Why it is hard to share the wealth

09:15 12 March 2005
Exclusive from New Scientist Print Edition
Jenny Hogan

The rich are getting richer while the poor remain poor. If you doubt it, ponder these numbers from the US, a country widely considered meritocratic, where talent and hard work are thought to be enough to propel anyone through the ranks of the rich. In 1979, the top 1% of the US population earned, on average, 33.1 times as much as the lowest 20%. In 2000, this multiplier had grown to 88.5. If inequality is growing in the US, what does this mean for other countries?


Almost certainly more of the same, if you believe physicists who are using new models based on simple physical laws to understand the distribution of wealth. Their studies indicate that inequality in market economies may be very hard to get rid of.


Economists will join physicists to discuss these issues next week in Kolkata, India, at the first ever conference on the "econophysics" of wealth distribution. "We are interested in understanding whether there is some kind of social injustice behind this skewed distribution," says Sudhakar Yarlagadda of the Saha Institute of Nuclear Physics (SINP) in Kolkata.


It is well known that wealth is shared out unfairly. "People on the whole have normally distributed attributes, talents and motivations, yet we finish up with wealth distributions that are much more unequal than that," says Robin Marris, emeritus professor of economics at Birkbeck, University of London.


Pareto's law


In 1897, a Paris-born engineer named Vilfredo Pareto showed that the distribution of wealth in Europe followed a simple power-law pattern, which essentially meant that the extremely rich hogged most of a nation's wealth (New Scientist print edition, 19 August 2000). Economists later realised that this law applied to just the very rich, and not necessarily to how wealth was distributed among the rest.


Now it seems that while the rich have Pareto's law to thank, the vast majority of people are governed by a completely different law. Physicist Victor Yakovenko of the University of Maryland in College Park, US, and his colleagues analysed income data from the US Internal Revenue Service from 1983 to 2001.


They found that while the income distribution among the super-wealthy - about 3% of the population - does follow Pareto's law, incomes for the remaining 97% fitted a different curve - one that also describes the spread of energies of atoms in a gas (see graphic).


Gas analogy


In the gas model, people exchange money in random interactions, much as atoms exchange energy when they collide. While economists' models traditionally regard humans as rational beings who always make intelligent decisions, econophysicists argue that in large systems the behaviour of each individual is influenced by so many factors that the net result is random, so it makes sense to treat people like atoms in a gas.


The analogy also holds because money is like energy, in that it has to be conserved. "It's like a fluid that flows in interactions, it's not created or destroyed, only redistributed," says Yakovenko.


Yakovenko also found that the total income of those in the poorer part of the distribution did not change significantly with time after accounting for inflation. But incomes for those in the Pareto curve shot up nearly five times from 1983 to 2000, before declining with the US stock market crash of 2001.


Class jumping


This, along with research data from other countries, suggests that there are two economic classes. In one, the rich grow richer while in the other the poor stay poor. Yakovenko explains this by going back to the analogy of atoms in a gas.


The atoms assume an exponential distribution of energy when they are in thermal equilibrium, and pushing the gas away from this state takes a lot of energy and it could prove similarly difficult to shift an economy to a different state. Randomness in the model does, however, mean that individuals can jump from one class to another.


"It suggests that any kind of policy will be very inefficient," says Yakovenko. It would be very difficult to impose a policy to redistribute wealth "short of getting Stalin", says Yakovenko, who will talk in Kolkata next week.


Saving plans


A more sophisticated model developed by Bikas Chakrabarti of the SINP and his colleagues paints a slightly less bleak picture for the poor. His team adjusted the gas model to allow people to save various proportions of their money.


This model predicts both the wealth classes that Yakovenko found. It also suggests that if you save more you are more likely to end up rich, although there are no guarantees. Changing people's saving habits could be an effective way of making the wealth distribution fairer, rather than enforcing taxes, says Chakrabarti, who is one of the Kolkata conference organisers.


Macroeconomist Makoto Nirei at Utah State University in Logan, US, whose own work will be presented at the conference, is supportive of the physicists' work but he has reservations about how they model the exchange of money. "The model seems to me not like an economic exchange process, but more like a burglar process. People randomly meet and one just beats up the other and takes their money."


Other economists warn it is too early to use such models to inform policies. "The models are too abstract," says Thomas Lux, an economist at the University of Kiel in Germany. But J. Doyne Farmer, a physicist from the Santa Fe Institute in New Mexico, US, points out that these models have their place: "Many economic theories don't even come close to producing the wealth distribution we see, and if you can't produce that you're dead in the water."

I guess that says a lot for the old trickle down voodoo economic theory that you still hear touted from time to time.

It doesn't seem to be the case that tax cuts for the rich stimulate investment and help all of us. Looks like the rich folk just keep the money and laugh har de har har all the way to the bank.

You know, somebody ought to have told George W. that he was giving the big tax cut to the wrong people. I guess he could have answered with the reply that he was just following the natural order of things, i.e. Paretto's Law and the Gas Analogy.

"Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else" by David Cay Johnson

http://www.amazon.com/exec/obidos/tg/detai...=glance&s=books

excerpt from review:

"Since the mid-1970s, there has been a dramatic shift in who benefits from the American economy and bears the burden of taxes. CEOs, big investors and business owners can delay paying their taxes for years and sometimes escape them almost entirely, while wage earners have their taken from each paycheck. Discreet lobbying by the political donor class has made tax policies and enforcement a disaster. Because of obligations to these donors Washington has been unable, or unwilling, to fix these problems. The news media have largely ignored official favors to those who are supposed to pay the corporate income tax, the estate tax, and the gift tax. Millions of families expecting tax cuts are losing some or all of them to a stealth tax that was originally enacted only to apply to the tax-avoiding rich, but that now stings single mothers making as little as $28,000. But the cumulative results are remarkable: the 400 richest Americans pay a smaller share of their income in taxes than someone making $100,000. The 400 richest pay less and less of their income in taxes while the middle class pays more and more. And while the incomes of the very rich skyrocketed over three decades, the average income for the bottom 90 percent fell.

"Johnston exposes exactly how the middle class is being squeezed to create a widening income gap that threatens the stability of the country. By relating the compelling tales of real people across all areas of society, he reveals the truth behind:
* "middle class" tax cuts and exactly whom they benefit
* how workers are being cheated out of their retirement plans while disgraced CEOs walk away with hundreds of millions
* how some corporations avoid paying any federal income tax
* how CEOs fly on vacation in corporate jets for less than you pay for a middle seat in coach ñ and stick you with most of the cost
* why the working poor are seven times more likely to be audited by the IRS than everyone else
* how the IRS became so weak that even when it was handed complete banking records detailing massive cheating by 1,600 people, it prosecuted only 4 percent of them"

end of excerpt.


Mostly, the people who are truly better off than 4 years ago the few percent of the people that own most of America. In 1970, the richest 0.01 percent (28,000 Americans) got 1 percent of the GDP. The Poorest third (96 million Americans) got 10 percent of the GDP. A ten to one ratio.

Today, the incomes of those two groups ARE EQUAL!

The super rich now account for 5 percent of GDP while the poorest third gets 5 percent. If you're rich, there are lots of loopholes to beat what looks like a progressive system. If you're a wage earner, you have zero options for loopholes.


We need a more equitable taxation system.

It isn't. We simply need true tax reform:

Sales Taxes hurt the poor the most because they spend 100% of their income and that income is comparatively small. The rich invest most of their income (often tax free).

I think income taxes should be eliminated for the lowest bracket, raised for the highest bracket.

I think payroll taxes should be eliminated for the lowest bracket, raised for the highest bracket.

I think Estate Taxes should be restored, perhaps with a higher exemption (5 Million), and with special exemptions for family farms and businesses which would grant a delay on any taxes due until such time as the farm/business is sold out of the family.

I think the VAT (value added tax) which is used in the EU is a good way to collect tax money from Corporations who would otherwise come up with creative (Enron) accountants to make their profits look like losses.

There.

A start.

Another problem that we need to deal with is "legalized tax evasion".

Off-shore corporations.

Trusts for the wealthy. International banking - an off-shore credit card can draw from a tax-free foreign account. Wow, that is a nice system if you can get away with it.

Someone once said that Osama Bin Laden was taught by the CIA, during the Soviet Afghan war, how to use the international banking system to transfer funds anywhere in the world without being subject to a country's laws.

The CIA told Bin Laden that the system will always be safe, because neither the USA or the European nations will interfere with it because their wealthy citizens use the system to avoid taxes, and to make "campaign contributions" where it counts.

How much of the push for "globalization" is an expansion of this "tax-free" world without borders (taxes) system?

Take the business out of government. The "process" model of business works in certain large population areas (Los Angeles, Chicago, New York, Atlanta), but as you get down to the local/regional area - things work more organically - geared to the "clientele" ,as it were. You can see the stark differences by visiting Phoenix, AZ and then visiting San Diego, CA.

Phoenix is geared for the older, retiree with "assisted aid" needs, and the government structure is set up accordingly.

San Diego has young singles, families - gogogo - 24/7 activity - and the government structure is set up accordingly, and would NEVER work in Phoenix.

BUT

GOVERNMENT IS NOT A BUSINESS. A business, by definition, is an entity developed to MAKE MONEY. That's what it was made for.

Governments are there to DISTRIBUTE MONEY COLLECTED from the CITIZEN in accordance to the WISHES OF THE CITIZENS for the good of the COMMUNITY.

Right now, BUSINESSES are given the same rights under law as an INDIVIDUAL CITIZEN. That is NOT right.

Their obvious advantage of WEALTH and INFLUENCE should show that BUSINESS should be in the same catagory as RELIGION in our country.

They have every liberty to practice what they preach, but they DO NOT have the power to demand the government's SUPPORT of their individual ideologies.

BUSINESS is a RELIGION.
RELIGION is a BUSINESS.

Starting to see the connection here?

Complementary Community Currency Systems and Local Exchange Networks

I think there's another way to skin this cat, yop, short of Stalin, that is...

We don't need to redistribute wealth - just use local, community currency systems, like the one currently being used in Ithaca, New York.

Community Currencies: A New Tool for the 21st Century

Rich people buy rich toys which are made by people using "unskilled laborers" who are actually very skilled yet are making minimum wage or less.

The average profit for a pick-up truck manufacturer is 5 to 10 thousand dollars. Profit! On each one! Imagine if that profit was shared with the workers a bit more, imagine how better off America would be. Instead it goes to the same rich greedy invstors. Every single dollar.

That used to be the job of the unions -- to get a bigger slice of the pie for the workers (and themselves, of course).

But union membership is in decline. Jobs are going overseas. Our only hope is along the lines of the "negative income tax" proposed by George McGovern in 1972.

Oh, by the way, he lost 49 states.

I guess a lot of rich people didn't like the idea.

Well the government has to run like a business and what is the one thing a business is supposed to do???

Have a profit.

Right now the Debt to the penny we have is $7,774,246,242,908.36. THAT is very far away from a debt free government.