The Wealth Divide The Growing Gap in the United States Between the Rich and the Rest

[one...two...tree 2,762]

An Interview with Edward Wolff

Edward Wolff is a professor of economics at New York University. He is the author of Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It, as well as many other books and articles on economic and tax policy. He is managing editor of the Review of Income and Wealth.

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Multinational Monitor: What is wealth?
Edward Wolff: Wealth is the stuff that people own. The main items are your home, other real estate, any small business you own, liquid assets like savings accounts, CDs and money market funds, bonds, other securities, stocks, and the cash surrender value of any life insurance you have. Those are the total assets someone owns. From that, you subtract debts. The main debt is mortgage debt on your home. Other kinds of debt include consumer loans, auto debt and the like. That difference is referred to as net worth, or just wealth.

MM: Why is it important to think about wealth, as opposed just to income?
Wolff: Wealth provides another dimension of well-being. Two people who have the same income may not be as well off if one person has more wealth. If one person owns his home, for example, and the other person doesn't, then he is better off.

Wealth — strictly financial savings — provides security to individuals in the event of sickness, job loss or marital separation. Assets provide a kind of safety blanket that people can rely on in case their income gets interrupted.

Wealth is also more directly related to political power. People who have large amounts of wealth can make political contributions. In some cases, they can use that money to run for office themselves, like New York City Mayor Michael Bloomberg.

MM: What are the best sources for information on wealth?
Wolff: The best way of measuring wealth is to use household surveys, where interviewers ask households, from a very detailed form, about the assets they own, and the kinds of debts and other liabilities they have run up. Household surveys provide the main source of information on wealth distribution.

Of these household surveys — there are now about five or six surveys that ask wealth questions in the United States — probably the best source is the Federal Reserve Board's Survey of Consumer Finances.

They have a special supplement sample that they rely on to provide information about high income households. Wealth turns out to be highly skewed, so that a very small proportion of families owns a very large share of total wealth. Most surveys miss these families. But the Survey of Consumer Finances uses information provided by the Internal Revenue Service to construct a special supplemental sample on high income households, so they can zero in on the high wealth holders.

MM: How do economists measure levels of equality and inequality?
Wolff: The most common measure used, and the most understandable is: what share of total wealth is owned by the richest households, typically the top 1 percent. In the United States, in the last survey year, 1998, the richest 1 percent of households owned 38 percent of all wealth.

This is the most easily understood measure.

There is also another measure called the Gini coefficient. It measures the concentration of wealth at different percentile levels, and does an overall computation. It is an index that goes from zero to one, one being the most unequal. Wealth inequality in the United States has a Gini coefficient of .82, which is pretty close to the maximum level of inequality you can have.

MM: What have been the trends of wealth inequality over the last 25 years?
Wolff: We have had a fairly sharp increase in wealth inequality dating back to 1975 or 1976.

Prior to that, there was a protracted period when wealth inequality fell in this country, going back almost to 1929. So you have this fairly continuous downward trend from 1929, which of course was the peak of the stock market before it crashed, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s.

Income inequality has also risen. Most people date this rise to the early 1970s, but it hasn't gone up nearly as dramatically as wealth inequality.

MM: What portion of the wealth is owned by the upper groups?
Wolff: The top 5 percent own more than half of all wealth.

In 1998, they owned 59 percent of all wealth. Or to put it another way, the top 5 percent had more wealth than the remaining 95 percent of the population, collectively.

The top 20 percent owns over 80 percent of all wealth. In 1998, it owned 83 percent of all wealth.

This is a very concentrated distribution.

MM: Where does that leave the bottom tiers?
Wolff: The bottom 20 percent basically have zero wealth. They either have no assets, or their debt equals or exceeds their assets. The bottom 20 percent has typically accumulated no savings.

A household in the middle — the median household — has wealth of about $62,000. $62,000 is not insignificant, but if you consider that the top 1 percent of households' average wealth is $12.5 million, you can see what a difference there is in the distribution.

MM: What kind of distribution of wealth is there for the different asset components?
Wolff: Things are even more concentrated if you exclude owner-occupied housing. It is nice to own a house and it provides all kinds of benefits, but it is not very liquid. You can't really dispose of it, because you need some place to live.

The top 1 percent of families hold half of all non-home wealth.

The middle class's major assets are their home, liquid assets like checking and savings accounts, CDs and money market funds, and pension accounts. For the average family, these assets make up 84 percent of their total wealth.

The richest 10 percent of families own about 85 percent of all outstanding stocks. They own about 85 percent of all financial securities, 90 percent of all business assets. These financial assets and business equity are even more concentrated than total wealth.

MM: What happens when you disaggregate the data by race?
Wolff: There you find something very striking. Most people are aware that African-American families don't earn as much as white families. The average African-American family has about 60 percent of the income as the average white family. But the disparity of wealth is a lot greater. The average African-American family has only 18 percent of the wealth of the average white family.

MM: Are you able to do a comparable analysis by gender?
Wolff: It is hard to separate out husbands and wives. Most assets are jointly held, so it is not really possible to separate which assets are owned by husband and which by wife. Even when things are specifically owned by one spouse or another, the other spouse usually has some residual lien on the assets, as we know from various divorce proceedings. If a pension account is owned by the husband and the family splits up, the wife typically gets some ownership of the pension assets. The same thing is true for an unincorporated business owned by the husband. It really is not that easy to separate out gender ownership in the family.

What we do know is that single women, or single women with children, have much lower levels of wealth than married couples.

MM: How does the U.S. wealth profile compare to other countries?
Wolff: We are much more unequal than any other advanced industrial country.

Perhaps our closest rival in terms of inequality is Great Britain. But where the top percent in this country own 38 percent of all wealth, in Great Britain it is more like 22 or 23 percent.

What is remarkable is that this was not always the case. Up until the early 1970s, the U.S. actually had lower wealth inequality than Great Britain, and even than a country like Sweden. But things have really turned around over the last 25 or 30 years. In fact, a lot of countries have experienced lessening wealth inequality over time. The U.S. is atypical in that inequality has risen so sharply over the last 25 or 30 years.

MM: To what extent is the wealth inequality trend simply reflective of the rising level of income inequality?
Wolff: Part of it reflects underlying increases in income inequality, but the other significant factor is what has happened to the ratio between stock prices and housing prices. The major asset of the middle class is their home. The major assets of the rich are stocks and small business equity. If stock prices increase more quickly than housing prices, then the share of wealth owned by the richest households goes up. This turns out to be almost as important as underlying changes in income inequality. For the last 25 or 30 years, despite the bear market we've had over the last two years, stock prices have gone up quite a bit faster than housing prices.

MM: A couple years ago there was a great deal of talk of the democratization of the stock market. Is that reflected in these figures, or was it an illusion?
Wolff: I would say it was more of an illusion. What did happen is that the percentage of households with some ownership of stocks, including mutual funds and pension accounts like 401(k)s, did go up very dramatically over the last 20 years. In 1983, only 32 percent of households had some ownership of stock.

By 2001, the share was 51 percent. So there has been much more widespread stock ownership, in terms of number of families.

But a lot of these families have very small stakes in the stock market. In 2001, only 32 percent of households owned more than $10,000 of stock, and only 25 percent of households owned more than $25,000 worth of stock.

So a lot of these new stock owners have had relatively small holdings of stock. There hasn't been much dilution in the share of stock owned by the richest 1 or 10 percent. Stock ownership is still heavily concentrated among rich families. The richest 10 percent own 85 percent of all stock.

As a result, the stock market boom of the 1990s disproportionately benefited rich families. There were some gains by middle class families, but their average stock holdings were too small to make much difference in their overall wealth.

MM: Apart from the absolute level of wealth of people at the bottom of the spectrum, why should inequality itself be a matter of concern?
Wolff: I think there are two rationales. The first is basically a moral or ethical position. A lot of people think it is morally bad for there to be wide gaps, wide disparities in well being in a society.

If that is not convincing to a person, the second reason is that inequality is actually harmful to the well-being of a society. There is now a lot of evidence, based on cross-national comparisons of inequality and economic growth, that more unequal societies actually have lower rates of economic growth. The divisiveness that comes out of large disparities in income and wealth, is actually reflected in poorer economic performance of a country.

Typically when countries are more equal, educational achievement and benefits are more equally distributed in the country. In a country like the United States, there are still huge disparities in resources going to education, so quality of schooling and schooling performance are unequal. If you have a society with large concentrations of poor families, average school achievement is usually a lot lower than where you have a much more homogenous middle class population, as you find in most Western European countries. So schooling suffers in this country, and, as a result, you get a labor force that is less well educated on average than in a country like the Netherlands, Germany or even France. So the high level of inequality results in less human capital being developed in this country, which ultimately affects economic performance.

MM: To what extent is inequality addressed through tax policy?
Wolff: One reason we have such high levels of inequality, compared to other advanced industrial countries, is because of our tax and, I would add, our social expenditure system. We have much lower taxes than almost every Western European country. And we have a less progressive tax system than almost every Western European country. As a result, the rich in this country manage to retain a much higher share of their income than they do in other countries, and this enables them to accumulate a much higher amount of wealth than the rich in other countries.

Certainly our tax system has helped to stimulate the rise of inequality in this country.

We have a much lower level of income support for poor families than do Western European countries or Canada. Social policy in Europe, Canada and Japan does a lot more to reduce economic disparities created by the marketplace than we do in this country. We have much higher poverty rates than do other advanced industrialized countries.

MM: Do you favor a wealth tax?
Wolff: I've proposed a separate tax on wealth, which actually exists in a dozen European countries. This has helped to lessen inequality in European countries. It is also, I think, a fairer tax. If you think about taxes that reflect a family's ability to pay, a family's ability to pay is a reflection of their income, but also of their wealth holdings. A broader kind of tax of this nature, would not only produce more tax revenue, which we desperately need, but it would be a fairer tax, and also help to reduce the level of inequality in this country.

MM: In broad outlines, how would you structure such a tax?
Wolff: I would model it after the Swiss system, which I think is a pretty fair system. It would be a progressive tax. In the United States, the first $250,000 of wealth would be exempt from the tax. That would exclude 80 percent of all families. The tax would increase at increments, starting out at .2 percent from about $250,000 to $500,000. The marginal rate would go up to .4 percent from $500,000 to $1 million, and then to .6 percent from a $1 million to $5 million, and then to .8 thereafter.

It would not be a very severe tax. In fact, the loading charges on most mutual funds are typically of the order of 1 or 2 percent. It would not be an onerous tax, but it could raise about $60 billion annually. Eighty percent of families would pay nothing, and 95 percent of families would pay less than $1,000. It would really only affect very rich families.

MM: Do you recommend non-tax approaches to deal with inequality as well?
Wolff: I think we have to provide a much broader safety net in this country.

There are lots of things that we should do to strengthen our income support system. We can expand the Earned Income Tax Credit, which is now a fairly substantial aid to poor families, but which can be improved.

The minimum wage has fallen by about 35 percent in real terms since its peak in 1968. We should think about restoring the minimum wage to where it used to be. That would help a lot of low-income families.

The unemployment insurance system is in a real mess; only about one third of unemployed persons actually get unemployment benefits, either because they don't qualify or because they exhaust their benefits after six months. Typically the replacement rate is about 35 or 40 percent. In the Netherlands, the replacement rate is 80 percent. Our unemployment insurance system is much less generous than in other industrialized countries and can certainly be shored up.

Of course, the welfare system is in a total state of disrepair, since it provides very restrictive coverage. Even before the switchover from AFDC to TANF with the 1996 welfare reform bill, real welfare payments had declined by about 50 percent between 1975 and 1996. So we had already experienced an enormous erosion in welfare benefits, even before we adopted this new system.

http://multinationalmonitor.org/mm2003/03m...viewswolff.html

[bhajishah 4]

well yah!!!!

[one...two...tree 2,762]

well yah!!!!

I think he explains well, the negative consequences of having such a large disparity between the rich and the 95 percent of the population. What has baffled me for years though, is how many people who are part of that 95 percent, support Trickle Down Economics in spite of no tangible evidence that it actually works.

[Sofiyya 1,687]

Is he Obama's economic advisor?

[46]

Why are the left so concerned with relativism? Are the poor better off if the rich are poorer?

Example:

Assume purchasing power is stable. If a poor individual earns $20,000 per annum, why does it make a difference if a wealthy individual earns $50,000, $100,000 or $300,000 per annum? $20,000 is $20,000.

I'd rather earn $40,000 and know the rich earn $150,000, than earn $35,000 and know the rich only earn $50,000.

The article admits it is a "moral" issue, which I read as bitterness and revenge.

The argument that high Gini Coefficient nations have slower economic growth than low is bizarre. Global empirical evidence shows us otherwise save outlier cases like Norway (they struck oil) and Iceland (they collapsed a few weeks ago).

Absolute wealth pays bills and buys goods. Relative wealth simply means we are all poor together. We all know this and practice it in our lives. Have you ever gone to your boss and instead of asking for a raise, demanded that someone else be paid less? If you believe in relativism, that is just as good as a raise in your eyes. But of course, you only care about absolute wealth.

[Sofiyya 1,687]

Why are the left so concerned with relativism? Are the poor better off if the rich are poorer?

Example:

Assume purchasing power is stable. If a poor individual earns $20,000 per annum, why does it make a difference if a wealthy individual earns $50,000, $100,000 or $300,000 per annum? $20,000 is $20,000.

I'd rather earn $40,000 and know the rich earn $150,000, than earn $35,000 and know the rich only earn $50,000.

The article admits it is a "moral" issue, which I read as bitterness and revenge.

The argument that high Gini Coefficient nations have slower economic growth than low is bizarre. Global empirical evidence shows us otherwise save outlier cases like Norway (they struck oil) and Iceland (they collapsed a few weeks ago).

Absolute wealth pays bills and buys goods. Relative wealth simply means we are all poor together. We all know this and practice it in our lives. Have you ever gone to your boss and instead of asking for a raise, demanded that someone else be paid less? If you believe in relativism, that is just as good as a raise in your eyes. But of course, you only care about absolute wealth.

Thank you for that!

The left is totally about relativism. Morality is relative, manners are relative, laws are relative. That's what they do. They have been sold a bill of goods about how everyone must be equal and it has done little to make things better because they spend too much time measuring relativity.

Edited October 19, 2008 by Virtual wife

[Mr. Big Dog 10,747]

Why are the left so concerned with relativism? Are the poor better off if the rich are poorer?

Example:

Assume purchasing power is stable. If a poor individual earns $20,000 per annum, why does it make a difference if a wealthy individual earns $50,000, $100,000 or $300,000 per annum? $20,000 is $20,000.

I'd rather earn $40,000 and know the rich earn $150,000, than earn $35,000 and know the rich only earn $50,000.

I'd feel better if everyone that contributes to economic groth gets a share of that growth. That's what hasn't happened in the last expansion cycle - for the first time in recorded history. And we're not talking the poor, we're talking the middle class that has been disconnected from the train. What's happening here is that the roof gets heavier while the foundation is and has been weak and now we've been scraping from the walls to load more onto the roof. The construct is now collapsing right before our eyes. It's time the foundation and the walls are attended to so that the structure doesn't come entirely crashing down. Trickle down economics (better known as Reagan's voo-doo economics) has catastrophically failed

I don't care how much the highest earner makes as long as it isn't at my expense. These days, though, that's exactly what it is. When CEO's parachute out of the companies they worked for (remember that they are merely employees) with multi-million dollar packages after having run the companies they were tasked to grow into the ground or into bankruptcy court instead, then something is seriously out of whack. If you can't see or admit that, then I don't know what to tell you.

Edited October 20, 2008 by Mr. Big Dog

[peejay 327]

Why are the left so concerned with relativism? Are the poor better off if the rich are poorer?

Example:

Assume purchasing power is stable. If a poor individual earns $20,000 per annum, why does it make a difference if a wealthy individual earns $50,000, $100,000 or $300,000 per annum? $20,000 is $20,000.

I'd rather earn $40,000 and know the rich earn $150,000, than earn $35,000 and know the rich only earn $50,000.

The article admits it is a "moral" issue, which I read as bitterness and revenge.

The argument that high Gini Coefficient nations have slower economic growth than low is bizarre. Global empirical evidence shows us otherwise save outlier cases like Norway (they struck oil) and Iceland (they collapsed a few weeks ago).

Absolute wealth pays bills and buys goods. Relative wealth simply means we are all poor together. We all know this and practice it in our lives. Have you ever gone to your boss and instead of asking for a raise, demanded that someone else be paid less? If you believe in relativism, that is just as good as a raise in your eyes. But of course, you only care about absolute wealth.

Thank you for that!

The left is totally about relativism. Morality is relative, manners are relative, laws are relative. That's what they do. They have been sold a bill of goods about how everyone must be equal and it has done little to make things better because they spend too much time measuring relativity.

This is also known as the "misery loves company" school of thought. Equal opportunity doesn't always equate to equal results. Unfortunately everyone isn't equal...people are not the same.

That being said, as long as the game isn't rigged, I don't begrudge the wealthy the fruits of their labor. I do begrudge ill gotten wealth through manipulation of the system.

[HAL 9000 96]

It is definitely relativistic to equate x with y.

Which is why if you actually read up on the rhetoric behind the 'supposed' socialist proposals proposed by the probably winner to the White House, you'd notice that its not the rich becoming any less rich than before. Nor is it an expansion of the middle class by virtue of losing profitability of the upper castes. Its about the increasing opportunities so that those that want to be rich, do so, and those that want to increase their own well-being, do so as well. Pretty relativistic indeed.

Meanwhile in a very well known place called reality, the current middle and lower classes, that do work hard and do not earn the pay others earn, continue to be passed over in favor of profitability.

Since bulk capital does indeed maintain this economy, it is best to argue it as a volume effect: hoarded capital does not flow into the market by definition. Capital that is installed in those sectors that are more divested in actually spending it, does go into the market. Easy as that.

[IAMX 3,055]

Lets just say I disagree about this system of some work being more valuable than another.

We've come to merely accept the train of thought that those who are rich likely earned it. I've come to the grasps of reality that those who are rich mostly didn't earn it or the value of the rich person's hard work only exceeded it in dollars, but not in hours or effort. For a truly productive society, effort must be the reward, not dollars. Of course, this doesn't fit very well in a red scare society, which is fine, since one doesn't need to fit in, in every facet of society. Even though most of us favor rewarding the hardest workers most, we still somehow bend over for the "what's good for the business is good for America" nonsense. Not I. While I play within the system, I wouldn't fight against it changing, either.

Edited October 20, 2008 by SRVT

[HAL 9000 96]

I could seriously care less if the rich earn or not their money. Hypothetically, money not earned should be subject to oversight of some sort.

What our neo-con friends need to accept is that progressive economics are more interested in ensuring that an earner makes a fair share more representative of the work they do.

We need to get away from the cheap shot rhetoric that divides the economical classes in this country. Given our GDP, all in this country who work should be at an economical state where they can say they are well, not merely surviving. Given that not all like to work, then that in theory means more money for those that do.

[mawilson 2,133]

Why are the left so concerned with relativism? Are the poor better off if the rich are poorer?

Example:

Assume purchasing power is stable. If a poor individual earns $20,000 per annum, why does it make a difference if a wealthy individual earns $50,000, $100,000 or $300,000 per annum? $20,000 is $20,000.

I'd rather earn $40,000 and know the rich earn $150,000, than earn $35,000 and know the rich only earn $50,000.

The article admits it is a "moral" issue, which I read as bitterness and revenge.

The argument that high Gini Coefficient nations have slower economic growth than low is bizarre. Global empirical evidence shows us otherwise save outlier cases like Norway (they struck oil) and Iceland (they collapsed a few weeks ago).

Absolute wealth pays bills and buys goods. Relative wealth simply means we are all poor together. We all know this and practice it in our lives. Have you ever gone to your boss and instead of asking for a raise, demanded that someone else be paid less? If you believe in relativism, that is just as good as a raise in your eyes. But of course, you only care about absolute wealth.

[sereia 0]

Why are the left so concerned with relativism? Are the poor better off if the rich are poorer?

Example:

Assume purchasing power is stable. If a poor individual earns $20,000 per annum, why does it make a difference if a wealthy individual earns $50,000, $100,000 or $300,000 per annum? $20,000 is $20,000.

I'd rather earn $40,000 and know the rich earn $150,000, than earn $35,000 and know the rich only earn $50,000.

The article admits it is a "moral" issue, which I read as bitterness and revenge.

The argument that high Gini Coefficient nations have slower economic growth than low is bizarre. Global empirical evidence shows us otherwise save outlier cases like Norway (they struck oil) and Iceland (they collapsed a few weeks ago).

Absolute wealth pays bills and buys goods. Relative wealth simply means we are all poor together. We all know this and practice it in our lives. Have you ever gone to your boss and instead of asking for a raise, demanded that someone else be paid less? If you believe in relativism, that is just as good as a raise in your eyes. But of course, you only care about absolute wealth.

Well said.

[one...two...tree 2,762]

Why are the left so concerned with relativism? Are the poor better off if the rich are poorer?

Example:

Assume purchasing power is stable. If a poor individual earns $20,000 per annum, why does it make a difference if a wealthy individual earns $50,000, $100,000 or $300,000 per annum? $20,000 is $20,000.

I'd rather earn $40,000 and know the rich earn $150,000, than earn $35,000 and know the rich only earn $50,000.

The article admits it is a "moral" issue, which I read as bitterness and revenge.

The argument that high Gini Coefficient nations have slower economic growth than low is bizarre. Global empirical evidence shows us otherwise save outlier cases like Norway (they struck oil) and Iceland (they collapsed a few weeks ago).

Absolute wealth pays bills and buys goods. Relative wealth simply means we are all poor together. We all know this and practice it in our lives. Have you ever gone to your boss and instead of asking for a raise, demanded that someone else be paid less? If you believe in relativism, that is just as good as a raise in your eyes. But of course, you only care about absolute wealth.

How is the concentration of wealth not relativism? You make it sound as if wealth is created in a vacuum.

According to Business Week, the ratio of CEO pay to factory worker pay at the biggest 365 U.S. companies was 326 to 1 in 1997, up from 44 to 1 in 1965. In Japan in 1995, the equivalent ratio was 16 to 1, and in Germany, 21 to 1. Some of the biggest CEO pay raises have been awarded right after huge layoffs, leading to criticism that top executives are being rewarded for eliminating American jobs.

http://www.responsiblewealth.org/press/199...eholder_pr.html

So we either have become enlightened that CEO's are actually worth much more today relative to the factory worker, or we have a systematic concentration of wealth in this country into a select few. It's not just a moral argument as the author mentioned, the consequences are very real. In comparison to other industrialized nations, the income disparity has grown dramatically here in the U.S. and it's not that Joe factory worker isn't doing as good of a job as before. It's that we've shifted to a value system which places higher value on the upper echelon in society. That's not simply rewarding the wealthy for creating wealth, that's elitism.

Edited October 20, 2008 by Jabberwocky

[mawilson 2,133]

How is the concentration of wealth not relativism? You make it sound as if wealth is created in a vacuum.

Why is it surprising that the rich get richer faster than the poor get richer?

The rich have more money to invest and can employ professional services to help them invest that money.

The poor have limited resources and have to rely on their own expertise in making investment decisions.

It's easier to turn $1 million into $10 million than it is to turn $10,000 into $100,000.