Wealth inequality in the United States

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Wealth inequality in the United States (also known as the wealth gap[1]) refers to the unequal distribution of assets among residents of the United States. Wealth includes the values of homes, automobiles, personal valuables, businesses, savings, and investments.[2] Just prior to President Obama's 2014 State of the Union Address, media[3] reported that the top wealthiest 1% possess 40% of the nation’s wealth; the bottom 80% own 7%; similarly, but later, the media reported, the "richest 1 percent in the United States now own more wealth than the bottom 90 percent".[4] The gap between the top 10% and the middle class is over 1,000%; that increases another 1000% for the top 1%. The average employee "needs to work more than a month to earn what the CEO earns in one hour."[5] Although different from income inequality, the two are related. In Inequality for All—a 2013 documentary with Robert Reich in which he argued that income inequality is the defining issue for the United States—Reich states that 95% of economic gains went to the top 1% net worth (HNWI) since 2009 when the recovery allegedly started.[6]

A 2011 study found that US citizens across the political spectrum dramatically underestimate the current US wealth inequality and would prefer a far more egalitarian distribution of wealth.[7]

Wealth is usually not used for daily expenditures or factored into household budgets, but combined with income it comprises the family's total opportunity "to secure a desired stature and standard of living, or pass their class status along to one's children".[8] Moreover, "wealth provides for both short- and long-term financial security, bestows social prestige, and contributes to political power, and can be used to produce more wealth."[9] Hence, wealth possesses a psychological element that awards people the feeling of agency, or the ability to act. The accumulation of wealth grants more options and eliminates restrictions about how one can live life. Dennis Gilbert asserts that the standard of living of the working and middle classes is dependent upon income and wages, while the rich tend to rely on wealth, distinguishing them from the vast majority of Americans.[10] A September 2014 study by Harvard Business School declared that the growing disparity between the very wealthy and the lower and middle classes is no longer sustainable.[11]

Statistics[edit]

The distribution of net wealth in the United States, 2007. The chart in 2007 was divided into the top 20% (blue), upper middle 20% (orange), middle 20% (red), and bottom 40% (green). (The net wealth of many people in the lowest 20% is negative because of debt.)[12] By 2014 the wealth gap deepened.

In 2007, the top 10% wealthiest possessed 80% of all financial assets.[13] In 2007 the richest 1% of the American population owned 34.6% of the country's total wealth, and the next 19% owned 50.5%. Thus, the top 20% of Americans owned 85% of the country's wealth and the bottom 80% of the population owned 15%. In 2011, financial inequality was greater than inequality in total wealth, with the top 1% of the population owning 42.7%, the next 19% of Americans owning 50.3%, and the bottom 80% owning 7%.[14] However, after the Great Recession which started in 2007, the share of total wealth owned by the top 1% of the population grew from 34.6% to 37.1%, and that owned by the top 20% of Americans grew from 85% to 87.7%. The Great Recession also caused a drop of 36.1% in median household wealth but a drop of only 11.1% for the top 1%, further widening the gap between the top 1% and the bottom 99%.[12][14][15]

According to PolitiFact and others, in 2011 the 400 wealthiest Americans "have more wealth than half of all Americans combined."[16][17][18][19] Inherited wealth may help explain why many Americans who have become rich may have had a "substantial head start".[20][21] In September 2012, according to the Institute for Policy Studies, "over 60 percent" of the Forbes richest 400 Americans "grew up in substantial privilege".[22]

In 2013 wealth inequality in the U.S. was worse than in most developed countries other than Switzerland and Denmark.[23] In the United States, the use of offshore holdings is exceptionally small compared to Europe, where much of the wealth of the top percentiles is kept in offshore holdings.[24] While the statistical problem is European wide, in Southern Europe statistics become even more unreliable. Less than a thousand people in Italy have declared incomes of more than 1 million euros. Former Prime Minister of Italy described tax evasion as a "national pastime".[25][26] According to a 2014 Credit Suisse study, the ratio of wealth to household income is the highest it has been since the Great Depression.[27]

Wealth and income[edit]

There is an important distinction between income and wealth. Income refers to a flow of money over time in the form of a rate (per hour, per week, or per year); wealth is a collection of assets owned. In essence, income is specifically what people receive through work, retirement, or social welfare whereas wealth is what people own.[28] While the two are seemingly related, income inequality alone is insufficient for understanding economic inequality for two reasons:

  1. It does not accurately reflect an individual's economic position
  2. Income does not portray the severity of financial inequality in the United States.

The United States Census Bureau formally defines income as "received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc.[29] By this official measure, the wealthiest families have low income but the value of their assets earns enough money to support their lifestyle. Dividends from trusts or gains in the stock market do not fall under the definition of income but are the primary money flows for the wealthy. Retired people also have little income but usually have a higher net worth because of money saved over time.[30]

Artist's depiction of U.S. wealth inequality in 2013.

Additionally, income does not capture the extent of wealth inequality. Wealth is derived over time from the collection of income earnings and growth of assets. The income of one year cannot encompass the accumulation over a lifetime. Income statistics view too narrow a time span for it to be an adequate indicator of financial inequality. For example, the Gini coefficient for wealth inequality increased from 0.80 in 1983 to 0.84 in 1989. In the same year, 1989, the Gini coefficient for income was only 0.52.[30] The Gini coefficient is an economic tool on a scale from 0 to 1 that measures the level of inequality. 1 signifies perfect inequality and 0 represents perfect equality. From this data, it is evident that in 1989 there was a discrepancy about the level of economic disparity with the extent of wealth inequality significantly higher than income inequality. Recent research shows that many households, in particular those headed by young parents (younger than 35), minorities, and individuals with low educational attainment, display very little accumulation. Many have no financial assets and their total net worth is also low.[31]

According to the Congressional Budget Office, between 1979 and 2007 incomes of the top 1% of Americans grew by an average of 275%. ... (Note: The IRS insists that comparisons of adjusted gross income pre-1987 and post-1987 are complicated by large changes in the definition of AGI [32])[33] In 2009, people in the top 1% of taxpayers made of $343,927 or more.[34][35][36] According to US economist Joseph Stiglitz the richest 1% of Americans gained 93% of the additional income created in 2010.[37] [38] People in the top 1% are three times more likely to work more than 50 hours a week, they are more likely to be self-employed, and they earn a fifth of their income as capital income.[39] The top 1% is composed of many professions and has an annual turnover rate of more than 25%.[40] The five most common professions are managers, physicians, administrators, lawyers, and teachers.[39]

Wealth inequality and child poverty[edit]

The poor U.S. showing in 2013 UNICEF data on the well-being of children in 35 developed nations—with the United States at 34 out of 35 (Romania is worse)—may reflect growing income inequality.[41]

Causes of wealth inequality[edit]

Some primary causes contributing to the creation and persistence of wealth inequality include:

  1. Monetary policy
  2. Financial resources
  3. Money allocation
  4. Higher rate of savings and hence asset accumulation by the wealthy
  5. Higher net rate of return to assets owned by the rich (the wealthy may have special knowledge, and the level of fees and other charges on their savings will be less than those with small investments)
  6. Lower credit costs and credit constraints for the wealthy. Access to credit at lower rates enhances the level of profits and scope of investment opportunities
  7. Inflation
  8. Tax policy
  9. Decline in unionization

Essentially, the wealthy possess greater financial opportunities that allow their money to make more money. Earnings from the stock market or mutual funds are reinvested to produce a larger return. Over time, the sum that is invested becomes progressively more substantial. Those who are not wealthy, however, do not have the resources to enhance their opportunities and improve their economic position. Rather, "after debt payments, poor families are constrained to spend the remaining income on items that will not produce wealth and will depreciate over time."[42] Scholar David B. Grusky notes that "62 percent of households headed by single parents are without savings or other financial assets".[43] Net indebtedness generally prevents the poor from having any opportunity to accumulate wealth and thereby better their conditions.

Notably, for both the wealthy and not-wealthy, the process of accumulation or debt is cyclical. The rich use their money to earn larger returns and the poor have no savings with which to produce returns or eliminate debt. Unlike income, both facets are generational. Wealthy families pass down their assets allowing future generations to develop even more wealth. The poor, on the other hand, "are less able to leave inheritances to their children leaving the latter with little or no wealth on which to build…This is another reason why wealth inequality is so important- its accumulation has direct implications for economic inequality among the children of today's families."[42]

Corresponding to financial resources, the wealthy strategically organize their money so that it will produce profit. Affluent people are more likely to allocate their money to financial assets such as stocks, bonds, and other investments which hold the possibility of capital appreciation. Those who are not wealthy are more likely to have their money in savings accounts and home ownership.[44] This difference comprises the largest reason for the continuation of wealth inequality in America: the rich are accumulating more assets while the middle and working classes are just getting by. Currently, the richest 1% hold about 38% of all privately held wealth in the United States.[13] while the bottom 90% held 73% of all debt.[42] According to the New York Times, the "richest 1 percent in the United States now own more wealth than the bottom 90 percent".[4]

As the price of commodities increases because of inflation, a larger percentage of lower-class people's money is spent on things they need to survive and go to work, such as food and gasoline. Most of the working poor are paid fixed hourly wages that do not keep up with rises in prices, so every year an increasing percentage of their income is consumed until they have to go into debt just to survive.[citation needed] At this point, their little wealth is owed to lenders and banking institutions.

The distributive nature of tax policy has been suggested by some economists and politicians such as Emmanuel Saez, Thomas Piketty, and Barack Obama to perpetuate economic inequality in America by steering large sums of wealth into the hands of the wealthiest Americans. This claim has created much controversy and debate within the academic and political spheres.

Main article: Unions

The economist Joseph Stiglitz argues that "Strong unions have helped to reduce inequality, whereas weaker unions have made it easier for CEOs, sometimes working with market forces that they have helped shape, to increase it." The long fall in unionization in the U.S. since WWII has seen a corresponding rise in the inequality of wealth and income. [45]

Racial disparities[edit]

There are vast differences in wealth across racial groups in the United States. The wealth gap between white and black families nearly tripled from $85,000 in 1984 to $236,500 in 2009.[46]

There are many causes, including years of home ownership, household income, unemployment, and education but inheritance might be the most important.[46] Inheritance can directly link the disadvantaged economic position and prospects of today's blacks to the disadvantaged positions of their parents' and grandparents' generations. According to a report done by Robert B. Avery and Michael S. Rendall, one in three white households will receive a substantial inheritance during their lifetime compared to only one in ten black households.[47] This relative lack of inheritance that has been observed among African Americans can be attributed in large part to factors such as- unpaid labor (slavery), violent destruction of personal property in incidents such as Red Summer of 1919, unequal opportunity in education and employment (racial discrimination), and more recent policies such as redlining and planned shrinkage. Other ethnic minorities, particularly those with darker complexions, have at times faced many of these same adversities to various degrees.[48]

Effect on democracy[edit]

A 2014 study by researchers at Princeton and Northwestern concludes that government policies reflect the desires of the wealthy, and that the vast majority of American citizens have "minuscule, near-zero, statistically non-significant impact upon public policy . . . when a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose."[49] When Fed chair Janet Yellen was questioned by Bernie Sanders about the study at a congressional hearing in May 2014, she responded “There’s no question that we’ve had a trend toward growing inequality” and that this trend “can shape [and] determine the ability of different groups to participate equally in a democracy and have grave effects on social stability over time.”[50]

In Capital in the Twenty-First Century, French economist Thomas Piketty argues that "extremely high levels" of wealth inequality are "incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies" and that "the risk of a drift towards oligarchy is real and gives little reason for optimism about where the United States is headed."[51]

See also[edit]

References[edit]

  1. ^ Rugaber, Christopher S.; Boak, Josh (January 27, 2014). "Wealth gap: A guide to what it is, why it matters". AP News. Retrieved January 27, 2014. 
  2. ^ Hurst, Charles E. (2007), Social Inequality: Forms, Causes, and Consequences, Pearson Education, Inc., p. 31, ISBN 0-205-69829-8 
  3. ^ Boyer, Dave (January 24, 2014), "Obama to use State of the Union as opening salvo in 2014 midterms", Washington Times, retrieved January 26, 2014 
  4. ^ a b Kristof, Nicholas (July 22, 2014). "An Idiot’s Guide to Inequality". New York Times. Retrieved July 22, 2014. 
  5. ^ Marsden, William (January 26, 2014), Obama’s State of the Union speech will be call to arms on wealth gap, retrieved January 26, 2014 
  6. ^ Svaldi, Aldo (January 11, 2014), "Robert Reich: Income inequality the defining issue for U.S.", The Denver Post, retrieved January 26, 2014 
  7. ^ Norton, M.I.; Ariely, D. (2011). "Building a Better America – One Wealth Quintile at a Time" (PDF). Perspectives on Psychological Science 6: 9–12. doi:10.1177/1745691610393524.  (video)
  8. ^ Grusky, David B. Social Stratification: Class, Race, and Gender in Sociological Perspective, page 637. Westview Press, 2001 ISBN 0-8133-6654-2
  9. ^ Keister, page 64
  10. ^ Gilbert, D. (1998). The American Class Structure: In an Age of the Growing Inequality. Belmont, CA: Wadsworth.
  11. ^ America's wealth gap 'unsustainable,' may worsen: Harvard study. Reuters, September 8, 2014.
  12. ^ a b Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007 by Edward N. Wolff, Levy Economics Institute of Bard College, March 2010
  13. ^ a b Hurst, page 34
  14. ^ a b Occupy Wall Street And The Rhetoric of Equality Forbes November 1, 2011 by Deborah L. Jacobs
  15. ^ Wealth, Income, and Power by G. William Domhoff of the UC-Santa Barbara Sociology Department
  16. ^ Kertscher, Tom; Borowski, Greg (March 10, 2011). "The Truth-O-Meter Says: True - Michael Moore says 400 Americans have more wealth than half of all Americans combined". PolitiFact. Retrieved August 11, 2013. 
  17. ^ Moore, Michael (March 6, 2011). "America Is Not Broke". Huffington Post. Retrieved August 11, 2013. 
  18. ^ Moore, Michael (March 7, 2011). "The Forbes 400 vs. Everybody Else". michaelmoore.com. Archived from the original on 2011-03-09. Retrieved August 11, 2013. 
  19. ^ Pepitone, Julianne (September 22, 2010). "Forbes 400: The super-rich get richer". CNN. Retrieved August 11, 2013. 
  20. ^ Bruenig, Matt (March 24, 2014). "You call this a meritocracy? How rich inheritance is poisoning the American economy". Salon. Retrieved August 24, 2014. 
  21. ^ Staff (March 18, 2014). "Inequality - Inherited wealth". The Economist. Retrieved August 24, 2014. 
  22. ^ Pizzigati, Sam (September 24, 2012). "The 'Self-Made' Hallucination of America's Rich". Institute for Policy Studies. Retrieved August 24, 2014. 
  23. ^ Weissmann, Jordan (March 11, 2013). "Yes, U.S. Wealth Inequality Is Terrible by Global Standards". The Atlantic. Retrieved 16 March 2013. 
  24. ^ Peter Baldwin (2009). The narcissism of minor differences: how America and Europe are alike. Oxford University Press. ISBN 978-0-19-539120-6
  25. ^ Tax evasion is a national pastime afflicting southern Europe. CNN. November 02, 2011
  26. ^ Low-Income Italians Own An Awful Lot Of Supercars, Private Jets And Yachts. Business Insider. January 12, 2012
  27. ^ Mark Gongloff (October 14, 2014). Key Inequality Measure The Highest Since The Great Depression. The Huffington Post. Retrieved October 14, 2014.
  28. ^ Grusky, page 637
  29. ^ U.S. Census Bureau, Housing and Household Economic Statistics Division (December 20, 2005). Income Overview. Retrieved December 2, 2007, from http://www.census.gov/hhes/www/income/about/index.html
  30. ^ a b Keister, page 65
  31. ^ Federal Reserve Bank of Chicago, Savings of Young Parents, December 2000
  32. ^ led to households in the top income quintile reporting a lot more of their income in their individual income tax form's AGI, rather than reporting their business income in separate corporate tax returns, or not reporting certain non-taxable income in their AGI at all, such as municipal bond income. Anyone who wants to discuss incomes in the U.S. fairly must include a chart of all available data split by quintile up to the mid-1980's. That should be followed by a chart from 1990 to 2011. The five-year gap would avoid the major AGI definition changes. The big picture of this subject is not just a segment of all available data starting in 1979, especially after the IRS warned about the large AGI definition changes in the late 1980's). In addition, IRS studies consistently show a majority of households in the top income quintile have moved to a lower quintile within one decade. There are even more changes to households in the top 1%. Without including those data here, a reader is likely to assume households in the Top 1% are almost the same from year to year.
  33. ^ It's the Inequality, Stupid By Dave Gilson and Carolyn Perot in Mother Jones, March/April 2011 Issue
  34. ^ Who are the 1 percent?, CNNMoney.com, October 29, 2011
  35. ^ "Tax Data Show Richest 1 Percent Took a Hit in 2008, But Income Remained Highly Concentrated at the Top." Center on Budget and Policy Priorities. Accessed October 2011.
  36. ^ Top Earners Doubled Share of Nation’s Income, Study Finds New York Times By Robert Pear, October 25, 2011
  37. ^ An ordinary Joe, The Economist, June 23, 2012
  38. ^ The Price of Inequality: How Today's Divided Society Endangers Our Future, Stiglitz, J.E.,(2012) W.W. Norton & Company, ISBN 978-0393088694
  39. ^ a b The Top 1 Percent - What Jobs Do They Have?. New York Times January 14, 2012
  40. ^ Divided We Stand: Why Inequality Keeps Rising. OECD (2011)
  41. ^ Fisher, Max (April 15, 2013), "Map: How 35 countries compare on child poverty (the U.S. is ranked 34th)", Washington Post, retrieved January 26, 2014 
  42. ^ a b c Hurst, page 36
  43. ^ Grusky, page 640
  44. ^ Hurst, page 34-35
  45. ^ Stiglitz, Joseph E. (2012-06-04). The Price of Inequality: How Today's Divided Society Endangers Our Future (Kindle Locations 1148-1149). Norton. Kindle Edition.
  46. ^ a b Thomas Shapiro; Tatjana Meschede; Sam Osoro (February 2013). "The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide". Research and Policy Brief. Brandeis University Institute on Assets and Social Policy. Retrieved 16 March 2013. 
  47. ^ Avery, Robert B.; Rendall, Michael S. (2002), Lifetime Inheritances of Three Generations of Whites and Blacks 107, The University of Chicago Press 
  48. ^ Keister, Lisa A. (2004), Race, Family Structure, and Wealth: The Effect of Childhood Family on Adult Asset Ownership 47, University of California Press 
  49. ^ Oligarchy, not democracy: Americans have ‘near-zero’ input on policy – report. RT, April 15, 2014. See also: Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
  50. ^ John Nichols (7 May 2014). Bernie Sanders Asks Fed Chair Whether the US Is an Oligarchy. The Nation. Retrieved 8 May 2014.
  51. ^ Piketty, Thomas (2014). Capital in the Twenty-First Century. Belknap Press. ISBN 067443000X pp. 26, 514

External links[edit]