Tuesday, January 20, 2015

The Two Americas - For Richer and Poorer

A recent report by Credit Suisse Research Institute examines the changes in global household wealth over the past year.  Here is a brief summary with an emphasis on the statistics for the United States as well as a brief look at how poverty levels and the distribution of income have changed in the U.S. over the past four decades.  Please note that all currency amounts are in United States dollars and that net worth or wealth is defined as the value of financial assets plus real assets (i.e. real estate) minus household debt.

Global wealth per adult increased to $56,000, up by $3450 over the year.  Total global household wealth increased by 8.3 percent to $263 trillion with global wealth now 39 percent above its 2008 low and 20 percent above its pre-Great Recession peak.  Credit Suisse estimates that aggregate global wealth is likely to rise by nearly 40 percent over the next five years, hitting $369 million in 2019.  Aggregate global wealth has more than doubled since 2000, with financial wealth making up 54 percent of total wealth, up from a low of 49 percent in 2008 with the drop being largely due to collapsing real estate prices.

Now, let's focus on the United States.  U.S. total wealth rose by $8.9 trillion from mid-2013 to mid-2014 and is expected to reach $114 trillion by 2019.  In 2014, the United States remained the leader among all nations in terms of aggregate wealth. 

As shown in this chart, the United States comes in fourth place globally when it comes to average wealth per adult:

However, when you look at median wealth (the midpoint between the richest and poorest), the United States does not even make the top ten list:

Data on the globe's millionaire peer group shows that the number of millionaires has risen to 34.8 million individuals, up 164 percent since 2000.  With 14.166 million millionaires, the United States currently has 41 percent of global millionaires.  While the number of American millionaires is expected to rise to 19.705 million in 2019, America's share of global millionaires is expected to fall as the number of millionaires in the developing economies of the world rises.

When we look at the statistics for ultra-high net worth individuals (UHNW) who have net assets in excess of $50 million, there are now 128,220 ultra-wealthy individuals in the world, up from 41,000 in 2000.  Of these, 45,000 are worth at least $100 million, up from 14,000 in 2000 and 4,300 have assets in excess of $500 million compared to 1,200 in 2000.

The United States has the vast majority of the UHNW individuals as shown on this chart:

Most of you will have heard of the Gini coefficient.  For those who haven't, the Gini coefficient is a number between zero and one that measures the wealth distribution of a nation or group of people.  When the Gini coefficient is zero, wealth distribution is perfect, that is, all people have the same level of wealth.  When the Gini coefficient is 1, one single person controls all of the wealth.  Basically, as the Gini coefficient rises, wealth inequality rises.

Here is a graph showing what happened to the U.S. Gini measuring money income (i.e. cash incomes received on a regular basis before income tax payments but including income transfers such as social security) between 1967 and 2011:

It is quite obvious that there has been a significant increase in money income inequality in the United States over the past four decades.

In contrast, from the Congressional Research Service, here is a graph showing the trends in the poverty rate (in green) and number of poor persons (in red) in America between 1959 and 2013:

Here is a graph showing the poverty rate by age group from 1959 to 2013:

It is quite clear that there is a growing disparity in the United States between the wealthy (particularly the ultra-wealthy) and the majority of Americans, particularly the poorest among us.  Stanford's National Report Card on poverty and inequality states that the Gini coefficient for 2010 is higher than  any level measured in nearly three decades.  In 2012, the lowest income quintile (those who are in the bottom 20 percent of earners) earned only 3.4 percent of total income, down from 3.8 percent in 2007.  As we can see on this graph, the share of income among all but the top quintile has dropped or remained level since 1968:

Between 2007 and 2010, the share of income received by the bottom three quintiles (bottom 60 percent of earners) dropped by at least 10 percent and reached all-time lows.  

While the Great Recession had a significant impact on income share among the bottom 60 percent of income earners, it just reaffirmed a trend that had been in place for decades.  When combined with skyrocketing executive compensation levels, the dropping share of income for the majority of Americans is responsible for the growing economic disparity in our society.

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