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Preferred Citation: Edward N. Wolff, "How the Pie is Sliced" The American Prospect no.
22 (Summer 1995): 58-64 (http://epn.org/prospect/22/22wolf.html).
HOW THE PIE IS SLICED
America's Growing Concentration of Wealth
Edward N. Wolff
Conservative economic policy has one central idea: just create a bigger pie, and
everyone will have
a bigger slice. In fact, conservatives predict that if we cut the rich a bigger piece
by lowering their tax
rates, the resulting growth will enlarge everyone else's slice, too. This was the core
idea of Reagan's
tax cuts, and it is central to such current conservative goals as lower capital gains
taxes.
Unfortunately, since the 1980s the great majority of Americans
have not been getting bigger slices from a growing pie. As
many people have noted, median family income has failed to
grow. The picture is even more stark for gains in wealth than
for gains in income. New research, based on data from federal
surveys, shows that between 1983 and 1989 the top 20
percent of wealth holders received 99 percent of the total gain
in marketable wealth, while the bottom 80 percent of the
population got only 1 percent. America produced a lot of new
wealth in the '80s--indeed, the stock market boomed--but
almost none of it filtered down.
Few people realize how extraordinarily concentrated the gains
in wealth have been. Between 1983 and 1989 the top 1
percent of income recipients received about a third of the total
increase in real income. But the richest 1 percent received an
even bigger slice--62 percent--of the new wealth that was
created (see figure at right).
The most recent data suggest these trends have continued. My
preliminary estimates indicate that between 1989 and 1992,
68 percent of the increase in total household wealth went to
the richest 1 percent--an even larger share of wealth gain than
between 1983 and 1989. As a result, the concentration of
wealth reached a postwar high in 1992, the latest year for
which data are available. If these trends continue, the super
rich will pull ahead of other Americans at an even faster pace
in the 1990s than they did in the '80s.
Growing inequality in the distribution of wealth has serious implications for the kind
of society we live
in. Today, the average American family's wealth adds up to a comparatively meager
$52,200,
typically tied up in a home and some small investments. While Forbes magazine each
year keeps
listing record numbers of billionaires--in 1994 Forbes counted 65 of them in the
U.S.--homeownership has been slipping since the mid-1970s. The percentage of Americans
with
private pensions has also been dropping. And, with their real incomes squeezed,
middle-income
families have not been putting savings aside for retirement. The number of young
Americans going to
college has also begun to decline, another indirect sign of the same underlying
phenomenon. In fact,
international data now indicate that wealth is more unequally distributed in the U.S.
than in other
developed countries, including that old symbol of class privilege, Great Britain.
Economic worries may
be at the root of much
of the political anger in
America today, but
there is almost no
public debate about
the growth in wealth
inequality, much less
the steps needed to
reverse current trends.
The debate needs to
start with an
understanding of how
and why America's pie
is getting sliced so unequally.
REVERSAL OF FORTUNES
The increasing concentration of wealth in the past 15 years represents a reversal of
the trend that
had prevailed from the mid-1960s through the late 1970s. The share of total wealth
owned by the
rich depends, to a large extent, on asset values and therefore swings sharply with the
stock market,
but some trends stand out (see figure 2 above). During the twenty years after World
War II, the
richest 1 percent of Americans (the "super rich") generally held about a third of the
nation's wealth.
After hitting a postwar high of 37 percent in 1965, their share dropped to 22 percent
as late as 1979.
Since then, the share owned by the super rich has surged--almost doubling to 42
percent of the
nation's wealth in 1992, according to my estimates.[1]
Two statistics--median and mean family wealth--help to tell the story of growing
wealth inequality in
America. A median is the middle of a distribution, the point at which there are an
equal number of
cases above and below. Median family wealth represents the holdings of the average
family. Mean
family wealth is the average in a different sense: total wealth divided by the total
number of families. If
a few families account for a large bulk of the nation's wealth, the mean will exceed
the median. The
changing ratio between the mean and median is one measure of changes in wealth
inequality. Data
from the 1983, 1989, and
1992 Survey of Consumer
Finances conducted by the
Department of Commerce
show that mean wealth has
indeed been much higher
than the median: $220,000
versus $52,000 in 1992.
And mean wealth has
grown more rapidly--by
23 percent from 1983 to
1989, and by another 12
percent in the following
three years, while median
wealth increased by only 8
percent between 1983 and 1989 and then barely moved up at all from 1989 to 1992 (see
the figure
"Median and Mean Wealth and Income,"). As a result, between 1983 and 1989 the ratio of
mean to
median wealth jumped from 3.4 to 3.8.
Data for 1992 are as yet incomplete. However, the figures available indicate that the
ratio of mean to
median wealth saw another steep rise between 1989 and 1992, from 3.8 to 4.2. On the
basis of a
regression analysis of the historical relation between this ratio and the share of
wealth held by the top
1 percent of families, I estimated their share at 42 percent in 1992.
Income inequality also increased over the same period. From 1983 to 1989, the share of
the top 20
percent increased from 52 to 56 percent, while that of the remaining 80 percent
decreased from 48.1
to 44.5 percent. The preliminary evidence from the 1992 Survey of Consumer Finances
suggests a
further rise in income inequality between 1989 and 1992 (the ratio of mean to median
income
increased from 1.57 to 1.61), though this change is much more muted than from 1983 to
1989 (when
the ratio moved upward from 1.42 to 1.57).
By the 1980s the U.S. had become
the most unequal industrialized country
in terms of wealth. The top 1 percent
of wealth holders controlled 39
percent of total household wealth in
the United States in 1989, compared
to 26 percent in France in 1986, about
25 percent in Canada in 1984, 18
percent in Great Britain, and 16
percent in Sweden in 1986. This is a
marked turnaround from the early part
of this century when the distribution of
wealth was considerably more unequal
in Europe (a 59 percent share of the
top 1 percent in Britain in 1923 versus
a 37 percent share in the U.S. in
1922).
The concept of wealth used here is
marketable wealth--assets that can be
sold on the market. It does not include
consumer durables such as automobiles, televisions, furniture, and household
appliances; these items
are not easily resold, or their resale value typically does not reflect the value of
their consumption to
the household. Also excluded are pensions and the value of future Social Security
benefits a family
may receive.
Some critics of my work, such as the columnist Robert Samuelson of the Washington
Post, argue
that a broader definition of wealth shows less concentration. To be sure, including
consumer
durables, pensions, and entitlements to Social Security reduces the level of measured
inequality. The
value of consumer durables amounted to about 10 percent of marketable wealth in 1989;
including
them in the total reduces the share of the top 1 percent of wealth holders from 39
percent to 36
percent. Adding pensions and Social Security "wealth," which together totaled about
two-thirds of
marketable wealth, has a more pronounced effect, reducing the share of the top 1
percent from 36
percent to 22 percent. However, even though pensions and Social Security are a source
of future
income to families, they are not in their direct control and cannot be marketed.
Social Security
"wealth" depends on the commitment of future generations and Congresses to maintain
benefit levels;
it is not wealth in the ordinary meaning of the term.
Moreover, the inclusion of consumer durables, pensions, and Social Security does not
affect trends in
inequality. With these assets included, the share of the richest 1 percent reached its
lowest level in
1976, at 13 percent, and nearly doubled by 1989 to 22 percent. Nor does it affect
international
comparisons. For example, using this broader concept of wealth, we still find that the
share of the top
1 percent in the U.S. is almost double that of Britain in 1989--22 percent versus 12
percent.
WHY THE RICH GOT RICHER
Part of the explanation for growing wealth concentration lies in what has happened to
the different
kinds of assets that the rich and the middle class hold. Broadly speaking, wealth
comes in four forms:
homes
liquid assets, including cash,
bank deposits, money market
funds, and savings in insurance
and pension plans
investment real estate and
unincorporated businesses
corporate stock, financial
securities, and personal trusts.
Middle-class families have more than
two-thirds of their wealth invested in
their own home, which is probably
responsible for the common misperception that housing is the major form of family
wealth in America.
Those families have another 17 percent in monetary savings of one form or another,
with only a small
amount in businesses, investment real estate, and stocks. The ratio of debt to assets
is very high, at
59 percent.
In contrast, the super rich invest over 80 percent
of
their savings in investment real estate,
unincorporated
businesses, corporate stock, and financial
securities.
Housing accounts for only 7 percent of their
wealth,
and monetary savings another 11 percent. Their
ratio
of debt to assets is under 5 percent.
Viewed differently, more than 46 percent of all
outstanding stock, over half of financial
securities,
trusts, and unincorporated businesses, and 40
percent of investment real estate belong to the
super
rich. The top 10 percent of families as a group
account for about 90 percent of stock shares,
bonds,
trusts, and business equity, and 80 percent of
non-home real estate. The bottom 90 percent are
responsible for 70 percent of the indebtedness of
American households (See figures).
Thus, for most middle-class families, wealth is
closely
tied to the value of their homes, their ability to
save
money in monetary accounts, and the debt burden
they face. But the wealth of the super rich has a
lot
more to do with their ability to convert existing
wealth--in the form of stocks, investment real estate, or securities--into even more
wealth, that is, to
produce "capital gains."
Sure enough, we find that when wealth inequality
was on the rise, so was the relative importance of
capital gains. Between 1962 and 1969,
conventional savings--the difference between
household income and expenditures-- accounted
for 38 percent of the growth of wealth, but from
1983 to 1989 conventional savings accounted for
just 30 percent of increased wealth. Conversely,
capital gains became a bigger factor in the '80s.
The immediate causes lay in a falling savings rate
and more rapid growth in the value of stocks than
in the value of homes. In addition, the
homeownership rate (the percentage of families
owning their own home), which had risen 1
percent during the 1960s, fell during the 1980s, by
1.7 percent. The extension of homeownership
would suggest a widening diffusion of assets to the middle class. Alas, the
homeownership rate
peaked in 1980 at 65.6 percent and has been falling ever since.
Widening income inequality was clearly a factor in the growing concentration of
wealth. Income
inequality did not change much during the 1960s but has risen markedly ever since the
early '70s. The
wealthy save proportionally more than the middle class. So when the wealthy get a
larger share of
total income, their share of savings will increase even more. Not surprisingly,
between the 1960s and
1980s, the percentage of income saved by the upper third of families has more than
doubled, from
9.3 to 22.5 percent. That increase was partly spurred by generous tax cuts during the
Reagan years,
which were intended precisely to bring about that result.
In contrast, the middle third of the population saved almost 5 percent of its income
during the 1960s
but by the 1980s saved virtually nothing. This drop in savings reflected the growing
squeeze on the
middle class from stagnating incomes and rising expenses; the Reagan tax cuts did not
produce their
predicted effects on this group. The bottom third has historically saved none of its
income, and the
Reagan years did not turn them into savers and investors as Jack Kemp's happy vision
suggested.
According to my estimates, the chief source of growing wealth concentration during the
1980s was
capital gains. The rapid increase in stock prices relative to house prices accounted
for about 50
percent of the increased wealth concentration; the growing importance of capital gains
relative to
savings explained another 10 percent. Increased income inequality during the decade
added another
18 percent, as did the increased savings propensity of the rich relative to the middle
class. The
declining homeownership rate accounted for the remaining 5 percent or so.
In short, wealth went to those who held wealth to begin with. For those who didn't
have it, savings
alone were not sufficient to amass wealth of great significance.
ARE THERE REMEDIES?
These trends raise troubling questions. Will the increasing concentration of wealth
further
exacerbate the tilt of political power toward the rich? Might it ultimately set off an
extremist political
explosion? Is it compatible with renewed economic growth?
At least the surface evidence suggests that equality and growth are complementary. The
high growth
rates of the 1950s and 1960s occurred during a period of low inequality. The slowdown
in growth
that began in the 1970s was accompanied by rising inequality in both income and
wealth. High levels
of inequality put better training and education out of the reach of more workers and
may breed
resentment in the workplace. Analyses of historical data on the U.S. as well as
comparative
international studies confirm a positive association between equality and growth.
Diffusing wealth more broadly will not be easy. Some of the causes of growing income
and wealth
inequality lie in changes in the global economy for which no one has any ready policy
response.
However, the experiences of European countries as well as our neighbor Canada, which
are subject
to the same market forces, suggest that shifting the tax burden toward the wealthy
would spread
wealth more widely. In the U.S., marginal income tax rates, particularly on the rich
and very rich, fell
sharply during the 1980s. Although Congress raised marginal rates on the very rich in
1993, those
rates are still considerably lower than they were at the beginning of the 1980s. And
they are much
lower than in western European countries with more equal distributions of income and
wealth.
Another strategy to consider is direct taxation of wealth. Almost a dozen European
countries,
including Denmark, Germany, the Netherlands, Sweden, and Switzerland, have taxes on
wealth. A
very modest tax on wealth (with marginal tax rates running from 0.05 to 0.3 percent,
exempting the
first $100,000 in assets) could raise $50 billion in revenue and have a minimal impact
on the tax bills
of 90 percent of American families. Even with an exemption of $250,000, such a tax
would raise $48
billion.
On the other side of the ledger, the financial well-being of the poor and lower-middle
class would be
much improved by social transfers similar to Canada's, including child support
assurance, a rising
minimum wage, and extension of the earned income tax credit.
None of these measures appears politically feasible today. Instead, the current
majority leader of the
House is promoting a flat tax that would cut in half income tax rates for the rich and
entirely eliminate
taxes on capital gains. Many prominent Republicans have embraced the flat tax and
argued that it
should be central to the 1996 election. The rush to give the rich an even bigger piece
of the pie ought
to be stimulus enough to start a national conversation about where America's wealth is
going.
FIGURES
Figure 1: Winners and Losers in the 1980s
Percent of real wealth and income growth accruing to the top 1, next 19, and bottom 80
percent of
families, 1983-1989.
Wealth Growth
Top 1 percent: 61.6%
Next 19: 37.2%
Bottom 80: 1.2%
Income Growth
Top 1 percent: 37.4%
Next 19: 38.9%
Bottom 80: 23.7%
return to the text
Download or view the figure
Figure 2: Concentration of Wealth
Share of wealth owned by the top 1 percent of families, 1945-1992 (rounded to the
nearest percent)
1945: 33%
1949: 30%
1953: 34%
1958: 32%
1962: 35%
1965: 37%
1969: 34%
1972: 32%
1976: 22%
1979: 23%
1981: 27%
1983: 34%
1986: 35%
1989: 39%
1992: 42%
return to the text
Download or view the figure
Figure 3: Mean and Median Wealth and Income
Sources: author's computations from the 1983 and 1989 Survey of Consumer Finances;
Arthur B.
Kennickell and Martha Starr-McCluer, "Changes in Family Finances from 1989 to 1992:
Evidence
from the Survey of Consumer Finances," Federal Reserve Bulletin 80 (October 1994),
861-882.
Mean and median wealth and income, 1983-1992 (Wealth: to the nearest $5,000; Income:
to the
nearest $1,000). Mean to median ratio in parentheses.
Wealth:
Year Mean Median
1983 $155,000 $45,000
1989 $190,000 $45,000
1992 $215,000 $45,000
Income:
Year Mean Median
1983 $38,000 $28,000
1989 $45,000 $29,000
1992 $43,000 $28,000
return to the text
Download or view the figure
Figure 4: ...And the Rich Get Richer
Sources: author's computations from the 1983 and 1989 Survey of Consumer Finances;
Kennickell
and Starr-McCluer, 1994.
Changing shares of wealth and income, 1983 and 1989
Wealth, 1983 Wealth, 1989
Top 1 percent: 33.7% Top 1 percent: 38.9%
Next 19: 47.6 Next 19: 45.7
Bottom 80: 18.7 Bottom 80: 15.4
Income, 1983 Income, 1989
Top 1 percent: 13.4% Top 1 percent: 16.4%
Next 19: 38.5 Next 19: 39.1
Bottom 80: 48.1 Bottom 80: 44.5
return to the text
Download or view the figure
Figure 5: The Composition of Household Wealth, 1989
Source: authors computations from the 1989 Survey of Consumer Finances
Homes refers to owner-occupied housing; Deposits to liquid assets (cash, bank
deposits, money
market funds, cash surrender value of insurance and pension plans); Real
Estate/Business to
investment real estate and unincorporated businesses; Stock to corporate stock,
financial securities,
personal trusts, and other assets.
The Super Rich*
Homes: 6.6%
Deposits: 11.0%
Real Estate/Business: 45.1%
Stock: 37.3%
Middle-Income Families**
Homes: 68.6%
Deposits: 17.0%
Real Estate/Business: 7.5%
Stock: 7.0%
*Defined as families in the top 1 percent of the wealth distribution, with a net worth
of $2.35 million
or more in 1989.
**Defined as families in the middle quintile, with incomes between $21,200 and $34,300
in 1989.
return to the text
Download or view the figure
Figure 6: Assets Held Primarily by the Wealthy
Source: Author's computations from the 1989 Survey of Consumer Finances.
Families are classified into wealth class on the basis of their net worth. In the top
1 percent of the
wealth distribution (the "Super Rich") are families with a net worth of $2.35 million
or more in 1989;
in the next 9 percent (the "Rich") are families with a net worth greater than or equal
to $346,400 but
less than $2.35 million; in the bottom 90 percent (Everybody Else) are families with a
net worth less
than $346,400.
Stocks
Super Rich: 46.2%
Rich: 43.1%
Everybody Else: 10.7%
Bonds
Super Rich: 54.2%
Rich: 34.3%
Everybody Else: 11.5%
Business Equity
Super Rich: 56.3%
Rich: 33.7%
Everybody Else: 10.0%
Non-Home Real Estate
Super Rich: 40.3%
Rich: 39.6%
Everybody Else: 20.0%
Trusts
Super Rich: 53.6%
Rich: 35.4%
Everybody Else: 11.0%
return to the text
Download or view the figure
Figure 7: Assets and Liabilities Held Primarily by the Non-Wealthy
Source: Author's computations from the 1989 Survey of Consumer Finances.
Families are classified into wealth class on the basis of their net worth. In the top
1 percent of the
wealth distribution (the "Super Rich"), are families with a net worth of $2.35 million
or more in 1989;
in the next 9 percent (the "Rich") are families with a net worth greater than or equal
to $346,400 but
less than $2.35 million; in the bottom 90 percent (the "Rest") are families with a net
worth less than
$346,400.
("Deposits" includes cash, currency, demand deposits, savings and time deposits, money
market
funds, certificates of deposits, and IRA and Keogh accounts.)
Principal Residence
Super Rich: 7.4%
Rich: 26.3%
Everybody Else: 66.3%
Life Insurance
Super Rich: 16.8%
Rich: 27.7%
Everybody Else: 55.4%
Deposits
Super Rich: 21.0%
Rich: 37.8%
Everybody Else: 41.2%
Total Debt
Super Rich: 10.1%
Rich: 19.9%
Everybody Else: 70.0%
return to the text
Download or view the figure
NOTES
1. See my monograph, Top Heavy: A Study of Increasing Inequality of Wealth in America
(New
York: Twentieth Century Fund, 1995) for technical details on the construction of this
series.
return to text
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