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Fix America's Inequality by teaching America to be cheap?

I read an interesting article By Noah Smith - How to Fix America's Wealth Inequality: Teach Americans to Be Cheap.

Below you will find a large segment of the article. While I find that I agree with much that he has to say, I also find it difficult to believe some of what he proposes. For instance: the problem the poor have is not lack of money and therefore the need for redistribution is required for the poor and middle class. The truth is that poor people and the middle class (that have incomes – jobs) have money – they simply choose not to save or invest wisely.

Yes, the economy broke, the financial market crashed and yes it makes it very difficult for many today. But with that said – what were we the poor and middle class doing in the 80’s, 90’s and the boom years of the economy? Were we saving? Were we investing? I dare say, we were not, most people were spending and many middle class people were using their homes as credit cards in order to spend more.

Though, I do agree with him that we need, as a whole – poor and even the middle class, we need to change the way we think about money, finance, saving and investing. We can redistribute all the money we want – but the truth is most people will be right back in their financial trouble once they burn through all the redistributed wealth.

So how do we fight the inequality of wealth we have in America: as I always say – with knowledge. But read the segment below and you tell me what you think?

The math of wealth is actually pretty simple: It all boils down to four things: 1. How much you start with, 2. How much income you make, 3. How much of your income you save, and 4. How good of a rate of return you get on your savings.

So one obvious thing we could do to make wealth more equal is - surprise! - redistribution. It turns out that income redistribution and wealth redistribution have much the same effect on the wealth of the poor and middle-class. Income redistribution is probably a bit better, for two reasons. First, people with higher incomes tend to save more, meaning they build wealth more rapidly. Second, people with higher incomes tend to have less risk aversion, meaning they are more willing to invest in assets like stocks (which get high average rates of return, although they are risky) rather than safe assets like savings accounts and CDs that get low rates of return.

In other words, giving the poor and middle-class more income will boost the amount they are able to save, the percentage they are willing to save, and the return they get on those savings. Part of the reason America's wealth distribution is so unequal in the first place is that our income distribution is very unequal.

But there are reasons to believe that redistribution can't fix all of the problem, or even most of it. If you do the math, you discover that in the long run, income levels and initial wealth are not the main determinants of wealth. They are dwarfed by savings rates and rates of return. The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.

What can government do to get middle-class and poor people to save more? Higher interest rates don't do the trick -- people didn't save more in the early 80s when interest rates were stratospheric. High stock returns don't do the trick either -- in the booming 1990s, people actually saved less, seeming to prefer to "let the market do their saving for them."

Instead, the answer is to change America's culture of (not) saving. This sounds hard, but actually it is probably very doable. For years, behavioral economists such as Richard Thaler have been studying ways to "nudge" people to save more. The most famous "nudge," which has been endorsed by President Obama, is to make employee pension plans "opt-out" instead of "opt-in". But there are plenty of others. In lab experiments, just giving people information on how to save money makes them save a lot more.

This means that more financial education in public schools is a must. I'm not talking about teaching kids the Capital Asset Pricing Model. I mean what Bob Shiller calls "basic Suze Orman stuff." How to make a monthly budget. What "saving" and "borrowing" mean. How wealth builds over time. How to avoid borrowing lots of money at high interest rates (e.g. credit cards and payday loans). Etc. The new Consumer Financial Protection Bureau can help a lot with this too, by preventing companies from tricking poor people into taking out high-interest debt.

To read the full article go to: money finance

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