Legacies, Wealth Inflation and the Honor Due Wealth

Legacies, Wealth Inflation and the Honor Due Wealth

On Monday, I wrote about grade inflation in higher education, especially but certainly not exclusively at Harvard. Grade inflation generally is a topic that roils college faculty from time to time, not only ivy-covered halls, but other institutions as well.

While acknowledging that Harvard probably recruits a disproportionate share of the nation’s truly gifted college undergraduates, I argued that other factors raise doubts about any claim that Harvard’s undergraduate student body really was so extraordinarily gifted that most students, most of the time, should earn A-‘s or A’s.

Among those factors were two I’d like to return to, worrying today not about grade inflation in higher education, but wealth inflation among the nation’s wealthiest households.

First, the apparently good news. The Federal Reserve’s Survey of Consumer Finances released this month indicates that U.S. households experienced a 4 percent growth in real income on average between 2010 and 2013. Sounds like a bit of a real recovery for the typical American family, since it’s the average income that rose. A rising tide that lifts all boats, perhaps?

But averages can be very deceptive. If a small minority sees substantial increases in income, statistically the average can appear much higher than actually is “typical.” And that’s what has happened in this country. A rising tide of disproportionate wealth that lifts an elite few dramatically while the rest drown.

“Only families at the very top of the income distribution saw widespread income gains” in the period, according to the report. These gains were substantial enough, though they went to a tiny percentage of the population as a whole, to give the appearance of an overall increase in income. A more representative measure of the economy position of typical families, the median, fell 5 percent in the same period. This decline in the median reflects the fact that the lower 90 percent of households experienced net losses in real income over the study period.

90 percent

Today, the top 3 percent of households own well over half of the nation’s wealth; the bottom 90 percent of households, barely a quarter. The last four years have continued a trend that has inflated the wealth share of the wealthiest few while the vast majority’s share shrinks.

Is such disparity a cause for concern, or is it a reflection of some particular merit in those whose fortunes have improved? Perhaps the top 3 percent of the population (in terms of wealth) has economic merit that clearly exceeds that of the rest of the population (on average, of course), hence they fare well while the other 97 percent languishes.

That popular argument (“Why should we punish economic success?”) echoes thoughts of Harvard undergrads just being superior to students elsewhere. Except, with legacy admissions and the effects of being raised in educationally elite households (as most Harvard students, and indeed most successful college students, are), at least some of those A students at Harvard may simply be benefiting from legacies secured by others’ efforts, rather than from their own merit.

The same could be said of today’s “legacy” wealth. Most of the income and wealth gains of the elite 3 percent aren’t a result of remarkable innovativeness, extraordinary managerial skills, or very, very hard work. Most of the gain comes from investments; have you tracked the S&P 500 index since January 2010? And many of our wealthiest citizens are, themselves, “legacy” folks, with wealth passed on from prior generations that gave them a significant head start on wealth acquisition.

Don’t misunderstand me. There are very wealthy people who work hard, whose personal efforts generate innovations that improve our quality of life and jobs that feed millions. But having wealth is not, in and of itself, any indication of merit, any more than poverty is, in and of itself, any indication of a lack of merit.

When a small segment of society prospers while most suffer or struggle, there’s something unbalanced about the economy. Like it or not, that imbalance is hurting us now, and will in the future.

I’m not advocating for “income inflation” to match Harvard’s grade inflation.

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I’m just suggesting that, like the debate about grades and merit, we need to do more than deal in tautologies.

The rich do become richer in part because they are rich, and the poor do become poorer in part because they are poor.

Those are economic facts born of a capitalist economy. But that doesn’t mean that a growing gap between rich and poor is merited . . . or good for anyone.