Thinking Like an Economist: Income and Wealth Inequality Edition

It’s a given that a lot of people are concerned about inequality. Income inequality has historically been a more popular topic, but wealth inequality is also big this political season.

Let’s leave aside whether inequality is harmful or not, or has its positives too.

Instead, let’s focus on something completely different: are there 2 things to be worried about here, or something less than that? This is a perspective you won’t hear from anyone who isn’t an economist, and you won’t hear it from most of them either.

The trick to seeing this is to use finance to think in terms of present value. A stream of income going into the future has a present value today. Alternatively, a pile of wealth today can be turned into a stream of income of any length going into the future.

Going a bit further, it’s not that unusual to have young people with high income but not much wealth, and old people with low income but a lot of wealth. It’s not a big stretch to notice that we could come up with 2 different looking financial situations with the same present value. While we might prefer one or the other personally, on average those are interchangeable.

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So here’s the thing. Does, say, Bill Gates high wealth also earn him a high income? Of course it does. But, if we have some list from highest to lowest wealth, and another list from highest to lowest income, and we’re worried about the inequality in those lists … Bill Gates shows up on both even though he’s not working for income in a conventional sense.

It’s not as obvious going the other way, but are there young people with expectations of a lifetime of high income who buy a house (a form of wealth) that their older, lower income, siblings can’t? (I’ll let you in on a secret: that describes both sides of our family fairly well, but it doesn’t feel that great when we’re the ones making the bigger mortgage payments).

My point is not that income inequality isn’t important to understand, or that wealth inequality isn’t important to understand, but that there’s not really 2 distinct problems here, and economists ought to be telling people this.