The Poor Have It Easy? Wealth, Inheritance and Right-Wing Statistical Fraud

Perhaps you think you’ve heard everything.

Perhaps you’re one of those folks who feels that comparing criticisms of growing wealth inequality to Nazi propaganda is so obviously absurd that nothing can top it.

Perhaps you’ve found yourself thinking, “Wow, ya know, 85 people owning as much wealth as the bottom 3.5 billion people on the planet really doesn’t seem to be about merit,” and perhaps you worry about the rationality of anyone who thinks otherwise. Perhaps you wonder how anyone could seriously believe that those who question this level of inequity might be planning their own personal Kristallnacht, or preparing ovens for the roasting of the rich; or at least you figure, “Hey, the only person who might actually believe that kind of puerile nonsense would be a cretinous toad like venture capitalist Tom Perkins, who was once married to that shitty novelist Danielle Steel, and who once killed a man by running him over with his yacht,” because after all, that would make perfect sense.

But if you find these kinds of suggestions preposterous, or even evidence of a serious cognitive disconnect between the world of fantasy and that of reality (or the kind of thing that could only be believed by a convicted yacht-killer who was once married to that shitty novelist Danielle Steel), rest assured, there will soon come yet another round of right-wing media fanaticism to make it seem downright amateurish by comparison.

And so it was this week when the conservative cognitariat served up another heaping dose of anti-intellectual dumbshittery posing as serious analysis; this time, arguing — seriously, this is what they said — that poor people rely too much on inheritance from family, and the rich don’t inherit enough. Rather, the latter work for their money, while the working class is coddled by hand-me-down wealth, allowing them to sit around all day doing nothing.

No, seriously, why are you laughing? Are you claiming not to know that poor people inherit lots of money? Have you not been paying attention?

But unlike the comparisons between critics of wealth inequity and Hitler — which lack even a patina of respectability among remotely awake humans — this argument about the poors inheriting while the rich toil absent help from anyone else (let alone other rich relatives), was presented this week as if it were the pinnacle of respectable social science. Which just confirms, if this needed further confirmation, that conservatives either cannot read social science research, or they can, but seek to openly deceive others about what that research says (and doesn’t say), secure in the knowledge that most people will never bother to actually take a peek for themselves.

And so, in order to attack the notion that the wealthiest Americans owe their fortunes to unearned inheritance, and to reinforce the conservative narrative that they deserve their riches because of greater effort, the right-wing media has recently dusted off a 3-year old study on the role of inheritance in wealth inequality, which they believe proves the legitimacy of the current national income and wealth distribution. The study, by economists at NYU and the Bureau of Labor Statistics, shows that over the past 20 years, the relative importance of inheritance as a percentage of personal wealth has declined a bit, and that (to their own surprise), wealth transfers tend to slightly reduce overall inequality because those at the bottom receive inheritances that amount to more (as a share of their wealth) than those at the top.

However, the study’s conclusions and especially the way in which the study has been interpreted both leave much to be desired, and hardly vitiate the notion that the wealthy enjoy unearned head starts relative to the rest of us. Needless to say, the authors do not conclude that the poor are inheriting too much and the rich too little, or that the poor should work harder, like the rich, and stop living off wealth handed down to them by family, as suggested by right wing media mouthpieces.

So How Important is Inheritance to the Wealthy?

Although the authors of the study present data showing that the relative importance of inherited wealth to the rich has declined (as a share of one’s overall personal wealth) from the late ‘80s to the present, this claim actually has little to say about whether those inheritances still provide a substantial head start. Given the housing and stock market booms that occurred in the ‘90s, and early 2000s, and which only finally collapsed by 2008 (after the period examined by this study), one can obviously imagine that inheritance as a share of overall wealth would fall. After all, if I inherited $2 million, allowing me to make substantial investments in high-growth stocks and real estate during the go-go ‘90s, which then ballooned my net worth to $10 million, the wealth transfer would only represent 20 percent of my wealth, as opposed to inheriting the same $2 million during a period of a down market, during which I might sit on the money, or invest it quite cautiously, only increasing my wealth to $2.5 million. In the latter case, my inheritance would represent nearly all of my wealth, as opposed to the former example, for which it would only represent about a fifth. But the fact that inheritance fell as a share of overall wealth — during a period when outrageous amounts of money were being made in the stock market — does nothing to diminish the importance of inheritance to that process. In the above example, had I not inherited the $2 million, I wouldn’t have had the money to risk in the stock market in the first place, and the massive windfall I enjoyed after investing my newfound (and totally unearned) inheritance, would never have materialized.

Although the study concludes that perhaps a fourth of household wealth emanates from intergenerational transfers — not a seemingly huge share of the total — this fact ignores that, but for that transfer, many of the investments and opportunities that subsequently became available to inheritors might not have occurred. If I make a lot of money, in large part because of an initial bump from my family, the fact that that bump goes on to represent but a small portion of my total at the end of my life, hardly acquits the head start of the charge that it was implicated in my end result and overall success.

Take an obvious example to make the point: Consider two men, both of whom find themselves at the age of 60, with wealth holdings totaling $10 million, and who, in both cases, received inheritances worth $2.5 million, or one-fourth of their total wealth. The first man started out in business after college, relatively low on the corporate ladder and worked his way up, finally becoming an executive in his late 40s, and profiting from stock options at his company, before cashing out and retiring early to enjoy his later years in relative luxury, with a net worth of $7.5 million. Then, his father, at the age of 85 drops dead and leaves him $2.5 million more, bringing his total wealth to $10 million. The second man also starts out in business after college, and after about 5 years his father dies at the age of 50 and leaves him $2.5 million, in fungible properties of one sort or another. The young man invests $2 million of that in starting his own business, which ultimately proves to be successful, and by the age of 60 is worth $10 million, at which point he decides that’s plenty to live on, and he too retires. Now, both men are worth the same amount, and in both cases, their inheritances represent the exact same portion of the overall wealth holdings. But can we reasonably conclude that those intergenerational transfers were equally important to both men? Of course not. In the first case, the $2.5 million was a nice little bonus, the financial icing on an already well-frosted (and at least to some extent “self-made”) cake; but in the latter, the $2.5 million was the yeast that allowed the cake to rise in the first place. So simply noting that roughly one-fourth of one’s wealth is attributable to inheritance, even if true, begs the question: which fourth was it? The first or the last? Because the answer matters.

Even more to the point, the question is not “What percentage of one’s overall wealth is represented by an inheritance?”, but rather, “How much of one’s wealth would one have been able to accumulate, but for the head start offered by that inheritance?” The study neither asks nor attempts to answer that question.

Indeed, the authors acknowledge in a footnote on page 4 of the study that they cannot answer it using the data source they rely upon. If anything, Wolff and Gittleman understate the importance of inherited wealth by way of their methodology, which (by their own admission) involves counting returns on investment that are above a normal rate of return as the product of one’s personal savings, while only considering the normal rate of return as being connected to the inheritance itself. But this is problematic for two obvious reasons. First, it allows those who inherited wealth transfers to essentially be given personal credit for better-than-normal returns on those transfers, even though had they not inherited in the first place, there would have been nothing to invest, and no return on investment whatsoever. If I inherit nothing, I get no normal rate of return, let alone excess rate of return, or indeed, any rate of return; so properly interpreted, anything I make on inherited wealth should be seen as owing to the inheritance. And secondly, if I inherited wealth that I could then invest throughout the extraordinary ‘90s, when investment returns to capital were through the roof, crediting my savings and investment strategies for my excess returns on those investments would result in crediting me for my work effort, even though the results that obtained were largely due to a stock market bubble that had little to do with my own investment brilliance, and even though the investment decisions that made me so much money were probably made by stockbrokers, not me, sitting at a computer doing E-trade all by my lonesome.

In short, the study being used by the right to “prove” that great wealth is earned, not inherited, shows nothing of the sort.

Are the Poor Sponging off of Dead Relatives? Uh…No

As for the other claim made by the authors — and then even more grossly distorted by conservative commentators — to the effect that the poor and working class actually owe more of their well-being (as it were) to inheritance than do the wealthy, the data presumably showing this is not only “surprising” (the term the authors give it), but altogether preposterous, for reasons that should be readily apparent.

First, it stands to reason that if someone who is in the bottom fifth of the income or wealth distribution inherits virtually anything — even a few thousand dollars from a CD account at a bank, or a small house from a deceased parent — that such a transfer will represent a larger portion of their overall wealth, than would be represented by an even much larger bequeathment to an affluent person, as a share of their personal wealth. This is because even a small number, added to a small number, has a bigger relative impact than a large number added to a large number. As the authors of this very study conclude, “a small gift to the poor means more than a large gift to the rich.”

Someone whose net worth is zero, for instance (perhaps they rent, and although they have no credit card debt, also have no fungible assets to speak of), and then inherits $20,000 after the death of a grandparent, is now worth $20,000, and one-hundred percent of their wealth would be due to inheritance. Meanwhile, someone with a net worth of $1 million who then inherits another $500,000 (a much larger amount), would be worth $1.5 million, only one-third of which would be represented by inheritance. But can anyone honestly believe that the $500,000 will provide no greater advantage to the already-well-off person, or at least not one that is any better than the advantage now gained by the working class person now worth $20,000?

My own mother, for instance, was earning an income at the time of my grandmother’s passing that would have placed her in probably the fourth quintile of earners (lower-middle income), and had a net worth that would have placed her squarely in the 4th quintile out of 5 as well. Upon her mother’s death, she inherited a home that, although not palatial, is worth probably 6 times as much as her initial wealth prior to the inheritance (almost of which was due to a small 401k). So, in her case, 6/7 of her wealth now would be represented by inheritance. By contrast, if someone in the top quintile of earners and top quintile in terms of wealth holdings inherited an estate worth several millions of dollars, that might well represent less of their overall wealth than the share of my mother’s wealth represented by inheritance, but would anyone actually say that my mother was now somehow in the same boat (or an even better one) than the millionaire? Doubtful. And if the millionaire’s millions owe to an early inheritance (as noted above), which facilitated their wealth accumulation due to a substantial head start, while my mother’s inheritance came as she was already nearing retirement, after 40 years of labor market experience, during which she had to support herself and me, largely on her own, can we really say that the millionaire had worked harder and my mother less hard, since, after all, more of her wealth at age 65 was due to inheritance than that of the millionaire? Surely not. Such a claim would be the height of statistical and intellectual folly.

Furthermore, there are certain anomalies in the data ascertained by the study, which call into question any conclusion that inheritance plays a substantial role in the lives of the poor and working class, and especially relative to the affluent. For instance, as one can glean from Table 5 of the report, something strange happened in 2004, which tends to skew the average inheritance numbers — and their relative importance — specifically for persons at the bottom of the income pyramid. So, for instance, the mean (or average) inheritance for persons earning $15,000 or less, who despite their meager incomes managed to inherit in 2001, was about $156,000. Fewer than 1 in 10 persons with income this low inherited anything, of course (as noted in Table 4), but this amount was the average for those who received a transfer of some sort that year. Not bad, but three years later, that average had skyrocketed to over $800,000 in average inheritance, among the roughly 15 percent of low income persons receiving a bequeathment that year. Clearly, this average must have been skewed dramatically upward by a handful of truly massive inheritances that year, especially considering that by 2007, the average had come back down to about $243,000 among the 17 percent of low income persons who received an inheritance that year. But because of that one anomalous year, 2004, the average inheritance of those in the lowest income bracket who managed to inherit over the 18 years of the study, ended up far higher than it would have otherwise been.

This is especially true because the median value of transfers to those in the lowest income group in 2004, actually fell from its 2001 level, suggesting that the typical low income family didn’t make out so well that year in terms of inheritance value, but a handful of outliers managed to scoop up big fortunes thanks to the deaths of some especially well-off relatives. This is why, in Table 8 of the study (about which conservatives have been especially animated), one finds that the average share of low-income folks’ wealth attributable to inheritance from 1989-2007 was so high — about 65 percent — while the percentage for those earning at the top of the pyramid was much lower. In 2004, due to some obviously anomalous inheritances by low-income heirs, the share of wealth at the bottom attributable to wealth transfers ballooned from 26.5 percent to over 180 percent of wealth at that level! But how can inheritance represent more than the combined total of a groups’ wealth? How can it represent more than 100 percent of the wealth held by low income persons? Simple: the typical net worth of such persons is negative, and only because of the outlier effects of a few, can the importance of wealth on the aggregate group as a whole seem so large.

No Need to Pity the Rich: More Proof That Conservatives Are Professional Liars

Conservatives also conveniently ignore aspects of the study’s findings that contradict their pity-the-rich spin on the data. For instance, although the share of wealth represented by inheritance is certainly higher for lower-income persons, on those occasions when they actually inherit something, it is still very much the case that they are far less likely to inherit in the first place. So, for example, according to the study, nearly 4 in 10 households in the highest income bracket report an intergenerational wealth transfer of some kind, while only about 1 in 7 in the lowest income bracket do. In other words, richer folks are about 3.5 times more likely than low-income folks to receive an inheritance at all.

The inheritance gaps are even larger when we examine persons in different quintiles of wealth, as opposed to mere income. So, for example, among persons in the top wealth bracket (those with over $1 million in assets), nearly half received an inheritance of some type, compared to fewer than 1 in 10 in the lowest wealth category (those with less than $25,000 in assets). The wealthiest Americans, in short, are about 5 times more likely than the least wealthy to receive an inheritance, and even this is an understatement, since the cutoffs for the wealth quintiles in the data ($1 million as a minimum for the top and $25,000 as a maximum for the bottom) flatten out vast disparities among the super-wealthy (those worth billions), and among the poor (most of whom are worth nothing, or have negative wealth, and almost never inherit anything tangible at all).

But the differences between those at the top and those at the bottom when it comes to inheritance concern not only the relative odds of inheriting itself; rather, there is also the substantial difference in the values of the inheritances received at different economic levels. So the median inheritance for households in the top income group was 7 times greater than the median for those in the bottom income group who inherited; and the median for those in the top of the wealth distribution was 17 times larger than that for households in the bottom wealth group who inherited. The median value of inheritances for those in the wealthiest 1 percent of wealth holders was a full 26 times that of persons in the bottom quintile who received some form of transfer.

But remember, even these ratios between the value of inheritances at the top and the value of inheritances at the bottom are deceptive because they only compare the relative values of inheritances among the already restricted numbers of persons in each income and wealth group who actually received an inheritance. When we simply look at the average amount of inheritance received, per member of the highest income group and compare that to the average amount of inheritance received for a person in the lowest income group (which is a more direct way to determine the relative positions of persons in each group, in terms of odds of inheriting and value of the inheritance), the study finds that those in the top income group inherit 40 times more, on average, than persons in the bottom group; likewise, those in the top wealth group inherit 109 times more, on average, than those in the lowest wealth grouping. In 2007, the nation’s lowest income group inherited only about $6,000 per household, compared to over $2.7 million inherited per household among those in the wealthiest 1 percent. In other words, if persons at the bottom had to distribute their inherited wealth among each household in their income group, each household would only have about $6000 to play with, while each household among the wealthiest 1 percent would have $2.7 million in assets, with which to make use. So which group is benefitted more by inheritance, exactly?

In all, the study’s authors do not reach conclusions anywhere near those being pushed by the right (and indeed, one of the authors, Ed Wolff has long been one of the economists most loudly trumpeting the disturbing reality of wealth inequality in America). Rather, they note several explanations for what they discovered, in terms of why inheritance had become less important as a share of overall wealth for those at the upper-range of income and wealth, none of which involve greater work effort or merit on the part of the rich. Rather, the authors note that extraordinary capital gains in the housing and stock markets (both of which reached historic highs in the period under review) could explain the result; so too might relative death rates and life expectancy be the culprit. So, since life expectancy rose during the period under review (and since the wealthy live longer), the net number of bequeathments may have declined at the top in the study period, while lower income folks die earlier, and as such, might have been passing on assets more readily during the study. Of all the reasons offered by the authors to explain their results, none involved evidence of greater productivity or work effort at the top, or declining effort at the bottom.

In short, conservatives are wrong about what the study says and doesn’t say; and even where they read the study accurately, the conclusions they draw from it are inconsistent with the conclusions drawn by the authors. In other words, the people who actually conducted the research would consider the FOX personalities and Rush Limbaughs of the world, who twist their words to justify their own reactionary agendas, to be buffoons of the first order. Which just goes to show it isn’t only numbers that economists are capable of reading, if you know what I mean.

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