Tuesday, June 26, 2012

Divergence

Recently, I was looking around for a nice quick and light nonfiction reading. NPR is usually a great source for hearing about new nonfiction. There are many NPR programs where the host invites an author to peddle his or her wares. Alas, this time I was looking for a more concentrated list of potential light reading (where my definition of light reading may differ from yours). Furiously flipping through the NY Times bestseller list yielded a couple of candidates, but quite matched my craving for something similar to Alan Abelson's weekly Up and Down Wall Street column in Barron's, always dangerously witty yet informative. It was then that I stumbled on Timothy Noah's The Great Divergence: America's Growing Inequality Crisis and What We Can Do about It. The Great Divergence is a terrific read for our times. It is actually quite well grounded, citing numerous research papers from economists such as Paul Krugman, Emmanuel Saez, and many others. The book itself is an expansion of Noah's 10-part Slate column on "The United States of Inequality" from 2010. Noah looks at all the usual suspects (demographics, immigration, automation/computers, government policy, globalization, and education) and grills each against the long history of research findings and data.

One very surprising reveal was that today's wealthy has a mix of income that is markedly different from the pre-WW II times. It turns out that the modern well-to-do derive their income overwhelmingly from wages and salaries rather than dividends. This was claim certainly grabbed by interest. Looking through the census data for many well-off locales will reveal that the median family income is high but hardly a match for the lifestyles commonly associated with those locales. In fact, there are only a few cities (even small cities) where the median family income exceeds the associate level salary for a software engineer in Silicon Valley or New York. Drilling down deeper, Manhattan, perceived as a hotbed of wealth, only has a handful of communities with truly mind-boggling median family income. My original conjecture was that much of the wealth in these communities derive from dividends and capital gains, a claim that is at least anecdotally justified by the breakdown of family income in some of these areas. For example in Los Altos, California (zip code 94022), home of Silicon Valley's magnates, a small hamlet of almost exclusively owners with 1+ acre lots, and a perennial favorite in rankings of America's richest towns, the capital gains and dividends contribute between a third to half of the AGI. There are a few noteworthy items in this choice of example. Certain upscale communities host more renters than owners. This could potentially skew the income data. Thus, the choice of a majority owner community with considerable wealth.

Despite Noah's reveal, capital gains contribute a considerable part of income in high-wealth areas. Capital gains can easily contribute 40+% of total income for many zipcodes in Manhattan. Dividends, in contrast, contribute a smaller part (only in the high single digits according to city-data). As I've observed in an earlier post about dividends and earnings yield, there is a secular trend of dividends declining as a fraction of earnings ever since the 1960s, which staggered a bit would also be the time when the Great Divergence as described by Noah began.

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