June 20, 2012
Inequality has been receiving a fair amount of attention in recent years. Even before the Great Recession hit, a number of researchers and academics were sharing observations on the divergent paths of those in the middle and on the bottom compared to those at the top and very top. Median wages have been relatively stagnant, and, more importantly, had become divorced from productivity gains. And while poverty has persisted for large segments of the population, the share of income controlled by those at the top has continued to climb. These have been long-term trends which began to take shape in the early 1980s. Two questions have been on my mind. First, what about wealth? Second, what’s the connection between the Great Recession and inequality in America?
I’ve posed these questions to Tim Noah, whose recent book, The Great Divergence, has helped elevate the discussion of inequality in America. Tim recently posted a response on his informative and insightful blog. But I didn’t like his answers.
In his book, Tim limits his discussion of inequality to the distribution of income. I think this fails to capture the full extent of the phenomenon. In some ways, I understand the choice. We have much better data for income than we do for wealth and traditionally that is where the research on inequality has focused. Still, income is only part to the story, and I fear Tim has needlessly limited his inquiry. It reminds me of looking for something where the light is brightest even though it was lost somewhere else.
New data from the Federal Reserve make it clear that wealth has assumed a leading role in the inequality story. Their Survey of Consumer Finances offers one of the fullest accounts of the family balance sheet. Unfortunately, it is conducted only every three years. The good news is that the last two surveys (2007 and 2010) offer a means to examine the impact of the Great Recession.
Here is what the Fed reported about the changes in wealth holdings. Between 2007 and 2010, the average family saw their wealth decline 39 percent. That is a sentence that deserves to be bolded. This far outpaced the 8% drop of income the average family experienced. The 39% drop in wealth speaks to the severity of the recession and it did get front page treatment on a number of news outlets. But the impact was not experienced equally. Families in the top ten percent by income actually saw their net worth increase almost two percent.
Those at the top had their wealth holdings increase and almost everybody else experienced a drastic decline. That’s inequality by definition. Check out the visual:
Here’s another perspective on the same phenomenon. This time the families are ranked by their net worth holdings rather than income. Those in the bottom 25% had their (admittedly small) wealth holdings completely wiped out. Families in the next three groups experienced big drops but at increasingly declining rates. The top 10% were relatively immune from the impact of the Great Recession, experiencing a wealth loss of 6.4%.
These charts offer new and illuminating information. While we have known for years that median incomes have stagnated even as there were income gains at the very top, the re-concentration of wealth is an emerging phenomenon. And it appears that the Great Recession has changed the dynamics at play.
Tim writes on his excellent blog that he can’t get too worked up about this for a number of reasons, almost all of which I find surprising. First, he argues that the wealth was ephemeral; reflecting elevated home values that were inflated by the housing bubble. Yes, some of the wealth that appeared on family balance sheets was derived from housing. Those in the middle held their wealth primarily in homes, while those at the top had more diversified portfolios. And now it is the very divergence of home values and stock prices that has become and will continue to be a primary driver of inequality in the foreseeable future. This matters because public policy efforts have focused on stabilizing the financial markets but have failed to help families whose assets have been eroded (through no fault of their own) by the instability of housing markets.
And not all of the lost home equity was a result of the housing bubble. People are worse off than they were before the housing bubble took hold. The net worth of the average family is 27% below where it was in 2001. That is not just a lost decade; it is a debacle and a major blow to the middle class. The tragedy here is that the subprime virus inflected the whole housing market, and needlessly trapped millions of unsuspecting families.
Second, he writes that most people don’t have much wealth, arguing that when they own a home, they really are in debt. This is an odd claim because historically homes are a natural part of the wealth building process. Home equity gets built up over time as mortgages are paid off, and this equity can strategically be tapped to seize other opportunities, such as putting children through college. It is hardly fair to say, as Tim does, that the value of those houses had always been an illusion. Some people have indeed lost their homes, but even those that did not have lost significant pieces of their wealth portfolio that they were counting on.
Unlike Tim, I think wealth is consequential, and thus it is a significant public policy issue if its distribution is becoming increasingly skewed. Wealth, more broadly considered, can mean different things to different people. At the low end, we usually don’t think of it as wealth but rather as savings or access to resources that can be tapped strategically. Increasing savings and assets, along with income, is one of the keys to economic stability and upward mobility. Even small amounts can prevent debilitating downward spirals that might be triggered by a job loss or income event. The recession has actually provided support for the claim that asset holdings help people cope with unexpected events and increase their resiliency. In this respect, wealth and assets are a very significant measure of economic well-being, one that will become increasingly important as income volatility rises with declines in job stability.
And for those in the middle, wealth and assets are a foundation of economic security. There’s a strong a case to be made that the wealth lost in the Great Recession hit those in the middle and upper-middle class the hardest. Just look at the charts. These families may not have had massive wealth holdings to begin with but these assets were going to be used to send children to college or build a bridge to a secure retirement. Many families have been forced to revise their plans.
These trends are extremely relevant to current public policy debates. Contrary to Tim’s claim, the government does not only tax income, we tax wealth in many forms, including property taxes and capital gains. We also forgive taxes on some wealth if it is accruing in special accounts, such as a wide array of accounts associated with retirement. The regressive distribution of tax expenditures, which confers many advantages to high-income and high-wealth households, should be considered in the coming fiscal policy debates. In fact, it is likely the key to any large fiscal policy deal.
I would have thought that the consequences of wealth and the fact that its distribution has become increasingly unequal would have been of more interest to someone writing a book on inequality in America. It does not seem like such a stretch to see how the consolidation of wealth tips the scales of power toward the few in ways that might undermine our democracy and cut off pathways to economic mobility and security. We should be collectively concerned about creating opportunities for more families to build up their wealth holdings. It is a big problem if it is happening only at the very top.