The Role of the Rich in the Economy and Financial Markets | 02/25/21

• Many people underestimate the prevailing wealth inequality
Income inequality prevents social mobility
• Inequality affects consumption

For years, the policy has been discussing the widening gap between the rich and the poor and ways to counteract growing inequality in the population. Many people do not realize how important the wealthy part of the population is to the economy.

Inequality is minimized

As reported by the Neue Zürcher Zeitung, most people underestimate just how rich the rich really are. Michael E. Norton and Dan Ariely asked 5,000 Americans to assess the current distribution of wealth in the United States and “build a better America” ​​through their own ideals of degree of inequality. On the one hand, it turned out that respondents clearly underestimated the extent of wealth inequality, and on the other hand, respondents constructed an ideal wealth distribution that was more equitable than false low estimates of the actual distribution.

Upon polling, Norton and Arieli also found that all demographic factors – including those not usually associated with redistribution of wealth – wanted wealth to be distributed more evenly than is currently the case.

According to New Zealand, the data situation is difficult for Switzerland. However, wealth inequality with the Gini coefficient – a metric frequently used to measure inequality in values ​​with a value between zero and one – of 0.86 at the end of 2015, is among the highest in the world. At the cantonal level, it ranged from 0.72442 (Uri) to 0.92359 (Geneva), as evidenced by the 2019 document from the Federal Ministry of Finance.

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The relationship between inequality and social mobility

As Yonatan Berman writes in his paper “Understanding the mechanical relationship between inequality and intergenerational mobility,” there is a positive correlation between income inequality and intergenerational mobility in all countries. The correlation between the Gini coefficient, one of the most common methods of measuring income inequality, and the intergenerational income elasticity (IGE), which is one of the most popular methods of measuring mobility, can be shown in the Great Gatsby curve. This might indicate that intergenerational mobility leads to lower income inequality and vice versa.

In many countries, inequality has increased in recent years, while social mobility has decreased. In Switzerland, on the other hand, social mobility did not decrease – but it did not increase either: according to an analysis from 2016, rates of social mobility remained very stable in the 20th century. Thus, social progress is not more difficult but it is not easier than it was decades ago.

Effects on consumption

The wealthy also play an important role in aggregate demand, because as wealth inequality among the population increases, so has consumption inequality. At the time the idea of ​​a “fair tax”, the consumption tax as the only federal tax, emerged, the richest 20 percent of the American population was consuming up to the remaining 80 percent, according to New Zealand. This has likely shifted further to this day, as the richest 10 percent of the U.S. population consumes up to the remaining 90 percent. This development is likely due to income and wealth inequality.

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Rich in riskier investment behavior

While middle-class wealth mainly consists of the real estate they live in, the wealthy invest their wealth mainly in financial assets, according to NZZ. This also shows that the richest 10 percent of Americans own 90 percent of all the stocks and funds that have grown in value in recent years – making the rich richer.

In addition, the risk premium in stocks is declining, as wealth is also shifting towards the richer towards people who have more risky investing behavior. Since potential stock buyers will be on average more willing to take risks, “equity bonds can offset this risk at a lower premium,” according to Neue Zürcher Zeitung.

Therefore, investors should never lose sight of the importance of the wealthy population to the economy and stock markets when making investments.

Finanzen.ch editors

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