Monday, November 27, 2017

The Growth of Income Inequality in America

While discussions about income inequality have pretty much faded from page one, a recent study entitled "Billionaire Bonanza" by the Institute for Policy Studies suggests that, if anything, inequality is getting worse in the United States.  Here are some highlights from the report authored by Chuck Collins and Josh Hoxie.

Let's start by looking at how the inequality and wealth situation has changed over the past three decades.  In 1982, to enter the Forbes 400 list of the most wealthy Americans, one needed to have $75 million in assets which equates to $189 million in 2017 dollars.  In 2017, an American needed to have assets worth a minimum of $2 billion.  As well, in 1982, the combined wealth of the 400 Americans on Forbes list was $92 billion or $231 billion in 2017 dollars.  The combined wealth of the entire Forbes 400 list in 2017 was $2.68 trillion or 12 times the total in 1982 (in 2017 dollars) which is the same wealth that is held by the bottom 64 percent of Americans or 80 million households.  

The wealthiest 25 individuals in the United States own assets worth a combined $1 trillion.  To put this number into perspective, these 25 people hold more wealth than the bottom 178 million or 56 percent of all Americans combined.  Here is a list of the 25 wealthiest Americans and their net worth:

You will notice that the combined wealth of the three richest Americans, Bill Gates, Jeff Bezos and Warren Buffett is $248.5 billion.  This is more wealth than 160 million Americans or 63 million American households, roughly half of the U.S. population.

Wealth in the United States is not evenly distributed when looking at ethnicity/race.  Here is a table showing how wealth varies for each of the four groups that represent the American melting pot:

As you can see, median and average wealth for white households is far higher than it is for black, Latino and other households.  A significant part of this disparity is explained by the difference in home ownership rates among the four groups; in June 2017, 71.8 percent of white Americans owned homes compared to 45.5 percent of Latinos and 42.3 percent of African-Americans.

Now that we've looked at America's wealthiest, let's look at the other side of the coin with data from the Federal Reserve's Survey of Consumer Finances.  A median American family has a net worth of $80,000 (excluding the value of their family car).  Over 19 percent of American households have zero or negative net worth and are classified as "underwater".   The "underwater" designation is not evenly distributed across the United States and varies significantly by ethnicity/race:

African -Americans - 30 percent underwater

Latino - 27 percent underwater

Other - 24 percent underwater

White - 14 percent underwater.

These households face significant problems since they are unable to even survive a short-term unemployment situation.  

While we often hear about the "top one percent", who are the "worst of the worst" or the bottom one percent?  To be included in the 1st percentile, a household must have a negative net worth of more than $101,000.  In combination, these households have a combined negative net worth of $196 billion compared to the $33.4 trillion in wealth held by the top one percent of households.

A great deal of this wealth inequity can be attributed to the tax system in the United States.  Since many of the wealthiest Americans gained their wealth through the founding of publicly traded companies, the current tax policies that favour capital income (i.e. capital gains on stock transactions) over wage income work in their favour.  In contrast, here is what has happened to median real wages for wage and salary earners since 1989:

Here is the same data showing the year-over-year percentage change in real wages:

As you can see, for much of the nearly four decade-long period, real wages actually declined meaning that workers did not stay ahead of inflation.

Let's close this posting with this quote from French economist Thomas Piketty, author of "Capital in the Twenty-First Century":

"All large fortunes, whether inherited or entrepreneurial in origin, grow at extremely high rates, regardless of whether the owner of the fortune works or not. To be sure, one should be careful not to overestimate the precision of the conclusions one can draw from these data, which are based on a small number of observations and collected in a somewhat careless and piecemeal fashion. The fact is nevertheless interesting.

Take a particularly clear example at the very top of the global wealth hierarchy. Between 1990 and 2010, the fortune of Bill Gates -- the founder of Microsoft, the world leader in operating systems, and the very incarnation of entrepreneurial wealth and number one in the Forbes rankings for more than ten years -- increased from $4 billion to $50 billion. At the same time, the fortune of Liliane Bettencourt -- the heiress of L'Oréal, the world leader in cosmetics, founded by her father Eugène Schueller, who in 1907 invented a range of hair dyes that were destined to do well in a way reminiscent of César Birotteau's success with perfume a century earlier -- increased from $2 billion to $25 billion, again according to Forbes.

In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working. Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size. Note, in particular, that once a fortune passes a certain threshold, size effects due to economies of scale in the management of the portfolio and opportunities for risk are reinforced by the fact that nearly all the income on this capital can be plowed back into investment. An individual with this level of wealth can easily live magnificently on an amount equivalent to only a few tenths of percent of his capital each year, and he can therefore reinvest nearly all of his income. This is a basic but important economic mechanism, with dramatic consequences for the long-term dynamics of accumulation and distribution of wealth. Money tends to reproduce itself." (my bold)

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