Income and wealth are not the same thing. Wealth is a measure of total assets, while income is annual wages and investment income. A lot of high income people carry huge student loan and housing debt and are not wealthy.
There are few student loan totals large enough to make what is otherwise considered "high income" not wealthy.
The difference in lifetime earning between two people, both of whom have a high five figure or low six figure income and good growth potential, one of whom has $150,000 in student loan debt, is not very large.
Housing debt isn't relevant unless to wealth unless the house in question is underwater.
Don't forget about lost earnings and interest. Med school followed by 250k job vs. 120k withought med school is not as clear of a win as you might think.
If you start at a $120,000/yr job at 22 and retire at 65, with increases of 2% a year, you will earn ~$8.3 million nominal over the course of your career.
If you start at a $250,000/yr job at age 30 and retire at 65 , with increases of 2% a year, you will earn ~13 million nominal over the course of your career. That doesn't include the (modest) pay during the second half of medical training.
The estimated cost of attendance for the most expensive medical schools top out at around $60,000 a year for four years. Assuming you meet the requirements, the federal government will lend you $40,000 of that at 6.8% and the rest at 8.5%. If nothing is paid off until after one's residency, that means our doctor would be starting his career with $330,500 in debt and a $250,000 salary.
Meanwhile our petroleum engineer(?) would be earning $140,600 at that point. If the doctor put away the difference every year until his debt was paid off, it would take less than four years.
So at 34 your doctor has zero debt. Let's assume the 120k job is saving 10% at 8%ROI for those 12 years that's worth ~250k at 34 and adds an efective 20k a year in interest. On top of that there paying significantly more in taxes and that lifetime earnings gap is far less meaningful.
Fair enough. At that age, the doctor will be making $270k debt free and the engineer $152k + $20k. In any event, the non-financial trade-offs swamp the financial ones, I would think.
My basic point in the great-great grandparent post is that bellyaching of the form I'm not really rich because of X, usually doesn't stand up to scrutiny.
Housing debt won't drag your total assets down unless you happened to buy a house that's now underwater. The usual situation is for the difference of house value and mortgage amount to be significantly positive.
Income and wealth aren't the same thing, but they are highly correlated.
>Income and wealth aren't the same thing, but they are highly correlated.
No they are not.
According to the US Treasury:
"These low realized rates of return call into serious question the use of realized income from capital as part of any measure of well-being or ability-to-pay. For owners of capital, economic income may have little relationship to realized income, and rates of realization may vary according to the assets they
hold."
According to the Federal Reserve:
"...very wealthy people try quite hard to minimize their income."
They are actually quite correlated. Your links argue that there are cases where wealthy people don't have high income and vice-versa, but that doesn't disprove the quite strong general trend.
See table 5 (pg. 36) here, which shows both net worth by income percentile, and income by net worth percentile, to see the strong relationship between being high-net-worth and high-income: http://www.federalreserve.gov/pubs/feds/2009/200913/200913pa...
Example numbers: the top 1% of 2007 income-earners held 26% of U.S. wealth, and the top 1% of households by net worth in 2006 earned 16% of the year's income. Meanwhile, the bottom 50% of income-earners held only 14% of U.S. wealth, and the bottom 50% by net worth earned only 22% of U.S. income. The general trend holds in the in-between categories as well: the 95-99th percentile of incomes hold about twice as much wealth as the 90-95th percentile, etc.
So the relationship is not perfect, but taking the groups in aggregate, higher-income-earners control considerably more wealth than lower-income-earners. Some of the later figures in the document explicitly plot some ratios.
How is it "not extremely strong"? If there were no correlation, you would expect the top 1% of income earners to hold 1% of net worth, because there's no expected relationship between being high in income and high in net worth. If there were a correlation but a weak one, you might expect them to own a few times the uncorrelated amount. Maybe they'd own 2% of U.S. assets (twice the otherwise expected amount), maybe even 5% (five times the expected amount). Either of those would be enough to establish a clear relationship, but a weak one.
But they actually own 26% of American assets, twenty-six times the amount you'd expect in the uncorrelated case! The top 1% of Americans by income own a full quarter of all the country's assets— stocks, bonds, real-estate, etc. That seems like a pretty strong relationship.
This just isn't good statistics. The fact that the vast majority of hysterectomies are performed on women doesn't tell us anything about the probability that a randomly selected woman has had a hysterectomy; the fact that the vast majority of wealth is held by the rich doesn't tell us anything about the probability that a randomly selected rich person has a lot of wealth.
Err, the fact that the vast majority of hysterectomies are performed on women does tell us that hysterectomies are strongly correlated with sex. That was the initial dispute: whether wealth and income are strongly correlated or not. The distribution is a separate argument, although I'll note that the PDF I linked has some data on the distributions as well, and it does not support the "weak link between them" argument. The proportion of very-wealthy people with low incomes, and very-high-income people with low wealth, is actually quite small.
I took a quick crack at the correlation implied by table 5 in that paper you linked. Assuming wealth was constant across the ranges specified, I came up with a correlation of 0.45. So meaningful but not high. I personally suspect that it's actually much more highly correlated and that fact would come out if I didn't have to assume wealth was constant for 0-50 and 50-90, but it would be conclusory for me to incorporate that into my numbers.
I think overall it is rather highly correlated, yes. In fact, I'd submit that the number one predictor of having a high net worth would be to also have (or have had) a high income.
The easiest formula to build wealth is to have positive result to the income -expenses equation. If you accept that, income and expenses should be the two strongest correlations to large amounts of wealth overall.
Considering expenses need to be something north of zero in the best case and income has no upper bound, I'd give income the edge over the two in terms of overall strongest factor.
You're looking at one year of wealth creation here, and dancing around the obvious third variable: time. Old people are much more wealthy than young people[1] despite having comparable or lower incomes.
Just to add: Income to wealth correlation though is a matter of one being used to create another. The level of one's income has an impact on how easy it is to create wealth.
Aside from that though, the two should never be conflated. Many people are able to create wealth with small to moderate incomes, while higher income doesn't mean higher wealth if you also have high expenses.
I think it's also important to note that the causal relationship goes in both directions. Higher income increases the ability to create wealth, but also higher wealth increases the ability to have a higher income.
Certainly, they are very different things, and individual variance can be high, but they are definitely strongly correlated in the population at large.
but also higher wealth increases the ability to have a higher income.
This I don't quite agree with. Overall it makes sense but it is not as direct a correlation.
Wealth gives you leverage, but only by the weakest of factors can it give you higher income directly. There would always be some sort of intermediate step. There are few ways you can transform wealth directly into income without significant work. (At that point it becomes less a factor of the wealth directly and more you earning an income.)
Eg. You are born wealthy and because of that your father knows a lot of people willing to give you an opportunity that a person not born wealthy wouldn't have. This only works if you aren't an idiot, or an alcoholic, etc. If you are, the chances of you turning your own wealth into income which you can then convert back into more wealth is significantly hampered compared to someone without these issues but less starting wealth. If you aren't putting work and effort into exploiting the leverage that wealth provides, you will not create income.
I don't see this as counter to income and wealth inequality. Certainly there are those with medium to high income whose debts put significant pressure on their lives, but having access to homes and higher education is a big part of the wealth and income inequality in the US, so even having access to those things already means you have a certain level of wealth or privilege that many poor people do not.
No, it wouldn't. People with high incomes like to pretend that worthwhile uses of that money -- student loans, school for their kids, a house in a safe neighborhood -- somehow shouldn't count toward their spending. But that's the whole point of money! You get to spend it on the things you think are worthwhile!
"I'm not wealthy! I spend my entire (large) income every month!" is a profoundly silly thing to say.
I don't think you understand the concept of wealth and income from an economics perspective.
When person B has $10,000 he is wealthier than person A.
If person B spends $10,000 he is losing wealth. Depending on how he spends his 10,000, this may result in an overall net gain in his wealth (i.e., an investment, like buying a house) or an overall net loss to his wealth (i.e. a purchase, like buying a car, since cars depreciate).
Your wealth is an overall assessment of what you have accumulated. Your wealth is the sum of your current position + (revenue - expenses). Note that your current position can be negative regardless of how many cars, boats and homes you are entitled to use at the moment. This is the situation of many, many Americans at this time.
Your income, on the other hand, is simply the revenue. A relatively tiny part of the equation.
So it is entirely true that you can have a high income and little to no wealth. While it might seem silly to you from the perspective of someone that is looking at the use of possessions, depreciating or overly-leveraged positions make the statement a perfectly normal thing to say.
You might envy the house, but if that house is unable to be leveraged because more is owed to the bank than it is worth, it is actually a net loss when trying to determine wealth. A renter is actually better off than this homeowner.
Once you understand this, you'll realize that even with a low income, maximizing wealth creation opportunities is what pays off in the end.
Remember that we're talking about recurring income streams. You get to start over with a new $10k each month. It's silly to argue about how the $10k/month is grown or spent. It's still several thousand dollars a month more than someone below the poverty line! We don't need to dig much deeper than that -- the differences are pretty clear -- but for reasons that I think are obvious, a lot of people making that much want to focus on how poor they feel after they've spent the money.
"Once you understand this, you'll realize that even with a low income, maximizing wealth creation opportunities is what pays off in the end."
This is another one of those silly things that people with large incomes say a lot. People making minimum wage will never, ever, ever be able to save at a rate high enough to make any sort of difference. Parables about hard work and austerity are fun, but they miss the point.
And besides, you're just completely missing the point. Of course you'll be poor if you blow all your money. Who said otherwise? The point is that it's pretty silly to say at the beginning of each month, "I'm struggling just as much as everybody else" based on the fact that you're about to spend all that you've earned on luxury goods and services.
Let's keep in mind here that you were the one that introduced a "good/bad" evaluation into the discussion with your comparison of people against each other. I made no such comparison. I'm not choosing to critique a person's life choices, I'm simply explaining how wealth and income, although correlated, are not the same thing.
You are equating both "lots of stuff" and "lots of income" with wealth, and that is an improper view of the matter.
It's silly to argue about how the $10k/month is grown or spent.
Except that this balance between the products of the equation will make all the difference in the world to the end result - wealth. What is irrelevant is the dollar amount. What matters is how the equation is balanced.
It's still several thousand dollars a month more than someone below the poverty line!
While true, this is largely irrelevant to this overall picture. The equation remains. We can address a minimum expense expectation overall as a society, but that's a different topic, and we have already established some hard lines. The basic fact is that if your income is less than your expenses, you are becoming less wealthy. What the person next door is doing is not important. Wealth is not a zero sum game! The neighbour having a ferrari does not detract from your ability to earn an extra $10K. It doesn't matter to you at all, really. If he is complaining because he cannot afford that expense, he has the same issue as the person that is complaining they can't buy an xbox.
People making minimum wage will never, ever, ever be able to save at a rate high enough to make any sort of difference.
I hate this bullshit. Why? Because I did it, and I came from far worse circumstances than 70-80% of the people that have this defeatist attitude.
That's that bit about investment I was mentioning. I won't lie, it isn't easy to live on minimum wage. It's even harder to work at that level where you are deemed "taxable" but can't really afford anything. That's why you invest. You look to change the numbers in the equation to create a situation where you can build wealth. You put yourself in a position where you earn more and spend less, and then you do that for a decent period of time.
you're about to spend all that you've earned on luxury goods and services.
What's a luxury? Your shoes? Your beer? Your cigarettes? Your fast food lunch? Your Honda? Your cable tv? Your boat? Your house? Your Ferrari? Your private jet? Your island? This is entirely dependent on perspective, and thus, for the most part, irrelevant.
In reality, the poor overspend just as foolishly as the middle class and rich do. Only the nature and amount of the luxuries change. Not being able to afford a pack of smokes or cable TV is exactly the same as not being able to afford a boat or a second car. Either way, you can't afford it, so if you want to enjoy these things, you need to get yourself into a position where you can afford it.
It's meaningless and unproductive to compare a person overextending themselves on their McMansion to a person overextending themselves on McNuggets. The solution is the same - adjust the equation. EVERYONE can adjust the equation. EVERYONE can live cheaper than they do right now. EVERYONE can earn more than they do right now. The only difference between us all is that some of us will sacrifice to achieve these goals and some of us won't. Regrettably, one thing the poor do share is that most of them fall into the latter.
And that's where I remind you that I'm not a total douche and won't be following Ron Paul of the ideological cliff. Social programs and safety nets are tremendously important. It is essential that as many people as possible are allowed to find themselves in a position where effort and sacrifice are rewarded. It's essential that as many people as possible understand what I just said to be a viable path. Personally, if you are American, I feel there is work to be done in your nation in this respect. For me as a Canadian, I think we've more than covered off this level of support. Anything further is up to the people in the mirrors.
I appreciate your lengthy response, but this is all hand-waving. I don't know why you're trying so hard to prove that there's no difference between someone with a high income and someone with a low one. But here we are.
