Helpful lesson on wealth

There’s a growing debate worldwide about capital and whether everyone is getting their fair share. The latest figures in the United States indicate that the gap between rich and poor is widening and its not because the rich work harder, smarter or are just plain lucky. It’s the fact they have better access to capital, whether they earned it or just inherited it.

And much of the debate swings around not whether this is actually good for the country, but whether it’s good for the economy. I’m indebted to AFR market guru Philip Baker for highlighting the following data because it also rings true in Australia.

According to credit rating agency Standard & Poor, the top 1 per cent of US earners get on average $US1.3 million a year, while the top 0.01 per cent earn as much as $US30.8 million a year. The top 1 per cent’s income rose 15.1 per cent from 2009 to 2010; for the bottom 90 per cent, it rose by less than 1 per cent.

US census data shows that the median net worth of the richest 20 per cent of families is $US630,754, while the poorest had a negative net worth of $US6029. The top 40 per cent of households increased their net worth from 2000 to 2011. The bottom 60 per cent lost ground.

S&P’s chief economist Beth Ann Bovino thinks the level of income inequality in the US is damping GDP growth, at a time when the world’s biggest economy is still struggling, and the government is facing social and budgetary problems.

According to Bovino the one reason S&P cut its 10-year growth target for the US to 2.5 per cent from 2.8 per cent. The agency also considers imbalances in incomes can lead to “economic swings” and accentuate boom-and-bust cycles.

But interestingly S&P also proffers a solution. The United States needs to educate people to a higher level so they can reach a certain level of earnings potential. It’s simple really, if people earn more they will most go out and spend more. The economy gets kicked back into growth, the government collects more taxes and certain problems like an aging population can be funded.

The figures are compelling. S&P’s analysis shows there is a 45 per cent chance that a child born into a poor family will remain poor as an adult, but the chances of staying poor drops to 16 per cent if that child gets a college education. The difference in what college graduates get paid compared with those who don’t can be as much as $US30,000 a year.

On S&P’s numbers, if the workforce gained just one more year of education on average, US GDP would grow by an additional $US525 billion, or 2.5 per cent, by 2019.

Go Back