Shocking: 99% of fire payouts go to only 1% of homeowners!

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Frequently these days I will see some shocking statistic reported:

  • The top 1% of earners receive over 18% of all the income (or 23% including cap gains)
  • The top 5% sickest Americans account for half of all healthcare costs

These numbers suggest a shocking inequality. And there might even be an unusual inequality but you won't see it from these numbers. What's vital when people report things like this is that they outline what the ratio should be given what would be an expected distribution. You should expect the top 1% or top 5% of any unevenly distributed thing to be consuming a much larger share of the pie. That's what it means to have an uneven distribution. If the top 1% of income earners only earned 1% of income, you would be in a communist utopia, and that's true even if they earned 5%. That's what it means to be one of the top earners.

To make this clear, I present the following statistic I suspect to be generally accurate: 99% of the fire insurance payouts in a given year go to the top 1% claiming policyholders. I have not got an actual source, but it is presumably the case because fewer than 1% of people have their house burn down. You would expect that the top 1% would get essentially all the fire insurance money in any given year.

So when you see a claim about distribution involving the top x% getting much more than x%, the right response is, "sounds normal, show me why this is unexpected or unusual." It may well be, but you need the numbers to back it up.

Comments

While this is a valid point from the point of view of statistics, and one I've noticed myself many times, it is still a valid question to ask if the top 1% of earners should be earning 18% of the total income or whatever. The alternative is not necessarily communism. If one thinks, say, that earnings should be proportional to the product of time worked and intensity of the work, then someone who earns 1000 times what I do is probably earning too much. He can't be working 1000 times as much. I doubt that he is working 1000 times as hard, by any definition. He might be worth 1000 times as much to his company as I am to mine. In this sense, it is correct, but raises the question whether personal income should be determined exclusively by the market or whether other factors should play a role.

A related statistic is that the top 1% of earners pay 18% (or more, in a progressive-tax system) of the tax or whatever. Well, duh, big deal; as in your example, one is simply a consequence of the other.

I think the comparison with insurance is a bit misleading, though. The whole point of insurance is that everyone pays in a small amount and a few get out a large amount. This is different to income.

Phillip,

The idea that income should be directly tied to "how hard you work" Sounds nice, but in reality it doesn't really work.

The basis of capitalism is that it rewards those who are innovators. Bill Gates is rich because microsoft and his accomplishments were huge innovations and improvements on our society that almost everyone benefited from. Did he work millions of times harder to create these innovations? of course, not. But are they millions of times more valuable then say someone who has flipped a bunch of burgers for a living, Apparently yes, because we (society) have all paid him that much money for the technology that he has given us.

I would prefer the system stay this way because it will continue to reward innovators for what they produce, not just how hard they work...

I love how you were crafty enough to pick Bill Gates, the ONE billionaire who has very likely contributed the most to society via his innovations. Even so, the tremendous utility of his innovations could not have come about if it wasn't for the work of many others who were compensated less than a fraction of one percent of what he was. (Genius billionaires like Steve Jobs are very similar to Gates in this regard).

But what about the other 1000+ billionaires? I am almost positive that the majority of them have not made single-handed contributions that are even 1000 times as valuable to society as those of the average worker, let alone MILLIONS of times. So extreme wealth is clearly NOT necessarily correlated with "hard work" or "innovation" or "valuable contributions to society". Not by a long shot; in most cases, the correlation is vastly overstated. It's just that for proponents of capitalism, these three terms happen to be a much better sell than the real primary factor for obscene wealth: sheer LUCK.

Thank you for saying that Brad. That has always bothered me. People tend to quote statistics in the way that sounds the best for their cause.

It appears that it is the case that income inequality has gotten worse. The percentage earned by the top 1% has risen. However, there must be a better way to express the disparity.

Probably the Gini coefficient would be more appropriate, but we need something that everyone can understand. Any ideas?

It's also worth remembering that the top 1% of "earners" contains more than 1% of the people. (And there are many more people in the "top 20%" than the "bottom 20%". )This is because income statistics are based on reported *household* income. Households in the top 20% tend to include a lot of double-income families, whereas households in the bottom X% are mostly single-income families.

Also worth noting that since people's incomes change through their lifetime, simple demographic changes could make it look like "inequality is getting worse" even if everybody on the planet had the exact same income at each given age. Or suppose you take somebody who is in the "bottom 20%" and give that person a $200k/year job, changing nothing else. That individual is now hugely better off, but you made him so much richer that he's no longer in the bottom 20%. The average for his old quintile hasn't measurably changed because his new salary is not counted in that average. So long as there are new immigrants coming in near the bottom and new college students starting out near the bottom, it's very difficult to make it look like "the poor are getting richer" based on such statistics even if every single poor family were, in fact, getting richer over time.

I agree with the fact that stating that the top 1% receives X% of the income in itself is not very convincing, or even very interesting.

However, I don't think that is the argument people are generally making (people worth listening to at least).

I believe the argument being made is that over the last 30 years, the majority of the increases in income have gone to the top 10%, and within that segment, the majority of the increases in income have gone to the top 1%, etc. A variety of tables showing this can be found: http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States

The basic idea being, sure the U.S. has done great in the last 30 years, but the bottom 40% has seen almost NO increase in income. So the ideas that "a rising tide lifts all boats" and "trickle down" just don't hold water.

That's what people are complaining about.

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