A popular conception that couldn’t be more wrong has to do with income inequality. We all know and accept the income inequality rising in the United States however there are 2-popular conceptions which make up the wealthiest 1% of Americans. The first is that they were born into wealth or that they and the second is that they mainly include CEOs of the largest public companies. This article is to show that both conceptions are wrong.
Stanford Graduate School of Business and University of Chicago Booth School of Business recently released a stunning statistic that finds only a small fraction of America’s wealthiest fall into either of the two categories above.
- In 1982, 60% of the people on the Forbes 400 list of wealthiest Americans came from wealthy families. In 2011, that number had dropped to just 32%.
- In 2004, top executives of publicly traded companies made up only 5% of the top 1% of the wealthiest people in the United States. These are the members who earned individual salaries of at least $7.2 million that year.
Let’s look at why? Technology and scale.
The Forbes 400 of today are those who were able to become educated while young and apply their skills to the most scalable industries: technology, finance and retail. The explosion of IT has created an entirely new class of the very rich, many of them self-made. This is no coincidence that the 3 of the 10 wealthiest people in the USA: Bill Gates, Larry Ellison and Michael Bloomberg built their fortunes on IT that barely even existed in 1980s. Looking a bit deeper in to IT, shows that 25% of the top 1% built their fortune with it.
The second sector that grew even faster that technology (measured by contribution) is retail. 15% of Forbes 400 fortunes are based on this industry. One great example is the Walton family (Wal-Mart). Retail has been able to scale alongside with technology and making billionaire entrepreneurs such as Jeffery Bezos of Amazon.
It seems that real estate, energy and media have become significantly less important. Energy plays a role in about 21% of the fortunes represented on the “old” Forbes list; now it’s about 11%.
Another argument that is made (I kinda agree) is that even though these billionaires did not inherit vast amounts of wealth, they were hardly paupers. Bill Gates of Microsoft, for example grew up in a upper-middle-class (a.k.a. Rich) because his mom was successful however his father was a very successful corporate lawyer. About half of the Forbes 400 grew up in these circumstances compared to 30% in 1982.
“Being super rich no longer requires being born wealthy, but wealth does confer advantages, particularly in access to education. ..The new order is that those with some wealth and a lot of intellectual firepower and ambition can take their talent and apply it to a much larger pool of resources than in the past. And that makes them even wealthier.” -Rauh and Kaplan from their 2010 paper, “Wall Street and main Street: What Contributes to the Rise in the Highest Income?”
As always, if you have questions (@arberdoci)
“Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?” paper: http://rfs.oxfordjournals.org/content/23/3/1004.abstract
List of The Forbes 400 Richest People In America: http://www.forbes.com/forbes-400/