Wealth inequality in the United States
Encyclopedia
Wealth inequality in the United States, also known as the "wealth gap", refers to the unequal distribution of financial
asset
s among residents of the United States
. Wealth
includes the values of homes, automobiles, businesses, savings, and investments. Those who acquire a great deal of financial wealth do so primarily through the appreciation of fiscal portfolios. For this reason, financial wealth involves only stocks and mutual funds, and other investments. Hence, there is greater financial inequality than simple net worth disparities. Various sociological statistics suggest the severity of wealth inequality "with the top 10% possessing 80% of all financial assets [and] the bottom 90% holding only 20% of all financial wealth." Although different from income inequality
, the two are often interrelated.
Melvin L. Oliver and Thomas M. Shapiro propose that wealth signifies the opportunity to “make it” in life; wealth is not used for daily expenditures or factored into a budget but when coupled with income it comprises the family’s total opportunity “to secure a desired stature and standard of living, or pass their class status along to one’s children”. Moreover, “wealth provides for both short- and long-term financial security, bestows social prestige, and contributes to political power
, and can be used to produce more wealth." Hence, wealth possesses a psychological element that awards people the feeling of agency, or the ability to act. The accumulation of wealth grants more options and eliminates restrictions about how one can live life. Dennis Gilbert asserts that the standard of living of the working and middle classes is dependent upon income and wages, while the rich tend to rely on wealth, distinguishing them from the vast majority of Americans.
, between 1979 and 2007 incomes of the top 1% of Americans grew by an average of 275%. During the same time period, the 60% of Americans in the middle of the income scale saw their income rise by 40%. Since 1979 the average pre-tax income for the bottom 90% of households has decreased by $900, while that of the top 1% increased by over $700,000, as federal taxation became less progressive
. From 1992-2007 the top 400 income earners in the U.S. saw their income increase 392% and their average tax rate reduced by 37%. In 2009, the average income of the top 1% was $960,000 with a minimum income of $343,927.
In 2007 the richest 1% of the American population owned 34.6% of the country's total wealth, and the next 19% owned 50.5%. Thus, the top 20% of Americans owned 85% of the country's wealth and the bottom 80% of the population owned 15%. Financial inequality was greater than inequality in total wealth, with the top 1% of the population owning 42.7%, the next 19% of Americans owning 50.3%, and the bottom 80% owning 7%. However, after the Great Recession which started in 2007, the share of total wealth owned by the top 1% of the population grew from 34.6% to 37.1%, and that owned by the top 20% of Americans grew from 85% to 87.7%. The Great Recession also caused a drop of 36.1% in median household wealth but a drop of only 11.1% for the top 1%, further widening the gap between the 1% and the 99%. During the economic expansion between 2002 and 2007, the income of the top 1% grew 10 times faster than the income of the bottom 90%. In this period 66% of total income gains went to the 1%, who in 2007 had a larger share of total income than at any time since 1928.
and wealth
. Income refers to a flow of money over time in the form of a rate (per hour, per week, or per year); wealth is a collection of assets owned. In essence, income is specifically what people receive through work, retirement, or social welfare whereas wealth is what people own. While the two are seemingly related, income inequality alone is insufficient for understanding economic inequality
for two reasons:
The United States Census Bureau
formally defines income as “received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc. By this official measure, the wealthiest families have low income but the value of their assets earns enough money to support their lifestyle. Dividends from trusts or gains in the stock market do not fall under the definition of income but are the primary money flows for the wealthy. Retired people also have little income but usually have a higher net worth because of money saved over time.
Additionally, income does not capture the extent of wealth inequality. Wealth is derived over time from the collection of income earnings and growth of assets. The income of one year cannot encompass the accumulation over a lifetime. Income statistics view too narrow a time span for it to be an adequate indicator of financial inequality. For example, the Gini coefficient
for wealth inequality increased from 0.80 in 1983 to 0.84 in 1989. In the same year, 1989, the Gini coefficient for income was only 0.52. The Gini coefficient is an economic tool on a scale from 0 to 1 that measures the level of inequality. 1 signifies perfect inequality and 0 represents perfect equality. From this data, it is evident that in 1989 there was a discrepancy about the level of economic disparity with the extent of wealth inequality significantly higher than income inequality.
Essentially, the wealthy possess greater financial opportunities that allow their money to make more money. Earnings from the stock market or mutual funds are reinvested to produce a larger return. Over time, the sum that is invested becomes progressively more substantial. Those that are not wealthy, however, do not have the resources to enhance their opportunities and improve their economic position. Rather, “after debt payments, poor families are constrained to spend the remaining income on items that will not produce wealth and will depreciate over time." Scholar David B. Grusky notes that “62 percent of households headed by single parents are without savings or other financial assets”. Net indebtedness generally prevents the poor from having any opportunity to accumulate wealth and thereby better their conditions.
Notably, for both the wealthy and not-wealthy, the process of accumulation or debt is cyclical. The rich use their money to earn larger returns and the poor have no savings with which to produce returns or eliminate debt. Unlike income, both facets are generational. Wealthy families pass down their assets allowing future generations to develop even more wealth. The poor, on the other hand, “are less able to leave inheritances to their children leaving the latter with little or no wealth on which to build…This is another reason why wealth inequality is so important- its accumulation has direct implications for economic inequality among the children of today’s families."
Corresponding to financial resources, the wealthy strategically organize their money so that it will produce profit. Affluent people are more likely to allocate their money to financial assets such as stocks, bonds, and other investments which hold the possibility of capital appreciation. Those who are not wealthy are more likely to have their money in savings accounts and home ownership. This difference comprises the largest reason for the continuation of wealth inequality in America: the rich are accumulating more assets while the middle and working classes are just getting by. Currently, the richest 1% hold about 38% of all privately held wealth in the United States. while the bottom 90% held 73% of all debt.
As the price of commodities increases because of inflation, a larger percentage of lower class people's money is spent on things they need to survive and go to work, such as food and gasoline. Most of the working poor are paid fixed hourly wages that do not keep up with rises in prices, so every year an increasing percentage of their income is consumed until they have to go into debt just to survive. At this point, their little wealth is owed to lenders and banking institutions.
The distributive nature of tax policy has been suggested by some economists and politicians such as Emmanuel Saez
, Thomas Piketty
, and Barack Obama
to perpetuate economic inequality in America by steering large sums of wealth into the hands of the wealthiest Americans. This claim has created much controversy and debate within the academic and political spheres.
Inheritance therefore takes on a special meaning when considering the wealth gap between blacks and whites in today’s world because it can directly link the disadvantaged economic position and prospects of today's blacks to the disadvantaged positions of their parents' and grandparents' generations. According to a report done by Robert B. Avery and Michael S. Rendall, one in three white households will receive a substantial inheritance during their lifetime compared to only one in ten black households.
This relative lack of inheritance that has been observed among African Americans can be attributed in large part to factors such as- unpaid labor (slavery), violent destruction of personal property in incidents such as Red Summer of 1919
, exclusion from higher education and better paid jobs (racial discrimination), and more recently, redlining
. To put it succinctly a relative lack of accumulated wealth can be attributed in large part to Racism in the United States
. Other ethnic minorities, particularly those with darker complexions, have faced many of these same adversities.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s among residents of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. Wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
includes the values of homes, automobiles, businesses, savings, and investments. Those who acquire a great deal of financial wealth do so primarily through the appreciation of fiscal portfolios. For this reason, financial wealth involves only stocks and mutual funds, and other investments. Hence, there is greater financial inequality than simple net worth disparities. Various sociological statistics suggest the severity of wealth inequality "with the top 10% possessing 80% of all financial assets [and] the bottom 90% holding only 20% of all financial wealth." Although different from income inequality
Income inequality in the United States
Income inequality in the United States of America refers to the extent to which income is distributed in an uneven manner in the US. Data from the United States Department of Commerce, CBO, and Internal Revenue Service indicate that income inequality among households has been increasing...
, the two are often interrelated.
Melvin L. Oliver and Thomas M. Shapiro propose that wealth signifies the opportunity to “make it” in life; wealth is not used for daily expenditures or factored into a budget but when coupled with income it comprises the family’s total opportunity “to secure a desired stature and standard of living, or pass their class status along to one’s children”. Moreover, “wealth provides for both short- and long-term financial security, bestows social prestige, and contributes to political power
Political power
Political power is a type of power held by a group in a society which allows administration of some or all of public resources, including labour, and wealth. There are many ways to obtain possession of such power. At the nation-state level political legitimacy for political power is held by the...
, and can be used to produce more wealth." Hence, wealth possesses a psychological element that awards people the feeling of agency, or the ability to act. The accumulation of wealth grants more options and eliminates restrictions about how one can live life. Dennis Gilbert asserts that the standard of living of the working and middle classes is dependent upon income and wages, while the rich tend to rely on wealth, distinguishing them from the vast majority of Americans.
Statistics
According to the Congressional Budget OfficeCongressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
, between 1979 and 2007 incomes of the top 1% of Americans grew by an average of 275%. During the same time period, the 60% of Americans in the middle of the income scale saw their income rise by 40%. Since 1979 the average pre-tax income for the bottom 90% of households has decreased by $900, while that of the top 1% increased by over $700,000, as federal taxation became less progressive
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
. From 1992-2007 the top 400 income earners in the U.S. saw their income increase 392% and their average tax rate reduced by 37%. In 2009, the average income of the top 1% was $960,000 with a minimum income of $343,927.
In 2007 the richest 1% of the American population owned 34.6% of the country's total wealth, and the next 19% owned 50.5%. Thus, the top 20% of Americans owned 85% of the country's wealth and the bottom 80% of the population owned 15%. Financial inequality was greater than inequality in total wealth, with the top 1% of the population owning 42.7%, the next 19% of Americans owning 50.3%, and the bottom 80% owning 7%. However, after the Great Recession which started in 2007, the share of total wealth owned by the top 1% of the population grew from 34.6% to 37.1%, and that owned by the top 20% of Americans grew from 85% to 87.7%. The Great Recession also caused a drop of 36.1% in median household wealth but a drop of only 11.1% for the top 1%, further widening the gap between the 1% and the 99%. During the economic expansion between 2002 and 2007, the income of the top 1% grew 10 times faster than the income of the bottom 90%. In this period 66% of total income gains went to the 1%, who in 2007 had a larger share of total income than at any time since 1928.
Wealth and income
There is an important distinction between incomeIncome
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
and wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
. Income refers to a flow of money over time in the form of a rate (per hour, per week, or per year); wealth is a collection of assets owned. In essence, income is specifically what people receive through work, retirement, or social welfare whereas wealth is what people own. While the two are seemingly related, income inequality alone is insufficient for understanding economic inequality
Economic inequality
Economic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of...
for two reasons:
- It does not accurately reflect an individual’s economic position
- Income does not portray the severity of financial inequality in the United States.
The United States Census Bureau
United States Census Bureau
The United States Census Bureau is the government agency that is responsible for the United States Census. It also gathers other national demographic and economic data...
formally defines income as “received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc. By this official measure, the wealthiest families have low income but the value of their assets earns enough money to support their lifestyle. Dividends from trusts or gains in the stock market do not fall under the definition of income but are the primary money flows for the wealthy. Retired people also have little income but usually have a higher net worth because of money saved over time.
Additionally, income does not capture the extent of wealth inequality. Wealth is derived over time from the collection of income earnings and growth of assets. The income of one year cannot encompass the accumulation over a lifetime. Income statistics view too narrow a time span for it to be an adequate indicator of financial inequality. For example, the Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....
for wealth inequality increased from 0.80 in 1983 to 0.84 in 1989. In the same year, 1989, the Gini coefficient for income was only 0.52. The Gini coefficient is an economic tool on a scale from 0 to 1 that measures the level of inequality. 1 signifies perfect inequality and 0 represents perfect equality. From this data, it is evident that in 1989 there was a discrepancy about the level of economic disparity with the extent of wealth inequality significantly higher than income inequality.
Causes of wealth inequality
Some primary causes contributing to the creation and persistence of wealth inequality include:- Financial Resources
- Money Allocation
- Higher rate of savings and hence asset accumulation by the wealthy
- Higher net rate of return to assets owned by the rich (the wealthy may have special knowledge, and the level of fees and other charges on their savings will be less than those with small investments)
- lower credit costs and credit constraints for the wealthy. Access to credit at lower rates enhaces the level of profits and scope of investment opportunities
- Inflation
Essentially, the wealthy possess greater financial opportunities that allow their money to make more money. Earnings from the stock market or mutual funds are reinvested to produce a larger return. Over time, the sum that is invested becomes progressively more substantial. Those that are not wealthy, however, do not have the resources to enhance their opportunities and improve their economic position. Rather, “after debt payments, poor families are constrained to spend the remaining income on items that will not produce wealth and will depreciate over time." Scholar David B. Grusky notes that “62 percent of households headed by single parents are without savings or other financial assets”. Net indebtedness generally prevents the poor from having any opportunity to accumulate wealth and thereby better their conditions.
Notably, for both the wealthy and not-wealthy, the process of accumulation or debt is cyclical. The rich use their money to earn larger returns and the poor have no savings with which to produce returns or eliminate debt. Unlike income, both facets are generational. Wealthy families pass down their assets allowing future generations to develop even more wealth. The poor, on the other hand, “are less able to leave inheritances to their children leaving the latter with little or no wealth on which to build…This is another reason why wealth inequality is so important- its accumulation has direct implications for economic inequality among the children of today’s families."
Corresponding to financial resources, the wealthy strategically organize their money so that it will produce profit. Affluent people are more likely to allocate their money to financial assets such as stocks, bonds, and other investments which hold the possibility of capital appreciation. Those who are not wealthy are more likely to have their money in savings accounts and home ownership. This difference comprises the largest reason for the continuation of wealth inequality in America: the rich are accumulating more assets while the middle and working classes are just getting by. Currently, the richest 1% hold about 38% of all privately held wealth in the United States. while the bottom 90% held 73% of all debt.
As the price of commodities increases because of inflation, a larger percentage of lower class people's money is spent on things they need to survive and go to work, such as food and gasoline. Most of the working poor are paid fixed hourly wages that do not keep up with rises in prices, so every year an increasing percentage of their income is consumed until they have to go into debt just to survive. At this point, their little wealth is owed to lenders and banking institutions.
The distributive nature of tax policy has been suggested by some economists and politicians such as Emmanuel Saez
Emmanuel Saez
Emmanuel Saez is a French economist. Saez is Professor of Economics at the University of California, Berkeley...
, Thomas Piketty
Thomas Piketty
Thomas Piketty is a French economist who specializes in the study of economic inequality.-Youth and education:Piketty was born on May 7, 1971, in Clichy, Paris, to parents who had taken part in the May 1968 riots...
, and Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
to perpetuate economic inequality in America by steering large sums of wealth into the hands of the wealthiest Americans. This claim has created much controversy and debate within the academic and political spheres.
Racial disparities
When it comes to identifying issues that create and contribute to ongoing wealth inequality in the United States, it is also important to observe issues that surround the disparity in wealth between different racial groups. There are many factors involved, but inheritance might be the most important factor. Direct transfer of unused wealth/resources from a parent to a child provides them the opportunity to pay off debts and increase equity.Inheritance therefore takes on a special meaning when considering the wealth gap between blacks and whites in today’s world because it can directly link the disadvantaged economic position and prospects of today's blacks to the disadvantaged positions of their parents' and grandparents' generations. According to a report done by Robert B. Avery and Michael S. Rendall, one in three white households will receive a substantial inheritance during their lifetime compared to only one in ten black households.
This relative lack of inheritance that has been observed among African Americans can be attributed in large part to factors such as- unpaid labor (slavery), violent destruction of personal property in incidents such as Red Summer of 1919
Red Summer of 1919
Red Summer describes the race riots that occurred in more than three dozen cities in the United States during the summer and early autumn of 1919. In most instances, whites attacked African Americans. In some cases groups of blacks fought back, notably in Chicago, where, along with Washington, D.C....
, exclusion from higher education and better paid jobs (racial discrimination), and more recently, redlining
Redlining
Redlining is the practice of denying, or increasing the cost of services such as banking, insurance, access to jobs, access to health care, or even supermarkets to residents in certain, often racially determined, areas. The term "redlining" was coined in the late 1960s by John McKnight, a...
. To put it succinctly a relative lack of accumulated wealth can be attributed in large part to Racism in the United States
Racism in the United States
Racism in the United States has been a major issue since the colonial era and the slave era. Legally sanctioned racism imposed a heavy burden on Native Americans, African Americans, Asian Americans, and Latin Americans...
. Other ethnic minorities, particularly those with darker complexions, have faced many of these same adversities.
Slaveholding
Slaveholding in the United States, a measure of wealth, was unevenly distributed:- As of the 1860 census, enumerating slave schedules by County, 393,975 named persons held 3,950,546 unnamed slaves, for an average of about ten slaves per holder. As some large holders held slaves in multiple counties and are thus multiply counted, this slightly overestimates the number of slaveholders.
- Excluding slaves, the 1860 U.S. population was 27,167,529, yielding about 1 in 70 free persons (1.5%) being slaveholders.
- The distribution of slaveholders was very unequal: holders of 200 or more slaves, constituting less than 1% of all US slaveholders (fewer than 4,000 persons, 1 in 7,000 free persons, or 0.015% of the population) held an estimated 20–30% of all slaves (800,000 to 1,200,000 slaves).
See also
- Affluence in the United StatesAffluence in the United StatesAffluence in the United States refers to an individual's or household's state of being in an economically favorable position in contrast to a given reference group...
- Income inequality in the United StatesIncome inequality in the United StatesIncome inequality in the United States of America refers to the extent to which income is distributed in an uneven manner in the US. Data from the United States Department of Commerce, CBO, and Internal Revenue Service indicate that income inequality among households has been increasing...
- Tax Policy and Economic Inequality in the United StatesTax policy and economic inequality in the United StatesThe United States tax code in regard to income, capital gains, estate, and inheritance taxes, has undergone significant changes under both Republican and Democratic administrations and Congresses since 1964. The number of marginal income tax brackets has decreased while the spread within each tax...
- Investment clubInvestment clubAn investment club is a group of individuals who meet on a regular basis for the purpose of pooling money and retail investing. The invested sums can be $30 to $100 per month. For certain type of club pooling money is not mandatory...
- Net worthNet worthIn business, net worth is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time...
- "Occupy" protests
- Pareto principlePareto principleThe Pareto principle states that, for many events, roughly 80% of the effects come from 20% of the causes.Business-management consultant Joseph M...
- Redistribution of wealth
- Wealth condensation
- Wealth in the United StatesWealth in the United StatesWealth in the United States is commonly measured in terms of net worth, which is the sum of all assets, including home equity, minus all liabilities....
External links
- Americans Underestimate U.S. Wealth Inequality - audio report by NPRNPRNPR, formerly National Public Radio, is a privately and publicly funded non-profit membership media organization that serves as a national syndicator to a network of 900 public radio stations in the United States. NPR was created in 1970, following congressional passage of the Public Broadcasting...
- The United States of Inequality - a 10 part exposé and visual guide by Slate magazine
- 15 Mind-Blowing Facts About Wealth And Inequality In America - charts by The Business Insider
- The Growing Gap in the United States Between the Rich and the Rest - interview with Dr. Edward Wolff
- It's the Inequality, Stupid: 11 Charts that Explain Everything that's Wrong with America - March 2011 issue of Mother JonesMother Jones (magazine)Mother Jones is an American independent news organization, featuring investigative and breaking news reporting on politics, the environment, human rights, and culture. Mother Jones has been nominated for 23 National Magazine Awards and has won six times, including for General Excellence in 2001,...