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There's an old joke that if you ask 10 economists their opinion on any given question, you 'll get at least 11 different answers, which is a bit crude, but not untrue. And nowhere is this more untrue than on the issue of inequality. Recently, a few weeks ago, the world, albeit briefly, had its first trillionaire, who, along with just 11 other people, controls more wealth than the entire bottom half of humanity combined. Moreover, it seems that no matter how hard they try, they also cannot lose this money. Of the 100 richest people in the world, only two are poorer today than they were in 2019.
Mackenzie Scott, who gives away her money as quickly as possible, and Jack Ma, who still faces pressure from the Chinese government. Even beyond these statistical outliers, median household incomes in most major advanced economies remain virtually unchanged, while the income of the richest 1% has doubled or tripled in just the past two decades, and there are pretty obvious reasons for this. Top tax rates have been slashed significantly, worker and union protections have been destroyed, and asset owners are constantly bailed out. It sounds pretty straightforward, but there are many economists who would disagree. In fact, with that same set of numbers, there is a strong argument that the world has never really been more equal.
Now this is a problem because even if we disregard for a second who is right, such a fundamental difference of opinion on such a fundamental question in economics is not a good indicator of the accuracy of anything that economists might say. If we can't even understand that, what hope do we have of answering the more subtle questions? Of course, the first problem is that most ordinary people, and even most economists, have already decided whose side they are on in this debate. And really, they are only interested in hearing or finding the statistics and numbers they want to hear. So in this video we're going to try something a little different. We will look at the factual data that supports both sides of this debate. And you all better listen to both
sides, especially the one you disagree with, because just because we want something to be true doesn't mean it is. So what is the argument that inequality has gotten worse? What is the argument that inequality has improved? And finally, why can't even professional economists seem to reach a consensus on what should be a very simple question? There is one thing that all economists can agree on, and that is that your data has never been more at risk than it is now. Artificial intelligence has made it easier than ever to steal your information, and this threat will only increase as technology advances. That's why I use Surfshark.
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watching them without CleanWeb. Surfshark is offering a special offer to Economics Explained viewers. With our code you can get four extra months after signing up. Go to surfshark.com/economics or use the code economics at checkout to get four extra months of Surfshark VPN. Let's start with the argument that most people instinctively lean towards, namely that inequality has worsened dramatically. It is quite difficult to argue with the data presented here, at least at first glance. Economists Emmanuel Saez and Gabriel Zuckman of Berkeley have spent the better part of two decades tracking the distribution of wealth in the United States, and their headline
finding is striking. The share of total wealth held by the richest 0.1% of American households has roughly tripled from about 7% in the late 1970s to about 20% in recent years. By comparison, each thousandth family now controls about a fifth of all the wealth in the country. At the very top of the distribution, in his more recent work, Zuckman argues that concentration has actually surpassed the Gilded Age. The richest 0.00001%, which is about 18 families, including the likes of Bezos, Gates, and Zuckerberg, owned about 1.35% of all American wealth, compared to about 0.85% owned by the four dominant families in 1913: the Rockefellers, Carnegies, Fricks, and
Bakers. So why did it concentrate so quickly The most influential answer comes from Thomas Piketty, a French economist whose book Capital in the 21st Century became a truly unexpected bestseller. Piketty's central historical claim is that the egalitarian mid- 20th century was not the normal state of the market economy, but the one-off product of a catastrophe. Two world wars and the Great Depression destroyed and taxed concentrated capital. The fortunes of the old aristocracy were destroyed, progressive tax systems were built on the ruins, and for several decades, returns on capital and growth in the economy as a whole moved roughly in sync.
The top marginal tax rate in the United States Unions were strong, financial regulation was tight, and the economy was growing so rapidly that even working- class families were making real profits year after year. But since then, asset growth has significantly outpaced growth in the economy as a whole. His famous abbreviation for this is R greater than G, where R is the rate of return on capital and G is the rate of economic growth. Historically, has averaged around 4-5%, while G has been closer to 1 or 2% for most of human history, and often less, which arithmetically means that asset owners have outperformed people whose income depends on overall economic growth. If your capital grows by 5% per year and the economy as a
whole grows by 2%, you are falling behind everyone else. And the larger your initial capital, the faster you move away. Simply put, we had to work very hard and, frankly, we were very lucky with some very specific historical circumstances to reach the conditions of the post-war period. And we are simply returning to a more historical norm of increased inequality. You can also see this in the wage data. Real hourly wages for typical American workers peaked around 1973 and then decoupled from productivity, which continued to rise. Between 1973 and 2023, productivity increased by about 72 %, while typical employee compensation increased by about 9%. This is a huge gap, and in practical terms it means that workers were creating
more and more value each year, but were not seeing much of this reflected in their salaries. The share of labor in national income has decreased. The ratio of CEO pay to the typical employee rose from about 21 to 1 in 1965 to nearly 400 to 1 at the peak of the dot-com bubble. And even after the drop, it's still about 280 to 1 today. Institutions that had previously resisted such concentration were systematically weakened. Union membership has declined from about 35% of all workers in 1954, which was the peak, to about 10% today and only about 6% in the private sector.
This means that average workers have much less collective bargaining power than they did a generation ago, which means that wages remain flat while corporate profits rise. When individual workers negotiate their own wages, they find themselves at a structural disadvantage compared to employers who have more information, more leverage, and more alternatives. Unions were the mechanism that redressed this imbalance, and as their power diminished, so did the bargaining power of the typical worker. And that's not even the full picture, as inequality within a single country, such as the United States, is only part of the story.
The situation is much worse across the planet. In his work on tax havens, Zuckman argues that a significant portion of the world's wealthiest assets are offshore and completely outside of official statistics. His estimates show that about 8-10% of all global financial assets, over $7.6 trillion are held in tax havens that surveys and even tax records fail to adequately capture. And this is a minimum assessment that only covers financial assets. It does not include real estate, artwork, yachts, or other difficult- to-track stores of value. If the richest people systematically hide assets that miss official measurements, then every measured richest share is likely to be understated
. In reality, the situation is probably much worse than the numbers suggest. And more than ever in recent history, this concentrated wealth is buying political influence, further tailoring tax codes, regulations, and trade policies to the people already at the top. Campaign contributions, lobbying spending, and revolving doors between industry and government create a feedback loop where wealth generates power and political power protects wealth. This is not a conspiracy theory, it's just how However, perhaps the most disturbing part of this argument is what it means for the next generation. Economist Raj Chetty and his colleagues found that the proportion of American children earning more than their parents of the same age fell from about 90% for those born in 1940
to about 50% for those born in 1984. The promise that each generation would earn more than the previous one has been almost halved by this measure. This is a pretty devastating discovery, as it suggests that for the first time in modern American history, flipping a coin is roughly equal to the probability that your children will do better in school than you. Okay, now let's move on to the other side, and this is where many of you will feel uncomfortable, but continue. The simple fact is that, despite the anecdotes and facts about people like Musk, the share of wealth owned by the richest 1%, measured across developed economies as a whole, has actually declined significantly over the past century. The OECD's own data suggests that wealth inequality has
fallen well below the extreme levels of the early 20th century, even if current levels and some signs of growth in recent years remain a concern. This may be surprising, because it certainly doesn't feel like it, but the Gilded Age and the era before it were characterized by levels of concentration that make the current distribution almost modest by comparison. The reason it feels worse now is partly because we have better data and more media coverage of extreme wealth, and partly because we are comparing it to the post-war period rather than a longer arc of history. To be fair, the argument that the post-war period was an anomaly is two-sided. Yes, much of the infrastructure and wealth associated with it was destroyed by two world wars, and that
reset the playing field, but that's not exactly a good advertisement for equality. No one is arguing that the best way to solve the problem of inequality is to blow everything up. We could solve the problem of inequality tomorrow by destroying everything on the planet, because then everyone would have nothing, but that's obviously not an ideal outcome. Even beyond absurd extreme hypotheses, the fact that postwar equalization required catastrophic destruction supposedly indicates that capital accumulation , while unequal, still benefits everyone more than the alternative. And there is a much more practical version of this argument, which is that consumption levels are a much better indicator of true material well-being than paper values of wealth, and they have
never been higher or more equal across the board. This is actually an important distinction. The 90-to-10 ratio for after -tax income inequality has increased by about 26% since the early 1960s, but the same ratio for consumption inequality has increased by only about 7%, meaning that even with income differences, what people can actually buy and consume remains much more equal than income figures would suggest. And there's a strong argument that what you can actually consume is more important than what's on your bank statement. If a factory worker in 2025 has a smartphone, air conditioning, a car with 10 airbags, and access to the entire internet, while a factory worker in 1975 had none of these, then the gap in life experience may be much smaller than the
Even if a rich person in 2025 is proportionally much richer than a rich person in 1975. Moreover, the tax burden has not actually fallen on the top 1%, as most people believe. Sure, the top marginal rate has fallen dramatically since the mid-20th century, but no one has actually paid that rate because of deductions and loopholes. The top 1% of earners now pay about 38% of all federal income taxes collected, about twice what they paid in the 1980s as a share of the total. Now, one can argue whether this is enough, but the claim that they are paying less than ever, at least by this measure, is the opposite of the truth. There are also more technical criticisms of worth taking seriously. Economist Matthew Rognley of the Massachusetts
Institute of Technology noted that Piketty's main conclusion about the growth of the capital share of income relative to the economy as a whole did not properly account for depreciation. A car purchased in the 1980s is not worth very much today. Software depreciates even faster. The plant, built in 1990, requires constant reinvestment just to stay operational. And if we take into account the fact that physical capital wears out and needs to be replaced, the picture changes significantly. The only asset class that has significantly increased its share of national income after accounting for depreciation is real estate, which is much more evenly distributed than financial capital.
Home ownership is distributed among tens of millions of families, and while housing affordability is clearly a serious problem, it is a very different problem than a handful of families owning all of the productive capital. As people are quick to point out, Elon Musk doesn't actually have a trillion dollars in any practical sense. He has a trillion dollars worth of stocks invested in highly speculatively valued companies that it would be extremely difficult for him to actually take out of the market. His wealth exists on paper, depending on whether other investors continue to assign these valuations to his companies. If sentiment changes as it has in the past, that number could drop by hundreds of billions in a matter of
weeks. The same goes for most of the world's biggest billionaires who currently top the list. Their wealth comes largely from the inflated valuations of their stocks, not from companies controlling a dominant portion of the real economy. The stock market values Tesla at over a trillion dollars, but the company's annual revenue is only a fraction of that amount, and its share of the global automotive market is still measured in single digits. If there is indeed a claim that we are returning to the Gilded Age, let's be practical about what that comparison means. Musk's shares in Tesla and SpaceX, which account for almost all of his wealth, trade at valuations that are hundreds of times higher than the actual profits of these companies.
Tesla's price/earnings ratio consistently exceeds 300. We could also just not buy Tesla or Starlink. Rockefeller's Standard Oil stock, by contrast, traded at a price-to- earnings multiple that, historically, was between five and ten, meaning the company was paying for itself every few years. And she had real control over the industry that was almost impossible to relinquish. If the market hype around Musk's companies dies down, his wealth will evaporate fairly quickly, as it is built on what other people are willing to pay for his shares, not on the underlying cash flow that these companies generate. To Rockefeller and the other Gilded Age barons, it really wouldn't have mattered, as they owned important industries with real pricing power and
huge barriers to entry. They could also liquidate their wealth much more easily by simply waiting years and taking a profit. Standard Oil was, in essence, an ATM. Musk, on the other hand, would find it nearly impossible to realize his theoretical net worth of a trillion dollars without crashing the stock price in the process, because the moment he starts selling in serious volumes, the market will adjust the valuation downward. And the Gilded Age, as a general rule, was actually better than most of history before it.
Going back even further, early industrialists and landed gentry had almost complete control over the factors of production. The average person in medieval Europe had neither wealth, nor political representation, nor a realistic prospect of economic mobility. By this standard, the trend over the centuries has been clearly and predominantly positive. The inequality argument generally works best when viewed solely from the starting point of the 1970s, which again was an anomaly. But even then, it's not exactly as if those years magically created amazing living conditions.
Homeownership rates in the 1970s were actually lower than they are today. Inflation averaged for most of the decade, poverty rates were higher, and violent crime rates were also significantly higher. And that was just within the United States. The 1970s were not, by any reasonable material measure, a golden age for the average person. They just had a more compressed income distribution, which is a completely different thing. Worldwide, this argument is virtually impossible to refute. In particular, the last three decades have seen the largest reduction in poverty in human history. The number of people living in extreme poverty fell from 2.3 billion in 1990 to an estimated 830
million by 2025. And the global rate of extreme poverty fell from about 36% to less than 10% over the same period. Even if we choose the United States again, and even generously choose the late 1970s as a starting point, which again is perhaps the biggest exception, true economic inequality, measured by real economic outcomes rather than speculative paper wealth, is better today, especially for marginalized groups. Partly that doesn't seem true because it's much easier to think of a comfortable middle class, let's be honest, mostly white family that could buy a house on a single union income in the 1970s. Statistically, it has become harder to replicate. But for single women, minorities, and the very poor, the quality of life has improved markedly. Access
to education has expanded, protections against workplace discrimination have strengthened, and poverty rates among black Americans, while remaining unacceptably high, have declined significantly since the 1970s. People are much more likely to perceive losses than perceived gains. Psychologists call this loss aversion, and it's extremely well documented. We feel the pain of something becoming more expensive much more acutely than we appreciate the benefits of something new becoming available. And on top of that, it's very easy to recall an idealized version of the past, where everything seems simpler and fairer, even when the evidence suggests otherwise.
Even for such an average family, statistically, the homeownership rate today is about the same as it was in the 1970s, at about 65%. So, depending on which side of this discussion you started on, at least half of what you just heard was probably hard to digest, and that's a big part of the problem. You may have noticed that the question of whether inequality has worsened is actually not one question, but at least four. The first is whether we measure income inequality, wealth inequality, or consumption inequality. The second is whether we are looking at the numbers before or after taxes and government transfers. Third, over what period of time do we measure them? And fourth, are we looking at inequality within a single country or across the
world as a whole? Depending on which combination you choose, it's quite easy to make a convincing argument in either direction. Global has improved beyond all doubt since 1900, and that's not even close. But wealth inequality in the United States has not improved since 1980, at least by most measures. Both of these statements are factual, both supported by accurate data, and point to completely opposite conclusions about whether inequality is improving or worsening. But it gets worse because even economists working with the exact same data set still have to make decisions about how to process that data, and those decisions can completely change the results.
The disagreement between Saez and Zucman on the one hand and Oten and Splinter on the other is probably the most striking illustration of this problem. Both teams start from the same source - IRS tax records, which theoretically should yield the same answer, but they diverge due to a reasonable but significant methodological choice. They need to decide how to distribute income that is underreported to the Internal Revenue Service (IRS), how to distribute untaxed business and capital income, how to handle the rapid growth in business income that followed the 1986 tax reforms, how to distribute government consumer spending, and whether the unit of analysis should be the tax return, the individual, or the household, adjusted for declining marriage rates and shrinking
family sizes. Each of these options is reasonable on its own, but together they paint strikingly different pictures of how the top income share has changed over the past 40 years. One team concludes that inequality has increased sharply, the other that it has been roughly stable. Same data, opposite answers. Then, of course, there's just human nature. Thomas Piketty is a brilliant economist, perhaps one of the most important economic thinkers of the 21st century, but he doesn't bother to look for data that contradicts his thesis about rising inequality. On the other hand, there are many economists whose research is funded by think tanks with a very clear agenda for tax cuts and deregulation. And their findings tend to conveniently support these goals. It's not
necessarily dishonest on either side, it's just how people work. We tend to find what we are looking for, and the questions we choose to ask are shaped by the conclusions we expect to reach. So what we end up with is a bunch of very elegant, data-driven arguments about two really different questions, disguised as if they answer the same thing. And the rest of us are trying to figure out which argument is correct, while the most reasonable answer is probably that it depends entirely on what you mean by the question. Now this video explores inequality in terms of the distribution of world wealth, but there is also the question of how much the world actually needs to share. We already did a whole video about this, looking at the total net
worth of the world and how it has changed over time. So we didn't want to repeat too much here, but if you're interested, you can click on it on your screen. Thanks for watching, friend. Goodbye.
