Why Someone Else Being Wealthier Actually Makes Me Poorer: Debunking a Suspect Claim

I found that the assertion stayed naggingly with me after I heard it expressed by one of the conservative talking heads appearing one night on Bill Maher’s Real Time HBO program: “Just because someone else is wealthier than I am doesn’t mean that it makes me poorer.”

I didn’t believe the statement when I heard it expressed but the way it seems to relinquish any envy gives it an attractive quality, making it sound admirably virtuous, as if it bespeaks a magnanimity of spirit even though it’s a statement wielded by the sort of spokespersons who also espouse such theories as “trickle down” economics. Somewhat inconsistently, “trickle down” economics proposes a world where another man’s accumulation of wealth can indeed be counted upon to affect your own but, optimistically, only for the better: Those who have less are expected to be satisfied by all the extra crumbs that will spill off the table with overflowing wealth. (The math behind this involves a prediction that the overall pie will always be bigger by more than the amount the wealthy themselves take.) These are the same sort of folk who now speak about the 1% Club as munificent “job creators.” Those espousing such theories can be counted upon to argue against measures such as a progressive income tax structure in order to to reduce the gap between the rich and the poor by having the wealthy pay higher income taxes.

“Just because someone else is richer doesn’t make me poorer”: Does this kind of statement really need debunking? Isn’t it just obviously wrong when you think about it? Maybe only to some and what might not be so obvious is just how many ways the statement is wrong. Let me count some ways:

1. Compensation to top executives in the United States is now paid at absurd multiples of other employees’ salaries. Ben and Jerry’s may no longer limit compensation of its highest paid employees to seven times that of entry level employees but the fact that it once did puts in perspective the kind of huge differentials now prevalent. Exact reliable figures about the ratio of top executive pay to bottom level employee pay or average employee pay level for given years is not easy to come by and the figures depend upon which group of companies one is selecting to derive one’s statistics, but whether one is looking at a ratio of 531 average employees’ salaries to1 highly compensated CEO’s, 525 or 263 to 1, 185 to 1, or 325-to-1 (the last ratio involving executives getting paid an average of $10.8 million each), each of those multiples represent corporate resources that could be redirected into hiring more employees or paying other lower-paid employees more. And isn’t it reasonable to expect that in the face of a more progressive income tax system we would likely see that kind of redistribution as the attraction of high salaries waned just as was the case when taxes were once more progressive?

2. Further, as focus shifts away from jobs being chased and held just for the sake of very high salaries mightn’t the quality of corporate management improve as a result? This is something we’d perhaps be more apt to believe if, along with Warren Buffett, we believe that executive compensation for U.S. executives is too often “ridiculously out of line with performance” and that a cooperation’s board’s ability to rein in such excessive compensation is a critical test of proper corporate governance. These then are two ways in which wealth lavished excessively on select individuals means the impoverishment others.

3. After another man is paid so many multiples more than his fellows the amount he is likely to invest should predictably be much greater than the rest of the populace and that investment will, in turn, spin off even more income. A fair amount of his wealth will probably be invested where so many of us inevitably think to invest: in stocks. Much of the nation’s wealth is owned through corporations. Ownership and control over a corporation is represented by its stock. The wealth of all of the nation’s investors intermingles in its ownership of the stock of those corporations but the intermingling is not equal in terms of ownership of the decision-making process because when it comes to corporate governance majority rules, the preferences of the minority must bend to the decisions of the majority. That majority is not added up in terms of stockholders as individuals; majority is counted up in terms of the majority of individual shares of stock. Which is to say the calculation involved is sheerly a measure of total wealth. As so much of the nation’s wealth is owned through corporations much of the nation’s policy is consequently set by the demands of those corporations but in the setting of such policy the voice of any minority ownership is lost as the corporate governance structure acts as a lens to focus the corporation’s influence behind the interests of aggregating wealth, much like a magnifying glass can bend the diffuse rays of the sun to focus on one concentrated incinerating point. Maybe I want my local environment kept clean and pure but maybe the corporations don’t, and maybe the wealthy will fly away to vacation in remote spots beyond my means where devastations to the environment will matter less to them.

4. When we think of influencing policy in the United States we think about appealing to our politicians and electing those we think will represent our interests, but every politician thinks of him or herself as having two constituencies: a.) Those individuals capable of voting for them, and b.) Their money constituency. The first is a finite constituency tied to a locality. In the United States every individual must decide where he will vote and there he will get to vote only once in each election. The monied constituency is free to cross lines. Those wealthy enough can support candidates anywhere no matter whether they live or vote where a candidate is running. They can even support candidates running against each other in the same election, and do. The amount of support supplied this way is limited only by one’s wealth and the will to deploy it. In the United States political spending in the form of contributions to political candidates is almost entirely the provenance of the very wealthy. Most of the money for the nation's political campaigns comes from .5% of the population,which means that it is really the .5% vs. the 99.5% that Occupy Wall Street ought to be talking about and 1 percent of the 1 percent account for almost a quarter of all individual campaign contributions to federal political campaigns in 2010. That means we have a government where it is going to be very difficult for ordinary citizens to get the attention of their political representatives because those representatives will spend most of their time preoccupied thinking about the donating elite. Unequal access to those entrusted with governing the nation leads, quite justifiably, to distrust of the system by those without access.

5. One reason that distrust of the system may now be very sensibly coming to the fore is that, as argued by Glenn Greenwald, the author of “With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful,” we have seen a two-tier justice system emerge, one for the nation’s uppermost class, another for the less politically powerful. Normatively, the idea that the same rules apply to all ought to supply a check and balance against draconian abuses in the legal system and against violations of the law. With a two-tier system liberties are no longer protected by this check and balance. So yes, when others become a lot wealthier than the rest of us we poorer souls all become still poorer because even our life and liberty are put in jeopardy.

6. Others being wealthier also makes us poorer when we are competing in the market for the same limited resources. This is really classic supply and demand economics. More money chasing a limited supply drives prices up. Since real estate is unique and can’t be duplicated it is very easy to see how the rules apply. In 2004 when apartment prices in New York were rapidly rising the New York Times ran an article about “gazumping” which, technically, is the acceptance of higher offer from a different buyer after a handshake deal on a lower apartment price was reached. With the market awash in new cash, offers significantly trumping already accepted offers for which contracts weren't yet executed were becoming commonplace. It created a lot of pressure to close deals rapidly. A “gazumping” buyer can be particularly effective in persuading a seller to accept an offer (in the bidding practice that is considered less than entirely ethical) if they offer cash and a substantial deferential in price. Sellers may appreciate the higher prices the wealthy pay but say, for instance, you have a property that has been in a family for many years: Members of the extended family who want to buy it and keep it in the extended family (essentially maintain the status quo) may be “gazumped” out of their opportunity to do so by those who have become disproportionally wealthy. Another example involving real estate would be a neighborhood townhouse providing homes to perhaps nine renting families which is then purchased by a bet-winning hedge fund entrepreneur who, with his newly minted wealth intends to occupy the entire building after he evicts all the long-term tenants. Those tenants will have to move elsewhere. Shifting wealth will subtract from their other choices and the prices they will pay will accordingly be higher. These examples involve real estate but the same rules apply whenever there is competition for commodities that are limited.

7. Others having wealth substantially exceeding my own makes life more expensive in other ways. Sometimes the cost of living gets established as a community package. Say I live in co-op or condominium building where the expense of maintenance and operation are handled communally. If everyone in the building has resources similar to mine we are all apt to have similar notions about the value of certain expenditures and the need to make careful resource-conserving choices. But if others in the building become far wealthier than I am then they may want to hire extra doormen and porters, multiplying expenses. They may also care less about close oversight of the the wisdom with which each community dollar is spent. They may be more inclined to delegate such oversight to hired professionals at extra expense. In their view the lobby might need to be grander. The wintertime heat in the building might be ratcheted up profligately allowing windows to be flung open. The building may become unaffordable to the less affluent but because the expenditures are communally undertaken and enforced those expenses must be paid by all who stay. Those who need to move as a result will bear an extra expense but those who don’t, won’t.

8. The community-determined expenses discussed above which are enforced are presented conceptually with the example of a residential co-op or condo, but the very same sort of situation can occur when government in a locality decides to provide a higher level of more expensive services, better roads, more frequent trash pick-ups, a more ostentatious Town Hall, etc. Or it can work similarly but in reverse: As an area fills with wealthier residents there may be fewer among them who feel the need for the services of a good public library open at convenient hours throughout the week. As a result these services may be cut back.

9. Besides communally undertaken and enforced expenses there are expenses associated with living alongside wealthier people that are not enforced but nevertheless hard to avoid. Those with fewer resources appreciate some of the changes that come with a gentrifying neighborhood (renovations, cleanliness, policing may improve and some new stores may be appreciated) but one of the complaints such residents often have is that many of the stores selling merchandise at price points geared to their own incomes disappear and are replaced by stores selling merchandise at price points they can’t afford. A Starbucks may have a certain novel cachet but the Starbucks coffee can be a lot more expensive than the alternatives.

10. Looking for a new home one might also find one’s choices of apartments circumscribed by the wealth and more affluent life style of others when one encounters apartments that are available only if one pays unaffordable “amenity fees.” The amenity fees may boost the cost of renting more for those looking to save money by doubling up when they are required to be paid on a per person basis. Developers have been packing new New York City buildings with amenities like swimming pools, party and entertainment rooms, screening rooms, roof decks, etc. - There is no free lunch (although amenities sometimes include ostensibly-free regularly-served breakfasts) so these would be paid for in increased prices somehow but now developers make a practice of charging overtly for these amenities by required fees imposed in addition to the rent.

11. The very best schools, particularly colleges, are also likely to exceed the reach of the less wealthy for a variety of cumulative reasons: a.) tuition b.) higher SAT scores by virtue of hired tutors and prep c.) preference for legacy admissions based on prior family member attendance d.) Attendance at better feeder schools, and e.) donations from the family to the school. Whether or not one succeeds in sending one’s children to the nation’s select set of very top schools would not be such an significant issue (many schools are very good and more than sufficient for providing excellent educations) were it not for the fact that attendance and socializing at premier schools significantly eases the entry of the next generation into a privileged club whereby they can expect better opportunities in terms of earning wealth. Ultimately it becomes a self-perpetuating system.

The above list can no doubt easily be expanded. I invite readers to suggest additions by commenting on this post. I know the list is not all-inclusive.

I originally thought to write this article months ago back when I first mused about what had been said on Bill Maher’s show. Since that time there was an influential article in the May 2011 edition of Vanity Fair by Joseph E. Stiglitz that makes similar and related points even if its theme is not exactly the same. On point Stiglitz makes that could be added to the above list is that the nation’s decisions with respect to war are affected when there is a class wealthy enough not to send any of its children to war. Surely we are poorer when another disinvolved individual makes a decision to send our children to war. I strongly suggest that if you have appreciated this National Notice article and haven’t yet read Mr. Stiglitz’s, you read it: Of the 1%, by the 1%, for the 1%.

A final point to mention: After acknowledging that another man’s wealth can, indeed, make me poorer in all the ways mentioned, there is another economic truism to remember. . . The value of a dollar is greater to a poor person than it is to a rich person. Ergo, when a wealthy man’s wealth makes a less wealthy man poorer, the significance in the shift is greater to the poorer individual. To the extent that the shift reflects an injustice, that injustice is consequently greater.

Inflation That's Causing Deflation: Some Not So Very Good News For the Real Estate Market

Inflation, deflation, stagflation: A little bit of inflation might be good for the economy, but too much is bad, as are deflation and stagflation.

In some ways that does not bode well for the national real estate market. It looks like we may, for a while, be experiencing the worst of all three of these economic problems. While real estate is often thought of as hedge against inflation it isn’t a hedge against the kind of inflation we are about to talk about: Inflation that causes deflation in the real estate market.

A Depressing Review Respecting the Concerns About Classic Deflation

Most people understand that what was going on during the Great Depression was not good news. It was a vicious cycle and the problem was deflation. The economy seriously slowed. Jobs were lost everywhere. As a result the prices of everything declined. If you were holding cash that was good because your cash was more valuable. But if you had to pay a mortgage, or rent property you were in trouble because you were now obligated to make payments that were effectively, in real terms (adjusted for deflation), more expensive than what you had originally agreed to, more than what you originally bargained for. The result: You might be propelled into a default. In fact, thinking it over, you were given a good reason to default on your obligations; your home, the property you were paying the mortgage on, was no longer worth as much as you once agreed to pay for it.

Deflation, Unemployment and Low Wages

Defaults then generated the vicious cycle mentioned. Spreading defaults meant that foreclosed upon properties flooded the market, lowering property prices still further- - adding to the deflation which would in turn again cause more defaults and around and around you could go. The slack could be picked up by increased employment but that is not what happened and there is a problem with expecting an uptick in employment in that situation. Deflation contributes to further unemployment and lower salaries and so that also becomes part of the vicious cycle. Generally, real estate price downturns follow rises in unemployment with a generous lag in time. But a slow real estate market contributes to unemployment.

The Money Supply and Keeping Deflation At Bay

Everyone knows that deflation is not good for the economy. It is a trap to be avoided. The way to stay out of that trap is to pump up the money supply enough so that prices don’t go down. That’s what the federal government via the Federal Reserve was trying to do with its effort at monetary easing, the last go-round known as QE2 for “quantitative easing, the second round.”

QE2's Fine Calibration: Walking the Line Between Staving Off Deflation and Causing Overheated Inflation

The Fed is was trying to finely calibrate the easing so that there would be enough additional money in the system to keep the economy moving and avoid deflation but not, on the other hand, overheat the economy with runaway inflation. It is to be remembered that a lot of money has already been pumped into the U.S. economy with the stimulus packages, and like the Vietnam era, with heavy spending on wars paid for with debt, not taxes (which led to high inflation after the Vietnam war). So it is quite possible that one day inflation could really take off.

Funded Inflation. . .

In fact, the Fed’s quantitative easing has, indeed, helped fund some inflation. The problem with the Fed’s quantitative easing, however, is that, aside from the fact that some felt it was too timidly restrained, its potential for deflecting deflation in the housing market was sapped as prices rose, particularly in two other areas: Fuel and food. The price of food is going up (with world food prices hitting a record in January) largely because of global climate change events. What are people to do when the price of eggs goes up 50%? The price of fuel is going up because we are still relying on the fossil fuels causing the climate change. And because we are importing so much of the oil, American employment doesn’t go up when those prices do. Instead, American employment goes down. The price of raw materials, including rare earth elements are also going up as other countries economies compete (out-compete?) with our own economy for them.

. . . Accompanied by Deflation

To the extent that the inflating prices driven by the inelastic demand for relative necessities like food and fuel absorb increases to the money supply intended to deflect the possibility of deflation we can get the worst of all possible worlds: Overall, we can have inflation as people shell out to pay for what are largely necessities, with things like oil being imported, while no money is left over for the more discretionary expenditures like the bigger and bigger homes in which Americans have been choosing to live in the last several decades, which means a continuing cycle of deflation and unemployment in those home sectors of the economy.

Consumer Income is Deflating For Most Americans

The inflation means consumers have less to spend in real terms overall. Over the last year, prices are up by 3.2 percent but average hourly earnings were only up 1.9 percent during the year. (See: U.S. wages can't keep up with consumer prices, Marketplace Morning Report, Friday, May 13, 2011.) So, consumers are losing ground financially with less real income to spend even before most of what they do extra to spend is directed to the rising fuel and food costs.

For most Americans whose principal income comes from wages rather than investments the decline in real purchasing power is exacerbated by the fact that they are on the short end of growing income inequality.* They have less comparative purchasing power as wage income declines relative to income overall which includes investment income. Recently released figures for March show that the rise in wage and salary income was only 0.3 percent but the rise in income overall was 0.5 percent. (See: Consumer spending rises on higher prices, Marketplace Morning Report, Friday, April 29, 2011.)

(* Today the top 1 percent takes in more than 20 percent of the nation’s income, in fact, almost a quarter of all the nation's income in any given year and controls forty percent of the country's wealth. Meanwhile, the bottom 40% of the country currently has only 0.3% of the nation’s wealth. According to Professor John Quiggin: “the vast majority of benefits of economic growth have gone to people in the top 10 percent of the income distribution. Within that 10 percent, the top 1 percent has done much better than the remaining 9 percent, and within that 1 percent, the top tenth of a percent has done even better.”)

Stagflation and the Real Estate Market

Remember the “stagflation” of the 70s? That’s essentially what we are experiencing again. The stagflation fo the 70s was when we learned that inflation and recession were not mutually exclusive, as previously believed. Back in the 70's under Nixon sharp increases in oil and food prices were both an issue. What you get: 1.) slow economic growth, 2.) high unemployment, 3.) rising prices, 4.) economic stagnation. That’s the classic view. Here is something this discussion is looking to add to the list: “5.) falling real estate prices.” That’s because the rising prices are confined to the inflation of the prices for other commodities out-competing real estate (and often not factored or considered to be part of the core inflation being measured).

Profit might go up in the oil sector as the energy firms take a tithing on all the additional cash flowing through that part of the economy, but persistence of the situation described above won’t be good for the real estate market.

Proving Numbers

Do we see any empirical proof of this?

According to the Zillow home price index home prices have been drastically declining since June of 2006. (See: First Quarter Brings More Dismal News for Housing Market, May 8, 2011, Katie Curnutte from which the chart above- similar to the one appearing below- is extracted.) Home values fell again last quarter by about three percent. 1.5 million homeowners are seriously delinquent on their mortgages. 2 million homes are in foreclosure. (See: U.S. home values fall 3%, By David Gura, Marketplace Morning Report, Monday, May 9, 2011 and Housing numbers continue to slide, Marketplace Morning Report, Monday, May 9, 2011.) Zillow is now predicting that the real estate market won’t bottom out until 2012, “at the earliest.”

Here are two other related Marketplace reports:

When will housing climb out of the recession?
Marketplace Morning Report, Monday, May 9, 2011

When will we hit bottom in the housing market?
Marketplace Money, Friday, April 22, 2011

Proving Exceptions?

The exceptions to this bad news?: Places where there is employment. Also, government policies that temporarily intervened with subsidies to boost home sales positively influenced the housing market for the brief while that they were in effect, but it is not necessarily a good thing that these policies artificially postponed reckoning with a final bottoming out of the market necessary to reflect low employment. Nor is it likely a good thing that there is now an oversupply of housing resulting from the bubble that ensued when the government pumped money into the housing sector with aggressively lowered interest rates and unregulated and unwise subprime mortgage lending.

Affordable Housing, But For Whom?

The silver lining of the oversupply is, arguably, that in the end it will be good for people looking for more affordable housing. . . . But that only works if such families have managed to retain jobs or income sufficient to afford even those lowered prices. Also remember that to the extent that there has been inflation in other areas of the economy such as food and fuel (accompanied by low interest rates on bank deposits), those on fixed incomes or retirees living on invested savings have actually had their incomes effectively reduced. (See: Low interest rates have costs, not just benefits, by Bob Moon, Marketplace, Tuesday, April 26, 2011.)

If you want to hear another perhaps facetiously contrarian point of view go to this article to consider the argument that substantial money is actually being pumped into the national economy (possibly to the tune of $50 billion) by defaulted homeowners living cost-free in the homes on which they no longer are paying the mortgages: 'Squatter rent' may benefit the U.S. economy by $50 billion, Marketplace, Friday, May 6, 2011.

An Oddball Silver Lining Theory

The proponent of this idea, Michael Feroli, chief U.S. economist at JPMorgan Chase, calculates that with about 8 percent of mortgages of the nation’s 44 million mortgages being past due, there is about $800 billion in mortgage payments that are past due, so that about $50 billion per year can be redirected by the defaulting mortgagor families and is therefore “free for other purposes.”

For Mr. Feroli’s theory to work it has to mean that this money is more beneficial when spent by the defaulting families directly rather than had they paid what was owed to the banks to have them do with what they would. Mr. Feroli supposes that the families being in dire economic straits will quickly spend the money on necessities. Conversely, if the banks aren’t paid they might fail, in which case the FDIC picks up the tab at taxpayer expense. The Marketplace coverage doesn’t say what Mr. Feroli thinks happens if the banks simply stay afloat without getting the money. Is he presuming that banks are tending to just sit on money these days?

In Late April S&P Case-Shiller Home-price Index Precursed Zillow's Early May News

Here from another Market Place segment that covered the latest S&P Case-Shiller home-price indexes figures showing a drop in prices at the end of April:

the amount of housing production that's taking place . . . . went below the 50-year-low level. That's a depression for the housing sector. It's been down 30 months at low levels, and it's because the demand is not there.

(Home prices continue to drop, Marketplace Morning Report, Tuesday, April 26, 2011)

See also this Marketplace story about the release of those Case-Shiller index figures which emphasizes how lower home prices translate into reduced consumer spending: Home prices going down, by Nancy Marshall Genzer, Tuesday, April 26, 2011.


And a NPR Planet Money post (which provided the chart above by Alyson Hurt/NPR) extracts these points out of those Case-Shiller report numbers:

• Home prices fell by 1 percent between October and November (according to Case-Shiller's 20-city composite).
• Prices fell in 19 out of the 20 cities tracked by the index between October and November.
• Prices fell by 1.6 percent between November of 2009 and November of 2010.
• Home prices fell in 16 out of 20 cities between November of 2009 and November of 2010.
• Eight cities hit new, post-bubble lows in November: Atlanta, Charlotte, Detroit, Las Vegas, Miami, Portland, Seattle and Tampa.

(See: Home Prices Keep Falling, January 25, 2011, by Jacob Goldstein):

If you go to the that article you will also see a table of home prices in the 20 metro areas tracked by the monthly Case-Shiller report.

The Glutting Oversupply of Homes

Perhaps if Americans had more jobs and at better salaries there wouldn't be such an oversupply of housing, but as things now stand, there is a glut of homes people can't afford and that glut stands in the way of a bottoming out of home prices and their eventual recovery. It's a problem in cities across the country such as "Detroit, Las Vegas, Miami, Phoenix and Tampa." In some cities the statistics are truly astounding. For instance, in Miami three out of five homes sold there are foreclosures or short sales:

Foreclosures have flooded the market in Miami. Three out of five homes sold there are foreclosures or short sales. (Short sales occur when lenders allow homes to be sold for less than what's owed on the mortgage.)

(See: Bargain Prices Help Reduce Glut Of Foreclosures, by The Associated Press, April 26, 2011.)

Three out five homes? That's 60% of the market. And that's recent news.

Skittish Banks

The oversupply and this dire picture leaves banks skittish. When, as a result, they refuse to provide financing there is less capital in the market to finance transactions that aren't foreclosures or short sales. (See: Housing market faces headwinds, by Janet Babin, Marketplace, Monday, May 9, 2011.) The banks have good reason to be skittish with fraud in the housing lending market increasing.

The Latest Bad News

It looks like there may be even more bad news piling on. It is reported that the federal government which “last year backed nine out of 10 new mortgages nationwide” is likely to stop providing government backing for larger loans. For three years now government agencies like Fannie Mae have been backing mortgages as large as $729,750 which, in high-cost areas like New York could be for a not very big apartment (and what it costs to build one). If government backing drops back down to $483,000 it could definitely drag down the market in those high cost areas like New York, California, New Jersey, Connecticut and Massachusetts. (See: Federal Retreat on Bigger Loans Rattles Housing, By David Streitfeld, May 10, 2011.)

Yo-Yo Federal Policy

If prices do get dragged down it will be another example of questionable government policies to support the housing market. There is nothing necessarily wrong with subsidizing the housing market, and backing mortgage loans may be a good strategy to do that. Maybe high-price loans should be excluded from support and there are certainly countervailing arguments that populations living in higher-cost areas of the country should not be discriminated against. If there is a cut-off point for federal backing it should escalate over time as prices rise. What is highly undesirable, however, in terms of federal housing subsidy programs are in-again-out-again strategies, because without consistent commitment the market will only yo-yo, ending on the downside when they come to an end.

As it is, we have already been waiting a very long time to find out where the actual bottom of the market is after the ending of the last set of temporary federal housing subsidies were terminated.

What's the best federal strategy to boost prices in the housing market? It's the obvious one: The federal government needs to create an economy that generates more and higher-paying jobs.