Here are the headline findings of a new study on inequality by NYU’s Edward Wolff:
I find that median wealth plummeted over the years 2007 to 2010, and by 2010 was at its lowest level since 1969. … Hispanics, in particular, got hammered by the Great Recession in terms of net worth and net equity in their homes. Households under age 45 also got pummeled by the Great Recession, as their relative and absolute wealth declined sharply from 2007 to 2010.
In short, if a lot of your net worth was tied up in your home, look out below. This is also why wealth inequality increased during the Great Recession and its aftermath. More of middle-class net worth was housing-based than that of the rich:
But I predict less attention will be given to Wolff’s findings about wealth inequality over the longer term. He determines that it was “relatively stable” from 1989 through 2007.
Wealth inequality in 1983 was quite close to its level in 1962. Then, after rising steeply between 1983 and 1989, it remained virtually unchanged from 1989 to 2007.
Wait, what? I thought this was a New Gilded Age due to the rise in inequality? Look at this much-cited income inequality chart by Thomas Piketty and Emmanuel Saez, which shows decades of rising inequality:
But it turns out that income inequality and wealth inequality show different trends. The huge jump in asset prices during the 1980s boosted the wealth of top-tier taxpayers, but as more regular folks got into the stock market, they benefited, too. The Ownership Society at work. Wolff:
On the basis of the Standard & Poor (S&P) 500 index, stock prices surged 171% between 1989 and 2001. Stock ownership spread and by 2001 over half of U.S. households owned stock either directly or indirectly.
See, income has a tendency to fluctuate a lot from year to year and looking at that only seems a narrow way of measuring inequality. Why not also look at wealth—all financial and nonfinancial assets? Wolff thinks that’s a good idea:
Most studies have looked at the distribution of well-being or its change over time in terms of income. However, family wealth is also an indicator of well-being, independent of the direct financial income it provides.
There are six reasons First, owner-occupied housing provides services directly to their owner. Second, wealth is a source of consumption, independent of the direct money income it provides, because assets can be converted directly into cash and thus provide for immediate consumption needs. Third, the availability of financial assets can provide liquidity to a family in times of economic stress, such as occasioned by unemployment, sickness, or family break-up. Fourth, as the work of Conley (1999) has shown, wealth is found to affect household behavior over and above income. Fifth, as Spilerman (2000) has argued, wealth generated income does not require the same trade offs with leisure as earned income. Sixth, in a representative democracy, the distribution of power is often related to the distribution of wealth. As a result it is important to consider developments in personal wealth along with both income and poverty when evaluating changes in well-being over time.
In another study, Saez created a revealing chart documenting the ups and downs of US wealth over the past century:
Saez and co-author Wojciech Kopczuk: “Our series show that there has been a sharp reduction in wealth concentration over the 20th century: the top 1 percent wealth share was close to 40 percent in the early decades of the century but has fluctuated between 20 and 25 percent over the last three decades.”
Saez and Kropczuk cite a number of possible reasons for the big decline: a) the democratization of stock ownership, b) the emergence of a large middle class in the post-World War II period, c) higher income and estate taxes, and d) the equalization of wealth across genders.
Now, I am not saying there hasn’t been a rise in US income inequality, something that has happened across advanced economies in recent decades. But this is a multifactor issue, according to economist Daren Acemoglu:
One is that technology has become even more biased towards more skilled, higher earning workers than before. So, all else being equal, that will tend to increase inequality. Secondly, we’ve been going through a phase of globalisation. Things such as trading with China – where low-skill labour is much cheaper – are putting pressure on low wages. Third, and possibly most important, is that the US education system has been failing terribly at some level.
We haven’t been able to increase the share of our youth that completes college or high school. It’s really remarkable, and most people wouldn’t actually guess this, but in the US, the cohorts that had the highest high-school graduation rates were the ones that were graduating in the middle of the 1960s. Our high-school graduation rate has actually been declining since then. If you look at college, it’s the same thing. This is hugely important, and it’s really quite shocking. It has a major effect on inequality, because it is making skills much more scarce then they should be.
Wealth inequality data shows the entire inequality issue is much more complicated than saying the rich have been getting richer, the poor poorer — and it’s because the 1% stole all the money.