Recently a fellow asked me about my impressions of French economist Thomas Piketty’s new book, Capital in the Twenty-first Century. I have not read the book, but I’ve read comments about it including a recent interview with the author. He postulates the existence and forecasts the growth of inequality in terms of the concentration of wealth and income.
In the introduction to the interview, there was an interesting statement: “hard work will matter less, inherited wealth more.” Really? Added up the entire annual realized income of those households in the $10M and over category the total would be over $300 billion. What percent of this amount is derived from trusts and estates? The answer is 1.3%. This percentage even doubled or tripled would hardly qualify America as a country where inherited wealth “mattered more.”
It appears from the interview that both Mr. Piketty and the interviewer are using income and wealth as synonymous terms. They are not. In my thirty-plus years of surveying and studying millionaires, I have consistently found that 80 to 86% are self-made. That also applies to decamillionaires. In 1982 according to Forbes about 38% of America’s wealthiest people were self-made. In 2012, the percentage jumped to 70%.
In a recent blog, I cite what many consider to be the most exhaustive study of socioeconomic mobility in America. Professors Chetty of Harvard and Saez of Cal-Berkeley studied about 50 million federal income tax returns of parents and their adult children. Part of this study as mentioned in The Wall Street Journal stated that:
The odds of a child moving up the economic ladder have remained the same for about the past three decades . . . that contradicts the narrative in Washington that economic mobility has declined in recent years.
Economic opportunities abound in this country. Yet most Americans are not wealthy. It is easy to blame the so-called inequities in our economy. But it is more about the fact that Americans spend all or most of their income on things that have little or no lasting value! They lack the discipline required to accumulate wealth. Most households are on a treadmill of working and consuming. The typical American household has a median annual realized income within the $50,000 to under $75,000 bracket. Only 6.3% of these people have any realized capital gains income. Thus an update is in order. Remember what I wrote in The Millionaire Next Door: big hat, no cattle. And now the update: no capital, no capital gains.
Piketty – “A: Instead of having a flat tax on real estate property, you would have a progressive tax on individual net worth. You would reduce the property tax for the people who are trying to start accumulating wealth.”
What a great incentive for people to work hard…
And by promoting these false inequalities, people get an excuse for their own failure to succeed. ” Well the system isn’t fair, the deck was stacked against me, I didn’t have a rich daddy….” etc, etc. Great post, thanks for rebutting this nonsense.
I agree with most of what you’re saying here. Unfortunately, I think you’re preaching to the already converted. Kind of frustrating the people who need to hear the message most will not listen to it.
It’s very strange that you would approvingly cite Saez when Saez and Chetty’s thrust was that, while mobility has not decreased substantially, it was very bad compared to the rest of the OECD to begin with…
Yes, economic opportunities abound in this country; I have seen as much from the bottom of the economy.
But in order to become wealthy, one needs to have either the right skills, capital, or access to capital.
All the frugality in the world will not transform a burger flipper into a millionaire.
Yes, a burger flipper can become wealthy. He works his way up the ladder to manage the burger joint. He saves assiduously for 40 years. I have a good friend who is a multimillionaire on a high school PE Teacher’s salary. He made no more than the guy who manages the local Burger King. (Rod Harman, featured in Money Magazine)
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inheritance is not the only way to pass down money. Leaving your children a house, buying their car, giving a substantial loan. These are all advantages, and I would bet money that 90% of millionaires do not come from nothing, they just don’t start with millions
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Who is actually a self made millionaire? Is somebody like Trump considered sefl-made? I think the real issue is defining what self-made. Once you are born in a rich or middle class family, you have some unparalleled advantages, that is a fact.
Yes, I believe that around 85% of people with a net worth of over $1 million are self-made. Myself, I started with a $10,000 down payment on a Iowa corn and soybean farm in 1989 and have continued on by buying an additional 7 more farms in Iowa. They have now increased in value to over $10 million dollars. Remember, I started with only $10,000 dollars of my own money in 1989, so yes, it is very, very, possible to achieve a $10 million dollar net worth with only starting out with next to nothing in terms of cash.
Numbers don’t lie, people do. Everyone bends, twists, and tweaks there “definitions” to accommodate their agenda. No matter how you debate the why, the fact is income inequality continues to grow in the USA. Those with wealth will always try to justify what they have as being the deserved result of sacrifice and hard work. Fact is there is no justification for the obscene wealth inequality in this country and the world. Even from an economic stand point of added value, no one has EVER done ANYTHING for the economy that would justify them having thousands of times more worth than what other families make in generations. Wake up 1%, you will have a real hard time when you get to the pearly gates explaining how you deserved exponentially more of the worlds resources than the millions of hard working class people that actually make the world go around.
Barry, I don’t expect to change your mind on this, but maybe seeking some common ground on definitions would be helpful. Let’s ask ourselves on a case by case basis: Lottery winners and Trust fund inheritors (Not self-made), professional athletes, Business developers, salesmen, Real Estate Investors, entertainers, Technology innovators (self-made). Perhaps this would also be helpful: If you take all the money away from a millionaire, and then come back in five years, and they have returned to millionaire status that person was a self-made millionaire. 80% of millionaires fit into that category.