The Inequality Debate Is a Lie — Both Sides Are Right (And Wrong)

Key Takeaway

Before forming an opinion—or making a financial decision—define exactly what is being measured. Ask whether you are looking at income, wealth, consumption, pre- or post-tax outcomes, and a local or global time frame. Then take one personal step: build skills that make you difficult to replace and learn the basics of long-term investing, so inflation and technological change do not quietly erode your purchasing power.

Episode Overview

This deep dive argues that the inequality debate is often framed as a single question when it is really several different measurement and time-horizon questions. The episode weighs evidence of rising U.S. wealth concentration against long-run global poverty reduction and improved material living standards, while arguing that worker empowerment should come from scarce skills, education, and access to asset ownership rather than simplistic policies.

Full Transcript

Transcript of The Inequality Debate Is a Lie — Both Sides Are Right (And Wrong) from Impact Theory. Auto-generated from episode audio; may contain minor errors.

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And the data says a lot of very important things. We're going to take a look at it in this deep dive. So let's take a look. Here we go. There's an old joke that if you ask 10 economists for their opinion on anything, you're going to get at least 11 different answers, which is a bit rude, but also not untrue. And nowhere is this less untrue than on the topic of inequality. The world recently, albeit briefly, had its first trillionaire a few weeks ago, who alongside just 11 other people, control more wealth than the entire bottom half of humanity combined.

What's more is that seemingly no matter how hard they try, they can't seem to lose that money either. Of the 100 wealthiest people in the world today, only two are poorer than they were in 2019. Mackenzie Scott, who has been giving away her money as fast as possible, and Jack Ma, who is still dealing with pressure from the Chinese government. Even outside of these statistical outliers, average household incomes have remained effectively stagnant in most major developed economies, while the income of the top 1% has doubled or tripled over the last two decades alone, with some pretty obvious causes.

And what's happening with the middle class? Because ultimately, getting a thriving middle class is important. And right now, what we're actually seeing is you're getting a lot more people getting wealthy. That is lost in this discussion. We're getting more people going upstream than is typical, but we also have more people going downstream. But I actually think that we have more people going upstream. The problem is you're just not getting that centered bell curve of middle class people thriving and making more money over time. And so as we go through the data, that's really what we've got to pull apart is, okay, what are happening to people on the bottom side of the K?

Why is it happening? How is that manifesting? And then what is it that actually matters about the accumulation of money? And how is it different than the accumulation of wealth, which is essentially fictional? And asset owners have been consistently bailed out. It sounds pretty open and shut. And yet there are a lot of economists who would disagree. In fact, with the same set of numbers, there is a strong argument that, in fact, the world has never been more equal. Now, this is a problem because even putting aside who is right for us, we're going to have to come to grips with the fact that from a global perspective, obviously, things are better than they have ever, ever, ever, ever, ever been.

The number of people that used to live in abject poverty has just been declining rapidly since China has been welcomed into the WTO. Obviously, there's plenty of argument to be had about whether them being in the WTO ends up being a net benefit to the US. That's a totally different story. But you cannot take away from the Chinese that they have pulled a massive amount, hundreds of millions of people out of poverty. It is extraordinary and is absolutely something that the world should celebrate. So when you step back and you zoom out and you look at the world as a whole, things are way, way, way, way, way better.

Hearing the catastrophizing and the doom saying, it's nonsensical, it's completely detached from reality. That is one of the things that I find most frustrating about this conversation is that we're in a much better place. How did we get into this much better place? We got into a much better place precisely because of free market capitalism. By allowing the free markets to do what they do, we've pulled people out of poverty. China embraced the free markets and pulled people out of poverty. They did not pull people out of poverty by communisming harder.

This is not a great indication about the accuracy of anything that economists might say. If we can't even get this straight, what hope do we have of answering more nuanced questions? Of course, the first problem is that most regular people and even most economists have already made up their minds about which side of this debate they sit on. That is correct. People see what they want to see. And as I'm sure you guys have heard a thousand times, you can make data say anything you want it to say.

And really, they are only interested in hearing or looking for stats and figures that they want to hear. So for this video, we are going to try something a little bit different. We are going to look at the actual data that supports both sides of this debate. And you all better listen to both sides, especially the one that you disagree with, because just because we want something to be true doesn't mean it is. So what is the argument that inequality has gotten worse? What is the argument that inequality has gotten better?

And finally, why is it that even career economists can't seem to come to a consensus on what should be a very simple question? Here's the problem. Data is insanely difficult to parse. And depending on how you look at the data, how you collect the data, it gets very hard to understand. Also, people will often try to obfuscate the data. If you're talking about China, forget it. They are going to show you what they want. And you're going to have to look at things like, how much light do they emit at night, for real?

That's how people try to figure out one of the ways, that people try to figure out what's actually going on in places like China. So this is one of those things, when you really try to run the math, you do start bumping into, okay, hold on. This is far more complicated than people want to think. This is not just people trying to tell a specific story with the data. The data is legitimately complicated. There is one thing that all economists can agree on, and that is the fact that your data has never been more at risk than it is right now.

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Let's start with the argument that most people instinctively lean towards, which is that inequality has gotten dramatically worse. The data here is pretty hard to argue with, at least on its face. Economists Emmanuel Saez and Gabriel Zucman at Berkeley have spent the better part of two decades tracking the distribution of wealth in the United States, and their headline finding is striking. The share of total wealth held by the top 0.1% of American households roughly tripled, from about 7% in the late 1970s to around 20% in recent years.

Keep in mind, he's talking about wealth. Wealth is fiction. To put that in context, one in every thousand families now controls about a fifth of all the wealth in the country. Now the question is why? And I'm telling you right now, a big part of why this is happening is we have financialized our economy, we have inflated our debts into absolute madness, we are deficit spending all the time, and your dollar is going down in value at such a rapid rate that if you don't learn how to invest, you're in trouble.

A lot of this is simply the dollar getting weaker, and it makes it look like your wealth is going up. Now the concentration of wealth wouldn't be sliding to the top if everybody understood how to invest, but of course the vast majority of people do not. That's why 10% of people own what, 93% of the assets? It's some insane figure. So we've really, this is why I'm actually gung-ho for the Trump accounts. This is brilliant. Get kids involved right from the jump, because it is the only way to protect yourself from a foundational thing in our economy, which is inflation.

At the very tip of the distribution, Zucman's more recent work argues that the concentration has actually surpassed the Gilded Age outright. The top 0.00001%, which is on the order of about 18 families, including the likes of Bezos, Gates and Zuckerberg, held roughly 1.35% of all American wealth, compared to about 0.85% held by the four dominant families of 1913, the Rockefellers, the Carnegies, the Fricks and the Bakers. So why has it gotten so concentrated so quickly? The most influential answer comes from Thomas Piketty, the French economist whose book Capital in the 21st Century became a genuinely unlikely bestseller.

Piketty's central historical claim is that the egalitarian mid-20th century was not the normal state of market economies, but a one-off product of catastrophe. Two world wars and the Great Depression destroyed and taxed away concentrated capital. The fortunes of the old aristocracy were wiped out, progressive tax systems were built in the wreckage, and for a few decades, the returns on capital and the growth of the broader economy moved roughly in step. The top marginal tax rate in the United States- Also something that he's leaving out is keep in mind what that growth was.

So that growth was brought to you by industrialization. The U.S. is still riding high on becoming an industrial superpower. You've got a ton of the world literally obliterated just in rubble. They need to be rebuilt. America has, post-World War II, a pretty radical approach to helping rebuild what were once their enemies, all with an eye towards who can we deal with? How can we help them build strong economies and then begin to trade with them? That accounts for a lot of the prosperity coming out of the war is just we're ready to make things, and we're trying to help the world rebuild.

We weren't trying to have some sort of imperialistic dominance over them. We were trying to help them get back up on their feet and actually build things in their countries, and so that created this rebuild effect. So everything gets knocked down, and now, okay, cool, we're rebuilding. That, when you come out the other side with the freest, most capitalist country on the world just trying to build a bunch of trading partners, and everything gets knocked down, okay, then you get something very interesting happening. But, for instance, all the people that want to knock down the system now, they don't want to replace it with free market capitalism.

They want to replace it with socialism. It's crazy. At above 90% through most of the 1950s, unions were strong, financial regulation was tight, and the economy was growing fast enough that even working-class families were seeing real gains year on year. Okay, just in case, I can't remember if he brings up the unions again in the future, but unions are one of the parts of this that I'm going to take the strongest exception to. The reason is I want people to understand what actually gives workers the power.

So let me be very clear on what my thesis is. I won't even call it a hypothesis. My thesis is if you want to create a world where we have that optimistic view of the future, we are coming back towards the middle, you've got to put power back in the workers' hands, okay? So understand, my stated goal is to get power back in the workers' hands. The question becomes, do you actually do that by making unions stronger? The problem is that when you've got unions getting strong, you get this thing called the holdup problem.

So academic research by labor economists like Barry Hirsch and Addison, they show that when a firm, like a company, is considering making long-term capital investments or investing in expensive R&D, unions are going to bargain thinking post-investment, and they're going to try to capture a portion of those returns in the form of higher wages. Now, on the surface, that feels awesome, right? It's like, hey, we're getting these guys the higher wages. That's exactly what Tom is arguing for anyway when he's talking about he wants to put power back in the workers' hands.

I am literally saying I want power back in the workers' hands because I want them to get better wages. So why on earth would I be pushing back against this? Because what you're creating is a bureaucracy. That bureaucracy is trying to grow and get bigger. And so they are constantly trying to bite into the wages, whether or not they are responsible for the increased productivity. And this is why this ends up breaking doubly now in a highly financialized economy, in very technical firms where a lot of this stuff is going to be done through increases in technology and not through the actual labor, the people that are getting better and more efficient.

Okay, so when companies—this is the data—when the companies anticipate that this is what's going to happen, firms in highly unionized sectors underinvest in physical capital, so they're building less things, and they underinvest in R&D compared to their non-unionized peers. Now, if all of the victory ends up going to the capital class, nobody's going to care. And I wouldn't expect any empathy, and I'd still expect people to be like, fuck this kid, get me some unions. But the reality is that corporate R&D investment data consistently shows that lower research intensity exists in unionized firms, that in the stock market and equity spaces, there's huge impacts.

There was a study by David Lee and Alexander Moss. They analyzed National Labor Relations Board representation elections from 1961 to 1999, and they found that winning a union election resulted in a long-term decline in a company's equity value. Again, not expecting anybody to care about that, but still roughly $40,000 per worker. So, of course, the companies are going to hate that because that's not going to help them continue to get the money they need to operate these companies. Remember, they go to capital markets to grow.

They go to capital markets to grow. So if you want a company to grow and you're hurting them from a shareholder value perspective, you actually end up hurting the worker. The reduction, by the way, again, $40,000 per employee, roughly on average, is driven by reduced profit margins, and most importantly, because it impacts the worker's long-term gains. So the company ultimately has a lower growth rate. Okay, so now you've got workers that are having to make this long-term trade-off. So while unions may secure short-term wage gains for the members that are already inside of the union, you've got reduced capital investment and slower company expansion, and that shrinks overall the firm employment rate.

So now for jobs across the economy, it's bad. So you might solidify something inside of that company and get the people that are already inside the union better wages, but it begins to stagnate across the economy and ultimately diminishes the long-term job creation and competitiveness of that company in the global markets, which means they become weaker, less growth, less mobility for the employees. We're hitting pause for a moment, but there's plenty more ahead, so don't go anywhere. Let's talk about quints. I ordered a few things from them recently, their fleece joggers, a couple of their tees, and the quality was the first thing I noticed.

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They no longer care about the long-term health of the company, and this is where I remind everybody that the reason you have to be worried about bureaucracies is they act like an organism, and organisms wanna survive, they wanna grow, get bigger, and allocate more resources to themselves. So they stop caring about the long-term health of the company, they stop caring about their viability in the marketplace, they stop worrying about growth, and so they're just trying to make sure they eke out a little bit more income for their employees rather, or for the people inside the union, rather than thinking we want this company to be massive and we want the worker to be powerful.

So as we think about this, what we have to think through is how do we empower the worker without just using the very limited gains, very limited gains that you ultimately get from a union? To me, that comes from being honest about what happens when you've got a global workforce where companies can just offshore everything wherever the hell they want, and that becomes the bigger problem. You wanna make sure that you empower the worker, but you have to create a limited pool of people so that you're not just importing cheap labor, you're not sending jobs overseas, that you're doing something to regionalize those jobs, and then you're making sure that people get educated in a way that actually makes them valuable as they come into the workforce.

If you're not doing that, and you're trying to do this top-down, it ends up breaking the broader economy, you get an early-term win that ends up being bad in the long run. So be careful what you wish for. But since then, the growth of assets has massively outpaced the growth of the overall economy. His famous shorthand for this is R greater than G, where R is the rate of return on capital and G is the rate of economic growth. Historically, R has averaged around 4% to 5%, while G, for most of human history, was closer to 1% or 2%, and often less, which means arithmetically that asset owners have outperformed people who depend on overall economic growth for their income.

If your wealth is growing at 5% a year and the broader economy is growing at 2%, you are pulling away from everyone else. And the bigger your starting pile of capital, the faster you pull away. In plain English, we had to work really hard, and frankly, get very lucky with some very specific historical circumstances to get the conditions of the post-war period. And we're kind of just returning back to a more historical norm of heightened inequality. Okay, now, part of the reason that that happens is just the way of the world.

You're not going to be able to control this from the outside without breaking the economy. So basically, what happens is, anytime that you have just obliterated the economy, as you build back, things are gonna get better. This is why China has pulled more people out of poverty in the last, whatever, 30 years, because their starting point was so god-awful. Remember, they're coming out of having killed 45 million of their own people by starving to death because they had so profoundly broken their economy. So sure, they're gonna look amazing, but do we really wanna kill 45 million people to give the next generation and the people that survive a period of economic growth?

No, China would have been way better off just not being stupid in the first place, not resigning people to the poverty that they put people in. And so once you discount the fact that they put those people in poverty and kept them there, then all of a sudden, them pulling people out of poverty starts to look a lot less impressive. So that's something that we've gotta be very thoughtful about, is this reversion to the mean is really about the fact that if you're a capital investor and you're able to put your money across the parts of the economy that work and you're able to avoid inflation, now you see how people are gonna win.

Now, hopefully, you understand why I beat the drum of the Trump accounts, educating people about how this system works. But of course, it's better for the capital class if you keep people ignorant, and so you get bankers and politicians that keep trying to obfuscate this stuff. You can see this in the wage data as well. Real hourly wages for typical American workers peaked around 1973 and then decoupled from productivity, which kept rising. Okay, the question becomes why, and a big part of this story is gonna be technology.

It's not the only part of the story, but it's a big part. 1973 and 2023, productivity grew by about 72%, while typical worker compensation grew by about 9%. That's a massive gap. And what it means practically is that workers were producing more and more value each year, but how well were they? And so that's the real question. How much of this is being driven by technological advancements, whether on production lines, whether we're talking about the computer revolution that's gonna start hitting in the 80s. So a lot of this stuff is the technology, and that's where even more of that productivity ends up going to the capital class because of the investment strategies in things like the infrastructure that make this stuff possible.

And so you get a lot of things that it isn't being brought to you by the labor force exclusively. And now you have this beginning split between one company is making a technology that another company is able to take advantage of to make that employee far more productive. And if that employee says, yeah, fuck you, I want more of this. They just go, okay, you're mistaking your ability to get productivity out of this computer with a universal ability to get productivity out of this computer. The way that a worker becomes empowered is they are so trained at doing a thing that they become very difficult to replace.

And so when just literal human physical labor was what you threw at an assembly line to get more productivity out of your assembly line, you had to throw more effective humans at it and just more humans at it. And that was the thing that allowed you to get more done in a given hour. And so now as you are trading sort of those economies of scale for economies of technology, it's a very different like exchange. And so that's why we have to address this in a different way that unions aren't gonna be able to touch.

Weren't seeing much of it reflected in their paychecks. The labor share of national income fell. CEO to typical worker pay ratios went from roughly 21 to one in 1965 to nearly 400 to one at the peak of the dot-com bubble. Okay, now this is an important one to address. This is a big part of when you start letting people outsource workers to wherever, you're driving the ability of that worker to negotiate an ever-increasing salary, you make it harder and harder for them to do that. And you make the executives far more important in the company because of what they're doing from a capital allocation standpoint.

So now it's like, well, do we build this thing here or somewhere else? Are there tax incentives that we can take advantage of somewhere? Is there a pool of talent somewhere else? I've worked with companies that have gone to Poland, say, because Poland has trained people in a certain type of programming. And so they'll open an office there because they can find workers there. Now that obviously disempowers the American worker who isn't necessarily skilled in that thing. So this is where we've gotta think about how, when people look, especially if they don't like Trump, when people look at Trump doing things that are protective of US industries, trying to bring back jobs that are more blue-collar in nature, he's trying to combat some of this to make the American worker who has a ability to move parts around, do simpler jobs in a way where that individual worker can be more powerful.

And then geography just takes care of a lot of their bargaining power. So it's like, hey, I can do this thing. You need a human to do this, at least for now. You need a human to do this. And this isn't something that you can outsource to somebody in Bangladesh because it's a physical facility that you've been given tariff and tax incentives to build here. And so we're gonna have to decide whether we wanna do that, but that's an incredibly useful way to empower a worker to actually be able to negotiate a better wage.

And even after falling back, they still sit at around 280 to one today. The institutions that used to push back against this kind of concentration have been systematically weakened. Union membership fell from about 35% of all workers in 90. By the way, really fast, something that I think is worth noting. I think I have fundamentally altered the way that I structure companies. I know all across Elon's companies, he's done the same thing. And it is nobody is just an executive anymore at Impact Theory. Literally 0% of people are just executives.

Nobody has like that middle management layer job. Everybody does the thing and may oversee somebody else who also does another thing. If you're going to be a coach at all, you're gonna be a player coach. That includes me. Everybody has day-to-day responsibilities to get a thing done. That is largely due to AI. And so it's very interesting to see how much those executive salaries are gonna alter because everybody is gonna be expected to actually be in the mix doing the thing. And so you're not just paying a layer of bureaucracy to make your problems go away.

It's like everybody has to do something. Now, as more and more people are doing a thing and you're not creating strata by role type, if you will, it'll be interesting to see if there's more and more parity there. We'll see. In 54, which was the peak, to roughly 10% today, and only about 6% in the private sector, which means that average workers have much less collective bargaining power than they did a generation ago. For the reasons we talked about. Which means wages stay flatter while corporate profits grow.

When individual workers negotiate. That is not a cause and effect, just to be clear, for the things we already talked about. It's part of it, but there was a study that came out that something like 2% to 6% is due to unions in terms of increase in pay. That means that somewhere between 98% and 94% has to do with something else. And I would put forward that something else is it is hard to find another worker that can do this thing. And so between globalization and technology, and just terrible education, that's where that problem begins to arise for the worker.

Salaries, they are at a structural disadvantage against employers who have more information, more leverage, and more alternatives. Unions were the mechanism that corrected for that imbalance. And as they have declined, so has the bargaining power of the typical worker. And this isn't- Again, massive overstatement. Even the full picture. Because inequality within a single country- like the United States, is only part of the story. Across the entire planet, it's significantly worse. Zucman's work on tax havens argues that a substantial slice of the world's top-end wealth sits offshore and outside official statistics entirely.

Remember, wealth isn't real. Just keep that in mind every time you hear the word wealth. He is using wealth on purpose. He does not mean money in the bank. His estimates suggest around 8-10% of all global financial wealth, over $7.6 trillion, is held in tax havens that surveys and even tax records can't properly capture. And this is a bare minimum estimate that only covers financial assets. It doesn't include real estate, art, yachts, or other hard-to-track stores of value. If the wealthiest people systematically shelter assets that official measurements miss, then every measured top share is probably an underestimate.

Here's the thing. Keep in mind that if you want to wall off people's ability to borrow against their assets and never pay it back, I'm totally here for it. However, people don't do that very often because debt is so dangerous. What people actually do is they, let's say they buy art, that art goes up in value, they eventually want to access that capital, so they sell that piece of art. That will be a taxed event. Now, you might have beef with the rates of long-term capital gains or something like that.

Again, very open to that argument. But the way that people make out, like, that person has that piece of art, that art has gone up in value, and somehow they're hiding that from people. They're not hiding it from people. It's stored in a form they can't access either. Now, if they borrow against it, they are very likely to pay it back. That whole scenario of people being worried that nobody ever pays it back just isn't what actually happens in practice. Most people are going to pay back that debt when things are favorable to pay off the debt.

When things are in the opposite direction and it's so cheap, they're going to pick up some debt, carry it for some number of years, and then they'll pay off the debt as things begin to change. We always have that conversation that you can't tax wealth because people have to sell the wealth thing to trigger the taxable event in order for them to pay the tax. Correct. So here's how the flow goes. What people are worried about is, hey, this asshole got a bunch of money and he's used some loophole to funnel that money into something else.

So that money becomes untaxable. If we want to say that it's a piece of art, just to have an example. Okay, so I got earnings. I funnel it over into the painting. Now, when I got the earnings, I paid tax on it, first of all. So to buy the art, I've already paid tax. So the art was bought with post-tax dollars. But let's say the art doubles in value. So now I've quote-unquote made an increase in wealth, but I haven't been taxed on it. People get very upset about that.

So now, increase in wealth on the painting, I now have equity. So let's say I've doubled my money. Let's say I bought it for $10. It's now worth $20. I borrow against the $10. I use the other $10 as collateral. So now I've got, let's just say I go crazy and I borrow the full $10 million. Okay, so now I've got a $10 million loan against a $20 million painting. And I'm paying some carry cost. I've got interest on that. So I'm paying that. Now, at some point, I'm probably going to say, I just want to pay this off.

And so when I go to pay it off, I have to pay it off with money that I've been taxed on. So to pay off the loan, I'm going to take now post-tax dollars, and I'm going to pay that off. Or I'm going to say, I'm now going to sell the painting, and I'm going to pay it off. And so when I sell it, I get charged tax on the increase, not charged on the first $10. I'm only charged on the second $10. And depending on what it is, I'm probably 20% to 30%.

But it's $10 million. So some people are going to have a beef that should be taxed at $50 or whatever. So I'm not. So I get that there might be a debate on the rate of that. But I am going to get taxed on that money when I put it into a form that I can access. So I got taxed to pay off the debt. So it was one way for me to temporarily access the money. You got taxed when you withdrew the money to pay off the debt.

Correct. Whenever you turned it into cash. Okay. Yep. And then if I sell that and actually access that equity that I've repurchased from the bank by selling it off. That triggers a taxable event. Then I get taxed there. So the only way for me to access the money is to get taxed on it. Full stop. Now, again, if the beef people have is the argument of by parking in that painting for two years, you turn that money into the gain, only the gain, but you reduced the tax on that gain.

And I'm mad about that. Okay, let's have that argument. But the argument that I think is patently ridiculous is that painting went up in $10 million. You're going to pay tax on that right now. That's retarded. It's full retard. That is somebody who does not understand that I may not be able to get that money, that that may have been a blip that then goes down. And by the way, maybe it goes negative and I'm underwater on the painting. Are you going to give me a refund on the tax that I paid?

Obviously not. So it's like there's a level of absurdity that comes along with that. And if we want to talk about the loans, then it's like, okay, look at how a loan actually works and point to the part that you're mad about. And then we can talk about that. Where they have problems with this is that if you think about, okay, your wealth keeps growing, which is actually not usually the case. Most people go broke. I want to remind you of that. But if your wealth were to continue to grow for an extended period of time- Well, hold on.

You said most people go broke, but wealth always compounds, right? T-shirt to T-shirt in three generations. It is far harder to keep money than it is to make money. That is the startling reality of life. And so the vast majority of wealth is lost by the third generation. So- Once they liquidate it and once- Generation one makes it, generation two spends it, generation three is broke again. All those things are taxable events. They would get taxed. They would get hit. It will be justified. I'm talking stock market, wealth, art, assets- I'm just trying to lay out for people.

The thing that they're worried about primarily isn't going to happen because most people go broke, which means that they were losing their wealth all along the way. Here's a pitch. This might help us. Cyan Spark, thank you. The act of lending against your asset triggers a step up basis. Would you be okay with that? The act of lending? No, because that's going to hurt the middle class. How is that going to hurt the middle class? Because it's going to increase the value of their house. So I have equity in my house and I now want to borrow and so I can do a construction loan.

He lacks it. He lacks our taking out. So you're saying- Home equity line of credits and things that are tied to homes are taken out. This will be traded for stock market. Okay. I am a kid with a brilliant idea and I want to start a business. So I'm going to take out a loan. Same thing. Fuck that kid. Sorry, you're one of the capital assholes now. I'm not borrowing against a $5 million stock market portfolio. You're going to borrow against something. Could be you borrow against your house.

Could be you borrow against your fucking Lego collection. If it's an SBA loan, you get up to 50k for free. I don't know. Come on. We're talking somebody who borrows millions of dollars. So my thing is if you're borrowing millions of dollars, then the step up basis then triggers. Yeah, that's crazy. That's crazy. If you're borrowing millions of dollars, I also argue you wouldn't be in the middle class right now. I think, well, okay. So now you come down to just because somebody can get somebody else to co-sign a loan or whatever, because they have a business idea that they want, or that the bank says, if you can go raise $7 million, I'm going to loan you 20.

There are all kinds of ways that people end up in a situation where they have no cash themselves, but they have equity. And now, if what we're saying is, well, you just got cash in your business, your business is worth this. So now we're going to tax you on that. It's like, wait, hold on. That person can't access that fucking money. So I think you have to be way more deft than that. You've got to be looking at something like, because I really think that the problem is duration, that you can stop the brain damage by dealing with duration.

And so you say something like, okay, your wealth is going to keep going up. And so you can get loan B to cover loan A. You get loan C to cover loan B. And now you just keep borrowing against your assets, living off of those loans, and counting on you getting wealthier to solve all your problems. This is exactly how people go broke. I just want to keep fucking saying that. But nonetheless, in some fantasy scenario where that person manages to be just fine forever, and they just keep borrowing money, and we want to make sure that that person gets taxed, then sure, there's some way that you can put in a mechanism that says that a loan over a given duration is considered a step-up in basis.

And so post 10 year mark or whatever, you're expected to pay it back. It would really have to be fucking looked at because off my head, I cannot run the math on that to know if that particular statement makes any sense or not. But you could certainly do something like that where a person cannot just forever compound their wins and never pay tax. No problem with that. But holy fuck, we've really got to be way more thoughtful about what people actually use money for. And you don't want to put yourself in a position where you're like, yeah, I don't want rich people to be able to start that next business because I want my fucking tax money.

That's crazy. And also, you don't want to stop the young upstart from doing the same thing where it's like, I want to start a business, or I want to go to college, whatever. There's a gazillion reasons why that person might want to borrow money, and we don't want to put a step-up basis. And rather than creating tax code that's like 30,000 pages long, it's like you want to treat this in the simplest way that you can. In reality, it's probably a lot worse than the numbers suggest.

And more than ever in recent history, this concentrated wealth is buying political influence, which is further tailoring tax codes, regulations, and trade policies to suit the people who are already at the top. Yes, and this is why we want to simplify the tax code. The top. Campaign contributions, lobbying expenditure, and the revolving door between industry and government all create a feedback loop where wealth generates political power, and political power protects wealth. That's not a conspiracy theory. It's just how incentives work. Perhaps the most concerning part of this argument, though, is what it means for the next generation.

The economist Raj Chetty and his colleagues found that the fraction of American children earning more than their parents at the same age fell from roughly 90% for those born in 1940 to about 50% for those born in 1984. Okay, this is devastating. And this is a big part of the reason that people feel like the American dream is dead. But keep in mind, what was going on in 1940 was we were about to get into the Second World War. And so we hadn't fully industrialized yet.

This is a very different scenario than on the other side of the war, where now we're just like this absolute industrial powerhouse, and we are able to do what the rest of the world can't. And so you have that perfect combination of we have a low starting point, and then everything is about to get amazing. So of course, you're going to see the steady decline, because the bar is going up, it's going to be a harder and harder threshold for people to get over. Now, do I want to see us find a way to reverse this trend?

Yes, but nobody should be surprised by it. The promise that each generation would out earn the last has, by this measure, been cut almost in half. That's a pretty devastating finding, because it suggests that for the first time in modern American history, a coin flip is roughly the odds your kids will do better than you did. Okay, so now for the other side of this, and this is the part where a lot of you are going to get uncomfortable, but stick with it. The simple fact is that despite the anecdotes and factoids about people like Musk, the share of wealth held by the top 1%, measured broadly across developed economies, has actually declined significantly over the past century.

The OECD's own data notes that wealth inequality has fallen well below the extreme levels of the early 20th century, even if current levels and some signs of an upward trajectory in more recent years remain a concern. That might be surprising, because it certainly doesn't feel that way. But the Gilded Age and the era before it featured levels of concentration that make the current distribution look almost modest by comparison. The reason it feels worse now is partly because we have better data and more media coverage of extreme wealth, and partly because we are comparing it to the post-war period rather than to the longer arc of history.

Now, to be fair, the argument that the post-war period was an anomaly cuts both ways. Yes, a lot of infrastructure and the wealth tied up in it was destroyed by two world wars, and that reset the playing field, but that's not exactly a great advertisement for equality. Nobody is arguing that the best way to fix inequality is to blow everything up. That actually isn't true. There are a lot of people saying that. We could fix inequality tomorrow by destroying everything on the planet, because then everybody would have nothing.

But that's obviously not an ideal outcome. It's not ideal, but you certainly got a lot of people saying we need to depopulate. Even outside of silly extreme hypotheticals, the fact that the post-war levelling required catastrophic destruction kind of makes the point that the buildup of capital, while unequal, still benefits everyone more than the alternative. And there is a much more practical version of this argument, which is that consumption rates are a much better indication of true material well-being than paper wealth values, and those have never been higher or more equal across the board.

This is actually an important distinction. The rise in the 90 to 10 ratio for after-tax income inequality since the early 1960s has been about 26%, but the same ratio for consumption inequality has only risen about 7%, which means that even as incomes have diverged, what people can actually buy and consume has stayed much more equal than the income numbers would suggest. Because a lot of people are talking about wealth, not actual dollars and cents in your pocket. And there's a decent argument that what you can actually consume is more important than what your bank statement says.

If a factory worker in 2025 has a smartphone, air conditioning, a car with 10 airbags, and access to the entire internet, while a factory worker in 1975 had none of those things, then the gap in lived experience might be much narrower than the gap in income would suggest. This is one of the biggest things that drives me nuts. People are not realistic about how much better the world has gotten. So from a technology standpoint, yes, it's disempowered workers in a lot of ways, but it's also made your life a lot better.

You can afford a lot more stuff. It is wild that for what is basically pennies, you can get Amazon to deliver something to you same day. It's crazy. It's crazy. Even if the rich person in 2025 is proportionally much richer than the rich person in 1975, what's more is that the tax burden hasn't really fallen on the top 1% in the way that most people assume. Sure, the top marginal rate has fallen dramatically since the mid-20th century, but nobody was actually paying that rate in the first place because of deductions and loopholes.

This is the thing that's crazy making. People will point to the 90 plus percent that we were paying after World War II at the top of the marginal tax rate, but per taxpayer in inflation-adjusted terms, we were collecting less per taxpayer than we do now. So just because you have a big number, that might make people feel better, but it doesn't actually generate more revenue for the government. It's crazy, but people just will not accept that. The top 1% of earners currently pay about 38% of all federal income taxes collected, which is roughly double what they were paying in the 1980s as a share of the total.

Again, when people say pay your share, that's wild. The wealthy are already paying way more than they used to. You can argue about whether that's enough, but the claim that they're paying less than ever is, at least by this measure, the opposite of true. It's ridiculous. There's also a more technical critique of the wealth inequality numbers that is worth taking seriously. The economist Matthew Wrongly at MIT pointed out that Piketty's headline finding about the capital share of income growing relative to the overall economy didn't properly account for depreciation.

A machine purchased in the 1980s isn't worth very much today. Software depreciates even faster. A factory built in 1990 needs constant reinvestment just to stay operational. And when you adjust for the fact that physical capital wears out and needs to be replaced, the picture changes considerably. The only asset class that has meaningfully grown its share of national income after accounting for depreciation is real estate, which is far more evenly distributed than financial capital. Home ownership is spread across tens of millions of families. And while housing affordability is obviously a serious problem, it's a very different kind of problem than a handful of families hoarding all the productive capital.

Now, as people are quick to point out, Elon Musk doesn't actually have a trillion dollars in any practical sense. He has a trillion dollars worth of stock tied up in very speculatively valued companies that would be extremely difficult for him to actually cash out of. His wealth exists on paper, contingent on other investors continuing to assign those valuations to his companies. And that they would keep doing that if he started selling them en masse, which they would not. If sentiment shifts, as it has before, that number can drop by hundreds of billions in a matter of weeks.

The same kind of thing is true for most of the major global billionaires at the very top of the list right now. Their wealth has largely come from the stretched valuations of their shares rather than from their companies controlling a dominant portion of the actual economy. The stock market values Tesla at over a trillion dollars, but the company's annual revenue is a fraction of that, and its share of the global car market is still in single digits. If there really is the claim that we're going back to the Gilded Age, let's actually be practical about what that comparison means.

Musk's holdings in Tesla and SpaceX, which make up almost all of his wealth, trade at valuations hundreds of times what those companies actually earn in profit. Tesla's price to earnings, which by the way, is its own problem, ratio has consistently sat above $300. We could also just not buy a Tesla or Starlink. Rockefeller's Standard Oil, by contrast, traded at a price to earnings ratio that was, by historical estimates, somewhere between five and ten, which meant the scale of that is so crazy that Elon Musk's companies trade at over 300 price to earnings ratio.

Dude, yeah, bubble much? The company was paying for itself every few years, and it had a genuine stranglehold on an industry that was almost impossible to opt out of. If the market hype around Musk's companies dies down, his wealth would evaporate pretty quickly because it's built on what other people are willing to pay for his shares rather than on the underlying cash flow those companies generate. For Rockefeller and the other Gilded Age barons, it genuinely wouldn't matter because they held essential industries with real pricing power and enormous barriers to entry.

They could also liquidate their wealth far more readily by just waiting a few years and collecting profits. Standard Oil was essentially a cash machine. Musk, by contrast, would find it almost impossible to actually realise his theoretical trillion dollar net worth without crashing the share price in the process, because the moment he starts selling in serious volume, the market would adjust the valuation downward. And the Gilded Age, in the grand scheme of things, was actually better than most of history before that. Going back even further, early industrialists and landed nobility controlled the factors of production almost entirely.

The average person in medieval Europe had no wealth, no political representation, and no realistic prospect of economic mobility. They were basically indentured servants. Like, it's wild. We have come so far, and yeah, so some of the outrage that we see now is just not justified in a historical context. By that standard, the trend over centuries has been clearly and overwhelmingly positive. The inequality argument tends to work best when framing it exclusively from the starting point of the 1970s, which again was an anomaly. But even then, not only that, but in the 1970s is when Nixon broke the final connection that the dollar had to gold, which meant that we could start inflating in earnest, which meant that people that hold assets are going to be the ones that are getting richer over time.

And so you begin the K-shaped economy. And it's not exactly like those years magically created amazing living conditions. Home ownership rates were actually lower in the 1970s than they are today. Inflation averaged over 7% through most of the decade. The poverty rate was higher, and violent crime rates were significantly higher as well. And this was just within the United States. The 1970s were not, by any reasonable material measure, a golden age for the average person. They just happened to have a more compressed income distribution, which is a different thing entirely.

Worldwide, this argument is basically impossible to lose. The last three decades in particular have seen the greatest reduction in poverty in human history. The number of people living in extreme poverty fell from 2.3 billion in 1990 to roughly 830 million by 2025. And the global extreme poverty rate dropped from about 36% to under 10% over that same period. Even choosing the United States again, and even generously picking the late 1970s as the starting point, which again is arguably the biggest outlier here, true economic inequality measured by real economic outcomes rather than speculative paper wealth is better today, especially for marginalized groups.

Part of the reason this doesn't feel true is that it's much easier to remember the comfortable middle class, let's be honest, predominantly white family, that could buy a house with a single union-backed income in the 1970s. That has statistically become harder to replicate. But for single women, minorities, and the very poor, quality of life has improved measurably. Access to education has expanded, workplace discrimination protections have strengthened, and the poverty rate among black Americans, while still unacceptably high, has fallen substantially since the 1970s. Humans are much more attuned to perceived losses than perceived gains.

Psychologists call this loss aversion, and it is extremely well documented. We feel the sting of something getting more expensive much more acutely than we appreciate the benefit of something new becoming available. And on top of that, it's very easy to remember an idealized version of the past, where things seem simpler and more fair, even if the data says otherwise. Even for that average family, statistically, home ownership rates are about the same today as they were in the 1970s, roughly 65%. So depending on which side of this debate you started on, at least half of what you just heard was probably difficult to sit with, and that is a big part of the problem.

What you may have noticed is that the question, has inequality gotten worse, is not actually one question, but at least four. Looking at inequality is something I'm flirting with doing a full deep dive on this, over the whole burrito gate scandal. It's actually pretty interesting when you start drilling in how much of this is about the psychological frame of reference that people have today is causing some amount of the friction. We have so many real problems, I certainly don't want those to get lost, but we're compounding our real problems by putting a layer of imaginary problem on top that is making things spiral out of control.

First is whether we're measuring income inequality, wealth inequality, or consumption inequality. The second is whether we're looking at the numbers before or after tax and government transfers. The third is over what time period we're measuring it. And the fourth is whether we're looking at inequality within a single country or across the world as a whole. Depending on which combination of those you pick, it's trivially easy to make a compelling argument in either direction. Global consumption inequality after taxes has improved beyond a reasonable doubt since 1900, and it's not even close.

But wealth inequality in the United States since 1980 has not improved. Remember, wealth inequality, it's not real money. Not by most measures. Both of those statements are factual, both are supported by rigorous data, and they point to completely opposite conclusions about whether inequality is getting better or worse. But it gets worse than that, because even economists working with exactly the same data set still need to make decisions about how to process that data, and those decisions can flip the results entirely. The disagreement between Sayers and Zucman on one side and Outen and Splinter on the other is probably the cleanest illustration of this problem.

Both teams start from the same source, IRS tax records, which should in theory produce the same answer. But they diverge because of defensible but consequential methodological choices. They need to decide how to allocate income that is underreported to the IRS, how to distribute untaxed business and capital income, how to handle the explosion of pass-through business income that followed the 1986 tax reforms, how to allocate government consumption spending, and whether the unit of analysis should be the tax return, the individual, or the household, adjusted for falling marriage rates and shrinking family sizes.

Each of those choices is reasonable on its own, but stacked together they produce dramatically different pictures of how the top income share has changed over the last 40 years. One team concludes inequality has surged, the other concludes it has been roughly stable. Same data, opposite answers. Then of course there is just human nature. Thomas Piketty is a brilliant economist, arguably one of the most important economic thinkers of the 21st century. But he's not exactly going out of his way to search for data that runs counter to his thesis of rising inequality.

So we really have to decide what is it that we're frustrated about? What is it that is so upsetting to people? Because if we can identify that, if we can figure out what's really going on, is it the visibility of wealthy people that's frustrating people? Is it globalization that's made people feel disempowered? Is it the inflationary pressures on people's money that is really driving people crazy? Because they can feel that something is going wrong, but they don't understand what it is. That's one of, I think, the biggest problems, and that technology is playing a big role in terms of the capital class being able to capture more of the value of productivity.

But if you think about, okay, how do I make myself irreplaceable? And if we look at that and just understand that some of this is going to be that when you have technology being the creator of a lot of that increased productivity, it's going to be hard for an individual to capture that because the reality is that the technology is the thing that you can slot a new person in, and you're still going to get something very close to the same level of output. And so that is always going to then go largely to the capital class.

And I ironically think that some of the things that Trump is doing, despite them being very unpopular, some of the things that Trump is doing actually speaks to empowering a worker who has to be physically in place to do the job. And then we finding out what is the real price that somebody will pay for blue-collar labor when we don't have the ability to outsource that to illegal immigrants, we don't have the ability to send it overseas, we really just have to find out at what point will an American take that job.

And then just to really make this complex and controversial, we have to figure out at what point would a U.S. citizen take that job if they didn't have access to a whole lot of governmental programs. And so that ultimately is going to be what we have to figure out. Otherwise, even if the K-shaped economy isn't racing away from each other as rapidly as people think, when you get to real tangible spending power, you are suffering a psychological problem that is making this continue to push people apart.

Now, again, there are real problems. Housing being so unaffordable, the age at which somebody buys a house, pushing back later and later is a problem. Being able to figure out things like the tax loophole that we spent time talking about, being able to shut things down so that even if things aren't equal, because they're never going to be equal, not as long as technology exists, not as long as difference in human capabilities exists, you're never going to have equal outcomes. But does the playing field feel fair?

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