Income inequality and wealth concentration are topics of extreme interest, particularly given the upcoming election. Income mobility is clearly a desirable attribute of a society, and offering opportunities for improving the financial situation of individuals and families is a hallmark of a well-functioning economy.
There are also undesirable consequences of excessive wealth concentration, yet financial rewards for innovation are a hallmark of economic and social progress. It is important at this time to cut through the rhetoric and take a balanced view of the situation.
First, a word about the difference between income and wealth. Income is the ‘flow’ of money coming in from wages and salaries or other sources. Wealth is the ‘stock’ measure of net worth at a given point in time: assets (such as bank accounts, mutual funds or stocks, homes, cars, and other durable goods) minus liabilities (mortgages, car loans, student loans, and so on). Not surprisingly, wealth and income are correlated, with higher income associated with a greater level of saving and therefore wealth accumulation.
Encouraging the addition of good jobs is clearly integral to allowing more people to accumulate wealth. Many manufacturing and construction jobs, for example, pay relatively high wages and offer paths to career advancement. There are also well-paying positions in many growing segments of the technical workforce (in areas such as health care and computers) which do not require a huge investment in education. Better information and ongoing efforts to improve education and workforce training are essential to income mobility as well as the ability to improve financial conditions including wealth.
The concerns related to wealth I hear most frequently are (1) that it is becoming too concentrated, (2) that it is too sharply divided along racial/ethnic lines, and (3) that too little is being done to deal with the situation. Let me start by saying that the statistics regarding wealth are tricky to interpret at times, because there are many factors at work. Changing stock market and business conditions, for example, can alter income and wealth dramatically (particularly at higher levels), as can the state of the housing market (since a house is a large component of net worth for many families).
One of the best sources of data regarding wealth in the United States is the Survey of Consumer Finances, which the Federal Reserve conducts every three years. Between 2010 and 2013 (the last time the survey was administered), the median net worth of all families fell by two percent to $81,200, while mean net worth stayed about the same at $534,600, though the pattern varied significantly across income groups. (Remember that “median” is the middle of a ranking from lowest to highest, so half of families fall above and half fall below that level; “mean” is the average; these numbers suggest the concentration in higher income groups.) This relative stability is an improvement over the 2007 to 2010 period, when net worth fell dramatically for many families with the financial crisis, recession, and bursting of the housing bubble.
The wealth share of the top three percent of families rose from 44.8 percent in 1989 to 51.8 percent in 2007 and 54.4 percent in 2013, according to the survey, supporting the idea that wealth is becoming more concentrated. However, the incomes of these families vary markedly with the economy and are far less concentrated than wealth. Interestingly, the shares of both income and wealth of the next highest seven percent of the families (percentiles 90 through 97) have changed little since 1989.
Wealth does vary notably by race and ethnicity. A study by the Federal Reserve Bank of St. Louis (using the Survey of Consumer Finances data) reports that median family wealth for all families in 2013 was approximately $81,500. For non-Hispanic white families, the median was about $134,000, with just over $91,400 for Asians, $13,900 for Hispanics, and almost $11,200 for African-American families. The reasons for these variations include differences in age, education, tendency to own financial assets and a house, and debt, among others.
Some people argue that one way to redistribute wealth is through tax policy. However, tax policy deals primarily with income, and it is unrealistic and undesirable to look to taxes as a way to provide upward mobility. Instead, we need to address the real issues in building wealth: having a good job and the basic financial literacy to understand how to increase net worth. In more affluent households where investments and financial concepts are discussed, for example, young people tend to develop a greater understanding and comfort level with financial investments, and a bull market can generate a lot of wealth. Investments in the stock market and other financial assets are open to anyone who has accumulated the relatively small minimums needed to open an account, and upward mobility could be enhanced through better financial education.
The other side of the wealth equation is avoiding excessive debt, particularly high-interest debt. Payday and auto title loans, for instance, can lead to a rapid downward spiral and shrinking net worth (as I discussed in a previous column). Regulation may be helpful in reducing predatory lending practices.
Economic mobility is a worthy societal goal, as is the ability to accumulate wealth. Increasing income through encouraging economic development (and, therefore, quality jobs) and workforce preparedness can play an important role in achieving this goal. However, it is also crucial to understand that wealth involves more than just income, but is also driven by financial literacy and personal choices.