constant. What this, unfortunately, proves is that the greatest amounts of wealth are concentrated in the hands of just a few the world over.

            This striking disparity is especially significant when we realize that we are moving in an even more skewed direction in relation to wealth and income rather than toward a more equitable distribution of it. According to economist, Paul Krugman:

            The standard of living of the poorest 10 per cent of American families is significantly lower today than it was a generation ago. Families in the middle are, at best, slightly better off. Only the wealthiest 20 per cent of Americans have achieved income growth anything like the rates nearly everyone experienced between the 1940s and early 1970s. Meanwhile the income of families high in the distribution has risen dramatically, with something like a doubling of real incomes of the top 1 per cent.

This skewing of the ownership of wealth is occurring globally, and even though the increase of multinational corporations and investment banks and the outsourcing of jobs from wealthier countries to poorer countries promised to bring a reduction of poverty in third world countries, actually the number of people living in poverty has risen.

            What explains the fact that, even though wealth is flowing outward globally at a greater rate than ever before, the lion’s share of wealth still remains in the hands of just a few? Two physicists, Jean-Philippe Bouchaud and Marc Mézard, of the University of Paris, established computer models that would follow wealth as it randomly shifted from person to person within networks as they interacted financially with one another. They found that as wealth flows around these networks it naturally begins to fall into the hands of fewer and fewer people by the same pattern established by Pareto. Models varied as to whether all people started out equally or with an already-established disparity, but regardless, the results were always the same. Their models showed that wealth distribution had little to do with differences with the backgrounds and talents of the individual people.

            Another example might be a poker game in which the players may start with different amounts of money or the same amount, but by the end of the evening, one person may end up with 80% or so of the total pot, one may end up with what he started with and one will end up owing his buddy twenty bucks. The pattern is reinforced as the winnings grow and the person with the most money can leverage his bets more effectively than the one barely able to make the ante. Likewise, the investor who can buy 100,000 shares of a hot stock will outperform the investor who can only afford 100 shares. Conversely, if the stock goes south, he can absorb the loss more easily while the other investor may be wiped out by the loss. Thus, the rich get richer and the poor get poorer.

            Not many opportunities present themselves for a change in the inequality. George Bush’s tax cuts, for example, have affected wealth in the following ways: Those with incomes over $1,000,000 have realized an increase of 10% after tax income; middle income families averaging about $57,000 gained about 2.3%; and the bottom 20% of people with incomes of about $17,000 gained 1.6%. It has already been shown that outsourcing of jobs doesn’t create higher paying jobs here in the United States nor does it do anything to alleviate poverty in other countries. While taxation of income is greater than the taxation of assets, capital gains, and inheritances, the greater part of America’s wealth will stay in the hands of those who have it now, and those who don’t have it now will be further blocked from getting a share of it.

            Not only do the rich get richer, they also get fewer. Incomes may increase across the board, but they haven’t even been keeping pace with the cost of living. Obviously, as the rich control a higher percentage of the wealth, the poor will have access to even less of it, supporting Pareto’s distribution rules. While these may be laws of economics, they don’t contribute much to the mood of a country. Pessimism, disillusionment, a sense of hopelessness and even anger abound in the United States, though certainly not among the top 1%. Perhaps we need a more “democratic” economy to match our supposed democratic government.