Wealth inequality in the US seems to be the crisis of our time judging by the volume of articles on the web and in newspapers and magazines devoted to the topic. As the 2016 presidential race heats up, we’ll undoubtedly be hearing more about wealth inequality as candidates try to convince us of how in touch they are with the ‘common man’. Always the contrarian, the Unrepentant Capitalist wonders how big a problem wealth inequality really is.
As a quick refresher—wealth inequality is the unequal distribution of wealth across all households. Wealth or net worth is a family’s assets (savings, stocks, homes) minus liabilities (mortgages and other debts). Assets greater than liabilities means a positive net worth. According to a study by Edward Wolff at the Levy Institute of Economics at Bard College, as of 2010, the top 10% of richest Americans owned 77% of the nation’s wealth; the top 1% owned 35%. As the stock market is up roughly 2x since 2010, and since the rich tend to disproportionately own stocks relative to the poor, Wolff’s 2010 figures undoubtedly understate wealth inequality today.
Okay, no argument, wealth is distributed very unevenly across the US, but is this bad? How much inequality is too much? Honestly, I don’t know. But I do know that some amount of wealth inequality is inevitable, and is actually necessary.
To better understand wealth inequality, one needs to take a closer look at who the rich and poor are. Data compiled by our friends at the US Census (see ‘Distribution of Net Worth, By Net Worth Quintiles and Selected Characteristics: 2011’) groups all households into five (5) net worth buckets or quintiles (20% chunks) from low to high and provides various break downs of those households by things like age, education, marital status, etc.
So who are the rich? The Census data tells us the richest group are 65 years and over, are married, are home owners, and have a bachelor’s degree or higher. Makes sense right? Those over 65, have had many years to accumulate stocks, bonds, and other savings, have watched those financial assets grow over the years via the compound effect, and have been able to pay-off their homes that have most likely appreciated in value over time. On top of being difficult emotionally, a divorce can do a real (bad) number on your finances. Any number of studies show that an individual’s lifetime earnings are directly related to their level of education. Not only does it make sense that older people will have a higher net worth, people approaching retirement need their higher net worth to live on when they’re retired.
So who are the poor? From the Census data, the strongest correlation to net worth is age. No surprise, the ‘less than 35 years’ age group have the lowest net worth. Young families with car loans, school loans, credit card debt, etc. will often times have a negative net worth as they start their adult lives. Important side note – when you see those stats about how a handful of rich have a net worth equal to a large number of families at the bottom of the net worth continuum, remember many of those at the bottom have understandably no or low net worth owing to their ‘new family’ status. Makes for an eye-popping headline (especially if you don’t take a deeper dive into the data.)
When I hear about the downside from wealth inequality, people cite their moral outrage by the disparity as it offends their sense of fairness, but I’ve seen precious little on how wealth inequality actually impacts the economy in a negative way. I might be able to get behind the ‘fight wealth inequality’ cause if someone could tell me how wealth inequality hurts the economy. Are the poor poor because the rich are rich? I’ve yet to see much in the way of supporting evidence.
So our wealth inequality is heavily driven by older, married, well-educated, home owners—sounds like a bunch of ne’er-do-wells to me—let’s grab our pitchforks and torches.