Must-Read: Y. Berman, O. Peters and A. Adamou: Far from Equilibrium: Wealth Reallocation in the United States

Must-Read: Well, well, well–since the 1980s modeling the U.S. wealth distribution as an endless non-ergodic inegalitarian spiral seems to fit rather well. That’s a genuine surprise…

Y. Berman, O. Peters and A. Adamou: Far from Equilibrium: Wealth Reallocation in the United States: “We fit observed distributions of wealth–how many people have how much–to a model of noisy exponential growth and reallocation…

…Everyone’s wealth is assumed to follow geometric Brownian motion (GBM), enhanced by a term that collects from everyone at a rate in proportion to his wealth and redistributes the collected amount evenly across the population. We use US data from 1917 until 2012. Firstly, we find that the best-fit reallocation rate has been negative since the 1980s, meaning everyone pays the same dollar amount and the collected amount is redistributed in proportion to his wealth, a flow of wealth from poor to rich. This came as a big surprise: GBM on its own generates indefinitely increasing inequality, and one would expect this extreme model to require a correction that reduces the default tendency of increasing inequality. But that’s not the case: recent conditions are such that GBM needs to be corrected to speed up the increase in wealth inequality if we want to describe the observations. Secondly, our model has an equilibrium (ergodic) distribution if reallocation is positive, and it has no such distribution if reallocation is negative. Fitting the reallocation rate thus asks the system: are you ergodic? And the answer is no. With current best-fit parameters the model is non-ergodic, and throughout history whenever the parameters implied the existence of an ergodic distribution, their values implied equilibration times on the order of decades to centuries, so that the equilibrium state had no practical relevance. http://arXiv:1605.05631


Brad DeLong
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