The dichotomy between the trajectory of the stock market over the last year and the state of the general economy in the U.S. has been the subject of many a pundit’s ruminations. There are many articles about the unfair advantage of the wealthy. The conclusion is that the disparate economic experience of the pandemic is evidence of systemic forces that ensure the rich get richer and the poor get poorer. As I read them, it seems something is missing from the analyses.
One statistic often cited is that 80% of the equity represented by the U.S. stock exchanges is owned by the top 10% wealthiest people in the country. And according to Lenore Palladino, an assistant professor of economics and public policy at the University of Massachusetts Amherst, studies show that 92 percent of corporate equity and mutual fund value is owned by white households, compared to less than 2 percent each by Black and Hispanic households (as reported by Vox columnist Emily Stewart, May 10, 2021).
Being white myself, someone who has a significant portion of life savings invested in the public equity markets, and a member of that 10% who reportedly own 80% of the total market value, I asked myself, “How did I get here? Why don’t others, from all walks of life, from all demographics, arrive as well, in relative proportion?” My skin color didn’t give me much of an advantage, although no doubt some. My start was from the lowest rung on the socioeconomic ladder. “Trailer trash” was my assigned category.
During my teen years, I was not on a positive life path. I came from a dysfunctional broken lower class family, with an abusive father and a mentally ill mother, had no real moral compass and found escape through substance experimentation, mostly psychedelics. I left home at 17, dropped out of college at 20. Not the classic background of the supposedly privileged.
One day, I woke up. Don’t know how to say it otherwise. I realized my life was going down the drain. I made a choice. Got a job, went back to school. Met the mother of my children, started a family, worked really long hours for many years. Put as much into long-term retirement savings as I could. Bought a house as soon as possible.
I learned that wealth is only possible through ownership of a valuable asset. When I say “wealth”, I don’t mean Zuckerberg wealth. I mean the level of financial independence that allows a person to one day not have to work to pay the bills, get quality healthcare, take a trip once in a while, see the kids and grand kids. Pay off the mortgage. And not need government support.
I borrowed a down payment from my in-laws and we bought our first home. We were never late on a payment, for any home owned, for 37 years. That provided good credit worthiness, so we have borrowing ability that I hope never to have to use again. And last December, Cheri and I pushed the mouse button to pay off our home.
During these several decades of work, I did not gamble on games of chance. Oh, sure, I’d play a game of poker with friends, buy a lottery ticket once a year and get raffle tickets for the school fund raiser. But many people spend significant portions of their income gambling to try to get ahead.
A study from the Journal of Gambling Studies, published in February of 2002, provides some shocking numbers. A statistically valid survey sample of the U.S. found that 82% of the population gambles regularly, and the average spend on gambling of all types was $1,735 annually (2002 dollars). This average gambling budget represented 4% of the median household income in 2002, a year when income actually dropped by 1.1% overall, compared to the prior year. The absolute amount of money won back from the gambling spend averaged $34 a year. Men typically spent over twice as much as women ($2,390 vs $1,097), but the proportion of each gender who did gamble was about the same (80% female, 84% male).
The study went on to find out what the rate of pathological gambling was, by demographic profile. The definition of pathological was essentially equivalent to substance addiction behavior. About 2.9% of the surveyed women were pathological gamblers. Men reached 4.2%. White people were pathologically addicted to gambling at a 1.8% rate, with Blacks at 7.8%, Hispanic at 8.0%, Asian at 6.6% and American Indian at 10.5%.
If you just take the overall average spend of $1,735, consider it an entirely elective expense that could have been applied elsewhere, and instead invest that in the S&P index between 2002 and 2020, the value of that investment would have risen to $58,574, with an annual return of just under 6%. The actual median savings level in the U.S. in 2020 (a year with a historically high savings rate) was $3,500.
There are many factors that contribute to the financial trajectory of any given person’s life. But one key question in the analysis of why the rich get richer and the poor get poorer is, why do people make the poor decisions they make as they navigate life? Why do people choose to bet on luck, instead of betting on themselves? Why did I make those errors in judgment as a young adult? Why did I choose to change my path? Did I have the ability to choose that others didn’t?
I don’t think so. My upbringing and conditions of life were worse than a lot of people when I launched from home at 17. I had uninterested parents, no money, no shoes and no direction at age 20, but I had my health. I could choose to work, to change my habits. I think a lot of the people who start with nothing in life can and do make similar choices. Of course, some people have physical and mental limitations that would prevent them from choosing certain paths. But even so, there are examples of physically and mentally challenged people who have accomplished incredible things in life.
In our debate about income and wealth inequality, we certainly need to examine the systemic factors that can impede progress for people who want to work hard and achieve financial stability. But we can’t forget the importance of personal choice either.