Wealth, Saving, and Inequality

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Noah Smith writes,

If you do the math, you discover that in the long run, income levels and initial wealth (factors 1 and 2 from above) are not the main determinants of wealth. They are dwarfed by factors 3 and 4 — 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.

Is this true? If so, it strikes me as a very conservative proposition. It suggests that the civilization-barbarism axis is what drives inequality of wealth, because deferred gratification is one of the civilized values in the conservative pantheon. In effect, Smith is saying that wealth comes from civilized behavior and lack of wealth comes from barbaric behavior.

Utterly oblivious to irony, Smith proceeds to recommend that government teach people to save.

Pointer from Mark Thoma.

4 thoughts on “Wealth, Saving, and Inequality”

  1. I gather what Smith would have in mind is something akin to the one semester course in health that high school kids used to take, or perhaps the one semester course in sex and gender that high school kids are supposed to encounter these days, Not something without precedent, in other words.

    Is this really sillier than requirements proposed by some Idaho state legislators, which would prohibit high school graduation for students who failed to complete a course in Ayn Rand’s ATLAS SHRUGGED?

  2. There is a difference between prudence (saving for a rainy day), and investing to get wealthy. Many people (most?) seem unable to do either. I think it is possible to teach prudence (but mainly through the parents, not school), but I think financial education is largely a waste of energy, beyond simple truths: Ain’t no free lunch, if it looks too good to be true it must be a scam, diversify and hold, after-tax returns are what matters.

    To become very wealthy through savings requires enough starting wealth to benefit from economies of scale in investments. For regular people, big returns are not attainable. Fees, taxes and other constraints just eat away at your gains.

  3. The issue is the savings rate is largely controlled, not by income, but by income derivative, as much as by time preference.

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