Episode 63: How To Solve Income Inequality

Announcer:

This is The WealthAbility® Show with Tom Wheelwright, way more money, way less taxes.

 

Tom Wheelwright:

Welcome to The WealthAbility® Show, where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility®. So financial education is something we talk about all the time in our podcast, but income inequality is something that the rest of the world is terribly concerned about. It's something that the Democrats and the Republicans are fighting over, it's something that we see uprisings throughout the world. And so is this an issue just of those who have not as much money, or is this an issue that everybody needs to deal with? Do we need to be able to solve income inequality to have peace and prosperity throughout the world? And today we have a very special guest to talk about how financial literacy impacts income and wealth inequality. And I'm very excited to welcome onto the show Dr. Anna Lusardi from George Washington University. Anna, thank you so much for being with us.

 

Annamaria Lusardi:

Happy to be here.

 

Tom Wheelwright:

And would you just give us basically a 30-second resume of what do you do and why do you do it?

 

Annamaria Lusardi:

I am a university professor at GW. I've been at GW for about 10 years, and I spent the rest of my academic career at Dartmouth College. For the past 15 years or so, I have dedicated my work studies and other programs to financial literacy and financial education. And I'm going to say it does matter. Financial literacy is an important skill that we all need to have today to succeed and to be able to navigate the economic environment in front of us. And it will eventually also help us to make us more financially secure.

 

Tom Wheelwright:

So here's the question. I'm going to just start off with the question. So you've done a lot of research on financial literacy. Let's start with that. Where do you think we are from a financial literacy standpoint in the U.S. and the world?

 

Annamaria Lusardi:

Well, we know this because there are a lot of international surveys that actually compare the U.S. with other countries, and they do it both looking at the young and looking at the adult. And also, I have to say it's the same in these two age groups, which is that the U.S. is overall in the middle of the pack when you look at the level of financial knowledge, which is not a good place where to be, because they want to see the country with the most developed financial markets. It's the countries where probably one of the few countries where young people today get out of college with more than $30,000 in student loans, and so where young people have to make important consequential financial decision very early on. And that's why it's also important to compare the financial literacy of 15 years old, for example, as the Piza OECD data does.

 

 

So overall I have to say their level of financial literacy in the U.S., both looking, I think at the country itself and looking as an international comparison is too low than what it should be.

 

Tom Wheelwright:

I appreciate that. That's my experience as well. As the financial literacy actually is very low, especially when you consider that financial literacy is not just about income and how to use money, but it's also about how to build wealth. So one of the issue I really want to focus on is what do you think is the answer or the solution to income inequality?

 

Annamaria Lusardi:

I don't think there is a solution. The problem is probably too big to seeing that we can use only one instrument to solve income qualities. It's certainly a very big problem. And by the way, if you look around the world as well, it's not that countries do not have that problem as well, and I'm sure that everybody has tried different things. So I think we can speak of contributors to income and wealth inequality. And I actually do think that if you look at the wealth inequality, it's far greater than the income inequality. And this is, I think what we have-

 

Tom Wheelwright:

How would you define… And income inequality, I think most people have heard what income inequality is and they get an idea, one person makes $200,000 a year, one person makes $50,000 a year, somebody else makes a billion dollars a year. We talk about that all the time. How do you describe the difference with wealth inequality?

 

Annamaria Lusardi:

I think actually using the number you have said now, when you look at just this span, the difference in income, I don't think you're going to go to the billions. There are very few people whose income is a billion. But that's very different when you go to wealth. So if you just look how huge is the value that the wealth can take, so just to give you an example, probably Jeff Bezos doesn't make billions of dollars in income, but he has billions of dollar in wealth. And so when you look at the wealth itself, the numbers are going to be a lot wider. And you can look at measure of inequality, like how indeed large the differences are, or you can look at how much people at the very top account for the total income or the total wealth in a country. And when you look at the second one, how much top wealthy people account for the wealth holdings, you really see a very large inequality.

 

Tom Wheelwright:

Got it. And since wealth is what produces income when you're not working, so that's… I mean we were talking earlier before we started recording about the current pandemic and that when you have a pandemic and all of a sudden people are out of work, they're out of money. Well, so income doesn't help them in that situation. They could be making $500,000 a year. And I mean, I for example, I have a client who's a physician. He's a surgeon. They closed down the surgery center. Well, you closed down the surgery center, his partners were scared to death because even making what they did as surgeons, they were living hand to mouth. And so when they shut down, they didn't have a lot of cushion there. Whereas of course my client fortunately has a lot of money, a lot of wealth that produces income so he doesn't really have to work. He works because he likes being a surgeon. But that's a big difference right there.

 

Annamaria Lusardi:

And that's why I am so interested in financial literacy, right? The fact that today is much more important than in the past to manage our resources. And so for example, to use our income to save and to create wealth and to grow our wealth. And I think the crisis, both crises actually have really unveil the difficulties that people face. The previous crisis, for example, has really shown that even in very important financial decision like buying a house, that we thought was a common decision where people can make important mistakes. And we have seen how mistakes were done and they are very important, the consequential.

 

What we do see now in the current crisis is how few people at the buffer stock of savings. And like very vivid in our mind is the line of the food banks, but not far away from when the government, from when the economy shutdown. Two weeks after the economy shut down, all of the cars were lining up. And it happened by the way last year as well when the government shut down in January 2019. So again, people do not have not just the saving for the long term as you were saying to allow us to have a good retirement, but don't have saving for the short term.

 

Tom Wheelwright:

How much savings do you think the average person has?

 

Annamaria Lusardi:

Well, again, because of this wide inequality, we do know, and actually I can tell you in the recent work that we have done that at least as of January when the economy was really doing still well, 27%, so about 30% of the population would not have been able to come up with $2,000 if an unexpected expense would happen. So and this, we are talking about just the precautionary savings, right? There are also statistics that says a lot of people live hand to mouth. I don't know that the percentages are as big as what some of the people argue. But when we ask, for example, about, “Do you have a small buffer?” We don't see these. When we ask people, “Do you plan for retirement? Have you made provision for retirement?” Yet again, we see that from one-third to 40% of people normally say, “I'm not making enough provision for retirement.”

 

Tom Wheelwright:

Very interesting. So how do you think that this income inequality or wealth inequality, do you think that it contributes to the uprisings we're seeing? Whether it be in the Middle East or whether it be down Main Street or in Portland or wherever it is, where do you think this income inequality, how do you think that impacts all of this energy that we're feeling around the world of all of these uprisings and protests?

 

Annamaria Lusardi:

So it's not I have to say a topic I study necessarily, so this is not coming from an academic research. But I do think that very wide inequality is probably not good for society. So certainly it's not good for the individual, in particularly if we see that at the bottom end of that wealth or income inequality lies a lot of difficulties, lies a lot of anxiety. So one of the things I can say is that one of the survey we did back in 2018, and this is a survey when the economy was doing well, when we asked people about financial anxiety, how much they would worry about thinking about their finances and so on, so many people had anxiety and so many people were worried. So this is I think important to touch the pulse of what people can be doing.

 

And so if you're not able to make end meets and if you have a lot of difficulties in succeeding, in work you want to do, people want to do well. They want to be able to put food on the table, help their families, make sure that their children get a good education and so on. This is the thing has become so much harder. And so I can imagine that there is a lot of discontent in the U.S. and in other countries as well. And of course the discontent can become bigger if you see other people in a sense accumulating enormous amount of wealth while you are not able to come to the end of the month. Is this the main reason to do so? I really don't think it's very healthy potentially for a country to have a large amount of inequality, and in particularly, to have a high proportion of people not able to make it to the end of the month.

 

Tom Wheelwright:

I'll get back to this in a second. Hey, if you like financial education the way I do, you're going to love buck Joffrey's podcast. Buck's a friend of mine, he's a client of mine, he's a former board certified surgeon, and he's turned into a real estate professional. So he has this podcast that is geared towards high paid professionals. That's who he's geared towards. So if you're a high paid professional and you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financial educated. I'd like to take control of my money and my life and my taxes,” I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

I'm reading Ayn Rand's book, We the Living, which if you're familiar with that book was written as her first novel. And it was written about the Russian Revolution and post Russian Revolution back in the 19… Basically mostly takes place in the early 1920s. And basically, the Russian Revolution was about income and wealth inequality. I mean, fundamentally that revolution, I mean, Soviet means worker, and it's the workers' revolution against having this big wealth inequality, and it's a fascinating description because she lived through it, she was there while this was going on. She was a young girl when this was going on. And to look at that type of upheaval and what happened to those who had wealth, because of course they had all their wealth taken away. We saw the same thing in Zimbabwe, right? Zimbabwe, what happened was that they drove out… The white farmers had all of the assets, they had all of the wealth, like you say.

 

And so they said, “Well, we're going to take over all of that.” Well, the result in both those cases was not more wealth for the country. And so one of the things that it seems to me is that when you drive intellectual capital away, then you lose a lot by driving intellectual capital away. But if you have all the intellectual capital in a few hands that's very wealthy, then what's the 99% going to do? An it seems like they're going to have some kind of an uprising. There's going to be something that they're going to be challenged with. But do you see that that is something that could happen here if we don't address the inequality?

 

Annamaria Lusardi:

It's a very hard comment or prediction to make. I also think it's very important that one makes a distinction between inheriting wealth, or how the wealth is form. So there are of course large differences today with the wealth that people have. How much of the wealth for example is inherited? Is it that I am wealthy just because my parents are wealthy and I just therefore I don't do anything? Or is it because I'm wealthy because I am in the important part of the economy that produce a lot of work like technology? Right? And so depending on this type of think of decisioning, also, the question is, how do we regulate the wealth? And also, is it important for example, that we give more access to people to the type of skills that can generate the wealth?

 

It's interesting to see that finally some of this wealth accumulated by very young people, very young people that have these incredible skills like technology to be able to give us this incredible product that we all want and that is an important way to generate wealth. And is such so, when the amount of wealth becomes so big, much more than in a sense people can use it, put at work in their own firms, I think we do have an obvious policy questions about, we are after all a society that has specific needs, so how can we make sure that we share in some of that accumulation of wealth? And so these are important question. I do not have an answer and I do not have a prediction, but I think it's something that we are all thinking about.

 

Tom Wheelwright:

Okay. So let me put this to you; which would be in your mind more longterm successful in dealing with the wealth inequality, reallocating income from the wealthy to the poor or the less wealthy, so to speak, as Joe Biden would do, or Bernie Sanders would do. That's very much their plan, is to reallocate income. Is it that or is it financial literacy, education as a whole, or is it some combination? What do you think?

 

Annamaria Lusardi:

Well, I certainly would go for a combination in a sense that as I said, there is not a unique solution, and also, we don't need to have just one instrument to do policy. And I also want to go a little bit beyond financial literacy, but I do think actually that financial literacy is a very important skill that we need today, and I actually think that it's a very important for the 21st century that we invest in skills and in access to skills, and that we invest in human capital and in talents. So if I have to make those decisions, what I could really do, and what I would love to do is invest a lot in not just education, like in term of college or high school, but education at the very beginning. I would invest a lot in making sure that we develop well the talents that people have, irrespective of their income situation.

 

And I would make sure that we invest and continue to invest a lot in human capital, because that's, I think what really creates income at the end. But this is so unequally distributed. If you look at the school, they are becoming more and more segregated. But I do see so much talents everywhere. At GW, I see these first generation students, they're incredibly talented. They are so good and willing to work and acquiring these important skills that are now necessary. So I think thinking hard of how to give access to everybody to a really good education and making sure we foster the talents as well is incredibly important. In my center as well, I see that the people that we are able to mentor, or the people that we are able to follow more or perhaps because we have more experience, so we have more time, they are actually able to do better. They succeed more and they engage and they're going to do even better in their own career.

 

So I think some of these attention to talents and to be able to train and to offer a good education I think is very important. And secondly, let's not forget that we are all facing shocks, and that there are a lot of barriers to what we can do. And some of them are not only due to how good we are or how persistent we are. If I had bad health and I had a sequence of bad health shocks, I wouldn't probably be a university professor today. And if I had faced other adversity, I would not have been able to do so. So I think also as a society, there is a way in which we can share shocks, in which we can share bad luck, and I think we should do so. What's the purpose of the government otherwise? I think it's… And that's why of course we need also good redistributive policy because not all of this is just you two our willingness to work hard. It's also due to the ecosystem.

 

And let's also make sure that this ecosystem is as fair as possible. There are a lot of unfairness not just in the tax policy but around us. And so taking away some of that unfairness, I think can be very important.

 

Tom Wheelwright:

No, I agree. Like you, I've travel around the world quite a bit, speaking in many different countries. And when I look at a third world country versus a first world country, what I really primarily see is the education level of the middle class. And I see a bigger middle… The first world countries have a much bigger middle class, and that middle class seems to come from education. It's the old story of, “Do I give you a fish or do I teach you how to fish?” And when you talk about income versus wealth, income is giving the fish, and wealth is learning how to fish. And so you're in the accounting department so we can talk about accounting and even though I know you're an economist.

 

So from an accounting perspective, most people I think are very focused on income statement. So that's one of the financial statements. But when it comes to wealth, this is the balance sheet. This is where your assets and your liabilities are, and what most people have is, frankly, the poor tend to have nothing on their balance sheet, the middle class tend to have liabilities at least equal to their assets. So it's not they don't have assets on their balance sheets, it's that they have enough liabilities like boats and cars and homes, and like you say, student debt, student loan debt, those are liabilities. Those are things they owe the offset the assets that they have. And the assets that they have aren't typically income producing assets so the liabilities are just constantly draining their income.

 

So it seems to me like giving somebody money, I mean, we look at lottery winners, right? Giving somebody money isn't going to create longterm wealth for them, or people even earning a big income doesn't create longterm wealth for them. What really creates the wealth is like you say, it's the skill and the understanding and the knowledge to take that money that you earn and use it and actually build the assets on your balance sheet. So the question is, how do we actually get the financial literacy more equal? Because you're right. I mean, I totally agree. It's access to this access, to the financial literacy and also to all the skills, not just financial, but other skills, and like you say, intellectual capital, give them access. How do you think we do that? How do we accomplish that?

 

Annamaria Lusardi:

I think at least in two ways, and this we have seen it both here and in other countries. So first of all, you have probably already mentioned one, which is that we need to have financial literacy in the schools. If we don't have it, then the access will still be that the wealthy or the college educated families in a sense will transmit it to their children, but it will be much, much more unequally distributed. So having it in the schools allows this in universal access also to the people who do not come from wealth, and so we are able to get these skills. We see that a very strong link between financial literacy and financial literacy knowledge. So I think it's very important to start at the school and to start as early as possible because our financial education habits actually start very early.

 

So if you look at people, even the saving behavior of children happen very early. But of course, how about the adult population? I also think it's very important to do financial education, or we call it financial wellness at work. Adults are at work, and at work today, we are making many financial decisions. So for example, how much to save or contribute to a 401(k) to take advantage if we add it with the employer matches, or even how to manage for those who added their health insurance. Now the health insurance contract has a lot of financial components in it. High deductible, for example, and things like this. So we have to be very skilled and much more financially savvy than in the past. So I think this could be too important in scalable an initiative that could really reach a large part of the population. And I think it would actually be important to make sure that people have at least that basic skill.

 

Tom Wheelwright:

So you're familiar with my friend, Robert Kiyosaki. [inaudible 00:27:12] that he also in his mission in life is financial literacy. And he also developed the game called Cashflow, which we, for example, play in our office. So I love the idea of having doing financial education in the workplace because I think you're right. I think that schools for whatever reason have declined in large part financial education, financial literacy. And I don't know how you actually get them to do that. You're in that world, so I'm hoping that you can have some influence there. But in the workplace, this is something where all of our listeners are entrepreneurs or they want to be entrepreneurs. And I think this is a really good point.

 

This is something we can actually do in the workplace, whether it's playing Robert's Cashflow game, frankly, playing monopoly. Monopoly is a terrific financial education game. Absolutely one of the best, probably the most played financial education game ever in the history of the world. And interestingly enough, it was invented during the Great Depression. So I found that fascinating. And it even has a rule in it that's much like the fed. If you don't have enough, if you run out of cash, you can just print more, which is definitely what we decided to do in this country is that if you run out of cash, you just print more. So it's that by itself. I mean, all of that, doing that in the office, I think that's a great thing. I mean, even for the pandemic days, he even has an online version and there are online financial games that I think when people play games, they tend to learn a little differently than if they're just being told something. So what do you think about the idea of even playing games in a workplace like that?

 

Annamaria Lusardi:

It's a little bit tricky because I think it's not obvious sometime that the games are able to teach or that people take a game as seriously as they should, because I think people think of finance as in a sense, an important and serious topic, something that even brings them anxiety. I think games are a good way potentially to take away the hesitation that people have about finance, because that's also a topic in which they are scared or they think [inaudible 00:29:44] learn it and so on. So to me, the advantage of games is actually about the simulation part. In many decision, we don't get to do it many times. So in a lot of the financial decision, sometimes the learning by doing doesn't happen. I don't retire many times, I don't buy so many houses, or I don't go to go to college back. And so that learning can be very limited.

 

A game in a simulation can actually teach us how things work, and therefore how [inaudible 00:30:21] be done. For the workplace, we have actually done several programs on our website at GFLEC, at the Global Financial Literacy Excellence Center, we have several program that can be used for the workplace. And the importance there as well, I think, is to really do something that is of relevance and of importance to people. And one of the things I want to say, or at least they are actually three that you have already mentioned that people may have a lot of asset, but also many of these assets are leverage. And so in our experience, one of the things that worry people a lot even more than saving for retirement often is managing that.

 

And so I think the workplace financial education has to address the problem that people have, and by addressing them holistically, what are some of the problems I think we can also then achieve, for example, some of the other decision which is making people being on a financial safe footing and making people as well save for retirement. And so a game might only address one things rather than all of them. And so we want to make sure as well that we address the concerns that people have. And finally, I also want to say, well, but an employer can say, “Why should I use the time, perhaps even the working time [inaudible 00:31:46] my workers play games, or why should I even help them save for retirement? I'm not a bank. I'm not their own financial advisor. Why do we have to take up that job?”

 

And I would highly recommend that they indeed take up the job for two reason. Actually, people which have financial worries are not as productive at work. And I can tell you this because we did a survey recently of how many hours people spend during the week dedicated to financial decision and how many of them at work as well, People do spend in a sense productive hours potentially making decision or being worried about decisions, financial decisions, so they are not as productive. And it's also a way today to take care of your workers, to make sure that they grow, they do well. And so it's a win-win. It's not that employer are doing charities here or are doing a good thing just to do it. It's actually an important things to make workers succeed, do well and do well for the firm as well.

 

Tom Wheelwright:

I could never have said that as well as you just did. So thank you, Dr. Lusardi. If anybody wants more information about your Global Financial Literacy Excellence Center, you call it GFLEC I think. If somebody wants more information about you or what you're doing in financial literacy wise, where would they go?

 

Annamaria Lusardi:

Yes, they can go on that website, is www.gflec.org. And in there we have posted all of our research, but also all of our programs. We do program for the workplace, so they would find information about that program. I have posted all of my lecture notes for personal finance. I teach personal finance in the accountancy department. And because we're also passionate about adding financial literacy in the school and we think that everybody could contribute to having financial literacy in the school, [inaudible 00:33:56] just ask your school district to add it. We also have a website called Fast Lane, also on the GFLEC website where we provide all of the information that is needed. If you want to start the financial literacy program in your school district, we call it Fast Lane because we want to put students on the fast lane to financial security.

 

Tom Wheelwright:

I love that. Thank you so much, Dr. Lusardi. It's absolutely been a pleasure and a privilege speaking with you today. Thank you for taking time for us. Just remember, everybody, that when you get financial literacy, when you really understand financial education, the difference between a balance sheet and income statement, there difference between wealth and income, and when you teach it and take time to teach it to other people, the end result, frankly, you're going to make way more money, and in the end, you're going to pay way less taxes. Thanks everyone. We'll see you next time.

 

 

 

 

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