Broker Check

Politicians and many others like to focus on who owns what share of the pie

October 20, 2021

Politics today is in large part about p itting one group against another and convincing one side they've been treated unfairly. One of those groups is the younger generation of workers known as Millennials, who are supposedly up to their eyeballs in debt and lagging well behind prior generations.

Millennials (born 1981-96)

Politics is a zero-sum game, so instead of focusing on whether the pie is growing or shrinking, politicians and many others like to focus on who owns what share of the pie. In this case, the pie we're talking about is total wealth among all American households. In turn, net worth is assets (stocks, bonds, real estate, mutual funds, bank deposits, pension entitlements, and ownership in businesses) minus liabilities (mortgages, student loans, car loans,...etc.).  

As of the middle of this year, Baby Boomers had 51.4% of all net worth, according to the Federal Reserve. Pretty good for a group that makes up about 21% of the US population. Meanwhile, Millennials are lagging way behind. This group – which now has 22% of the US population, slightly more than Boomers – has only 5.6% of US household net worth.

It's no wonder some politicians have been talking about this issue: there are more Millennials than Boomers but Boomers have about nine times more wealth than Millennials. Unfair!

The problem with these numbers is that despite being 100% accurate, they're 100% misleading. Each generation's share will rise and eventually fall as they start out young, hit their peak earning years, pay off debts, and then enjoy compounding returns on accumulated investments later on in life, before eventually spending down those assets. Back in 1989, the Oldest Generation had almost 80% of all net worth. Today, they have 14.4%. 

There is a much better way to look at the generations. Rather than looking at the share of total net worth, we should look at the average level of net worth for each generation as they age from young to old. Essentially, take each generation's total net worth, divide it by the number of households within each generation (some generations are bigger than others), and then adjust for inflation. Credit where credit is due: this method was originally developed by Jeremy Horpedahl, a very insightful economics professor at the University of Central Arkansas. 

We estimate that the typical Boomer was born in the fourth quarter of 1955. So, as of mid-2021, the typical Boomer was 65.5 years old. Right now, the average Boomer household has a net worth of $1.629 million. (Remember, this is an average, so it includes Jeff Bezos.) By contrast, the typical Gen Xer now has $1.108 million. (Yes, this includes Elon Musk.) 

Superficially, it looks advantageous to Boomers. But the typical Gen Xer was born in the third quarter of 1972, and so was age 48.75 in the middle of this year. That means Boomers have had longer to accumulate assets and earn compound returns.

But when comparing Boomers to Gen Xers, what we really want to know is how much net worth Boomers had back when they were 48.75 years old. And guess what? When you adjust for inflation, the typical Boomer household had $730,000 back then, well below today's Gen Xers, with $1.108 million. So when you adjust for age and inflation, the average Gen X household is beating the average Boomer household. 

Unfortunately, the data only goes back to 1989, and can't yet directly compare Millennials to Boomers. But we can compare Millennials to Gen X. Today, the average Millennial household, at age 32, has a net worth of $196,000. (Yes, this includes Mark Zuckerberg.) Back when Gen Xers were age 32, they had an inflation-adjusted $158,000. 

The bottom line is that, at the same point in their lives, the average Gen Xer is better off than the average Boomer and the average Millennial is beating the average Gen Xer.

None of this means this pattern will persist. If policymakers obsess about shares of net worth rather than growing the whole pie, they may adopt more policies that slow economic growth and wealth creation, and then Millennials could end up being thrown off track. For now, however, it's important to recognize that Millennials don't have it as bad as many think.

Using the pie illustration, I want to explain the big lie of those that espouse that the rich are getting richer and the poor and middle class are suffering because of that. Socialists and specifically those that follow the Communist Manifesto believe that the pie always remains the same size. So if the rich get richer, someone has to get poorer. But is that true?

Absolutely not! When Bill Gates, Hewlett-Packard, and others started the billion-dollar tech companies, they did so with little to no money... sometimes in garages. As they grew, their companies hired and hired and hired. They continued to see their companies expand their wealth. Where did this money come from? 

In the pie analogy, it would have to come from others. It did not take from others. It was the expansion of wealth and the pie. That meant that, even if the owners got wealthy, all those that worked for them also received money that did not exist before the companies were formed. As a result, the pie grew and everyone did better. The pie does not stay stagnant as the socialists push. Their theory is simply wrong and a narrative that is moved forward merely to get people to feel like victims of capitalism.

Capitalism expands everyone’s wealth, even the poor. That is why the poor in this country are richer than the average person in other countries. The agenda of the socialists is based on a huge lie and should be rejected outright. But like the statements of Pelosi in my last commentary, the lies are believed and the policy that is pushed is based on lies. Only after people accept the lies and find out that it does not give them anything better than they have now, do they regret following these smooth-talking elites. Don’t believe the lies. As I say in my seminars and so often in these commentaries, knowledge is a method of overcoming the lies. Peace comes from knowledge and facts, not believing the rhetoric of our leaders!

Earnings season

Earnings season for the third quarter of 2021 started strong with the majority of the large financial institutions reporting earnings that beat expectations by double digits. 

According to FactSet Research, we have received results from about 8 percent of the S&P 500 component companies as of Friday last week. Of the 8 percent that have reported results, 80 percent of the companies have beaten earnings expectations while 2 percent have met expectations and 17 percent have fallen short. So far, the Financial, Healthcare, Industrial and Real Estate sectors are turning in the best performance. I said that the weakness in the markets was temporary until we get earnings reports.

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