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The Wealth Gap Widens

By Chuck Collins

During the 1920s, the wealthy accumulated such exorbitant stocks of cash, they couldn’t spend it all. Instead, they played the stock market, fueling a rapid run-up in stock prices. Lower and middle income households, on the other hand, lacked wealth enough to meet their needs and were forced to borrow heavily.

Many historians believe that this combination of growing personal debt and a widening wealth gap destabilized the economy and precipitated the Great Depression. A similar fault line underlies today’s economy.

While the media trumpets rising economic growth and soaring Dow Jones, signs are emerging that the current boom, like that of the 1920s, is founded on vast inequities of wealth and is financed by growing consumer debt.

From 1983 to 1998, stock prices rose 13-fold, so that $100 invested in stocks in 1983 would be worth $1300 today. Conventional wisdom has it that everyone benefits from a rising market. After all, nearly half the population now owns some stocks, a much higher proportion than two decades ago.

However, very few have sizable stock holdings. In 1995, the most recent year for which detailed data is available, nearly three-quarters of stock-holders held less than $5,000 worth, including stock in retirement plans and mutual funds. Wealth in the United States is now as maldistributed as it was in 1929. Financial assets like stocks and bonds remain concentrated in relatively few hands, with the richest 10% of the population owning 88% of stocks and 90% of bonds. The personal wealth of Bill Gates alone exceeds the combined holdings of 40% of the U.S. population. Consequently, when the stock market climbs, a relatively few wealthy households reap most of the gains.

Even among the top 10%, wealth is highly concentrated. A mere 1% of households, each with at least $2.4 million in net worth (assets minus debts), now own 40% of the nation’s wealth, twice the share they claimed two decades ago. According to economist Edward Wolff of New York University, the concentration of wealth is even more dizzying if home equity is taken out of the equation (wealth in housing is the most widely-dispersed of assets). Excluding equity in homes, the richest 1/2 of 1% together (about 450,000 households) now own 42% of the nation’s financial wealth.

Thanks to a combination of rising profits, high real interest rates, skyrocketing CEO pay, and a booming stock market, the inflation-adjusted net worth of the richest 1% swelled by 17%, between 1983 and 1995. For others, the boom has been a bust. Thanks to falling wages, low savings levels to begin with, and rapidly rising personal debts, the poorest 40% of households lost an astounding 80% of their net worth.

While the rich racked up gains measured in the millions, the 40% at the bottom saw their average net worth shrink from $4,400 to a meager $900. And despite endless media cheerleading about the rising Dow making millionaires of the middle-class, the middle fifth of American households have actually lost 11% of their net worth since 1983.

Falling Wages increase the Wealth Gap

Behind the wealth gap lurks the wage gap, the fact that wages have fallen short of inflation for the past two decades. Although wages rose in 1997 and 1998, real weekly earnings for average workers are still lower than they were in the 1970s. Had wages risen at the same rate as productivity, hourly workers would today earn an additional $5.33 an hour or $11,000 a year — that could be used to purchase assets.

Instead, households are borrowing heavily to make up for stagnant wages. The U.S. savings rate — the percentage of personal income not spent each year — is less than zero, meaning that the typical U.S. household spends more than it earns. Debt service now eats up 17% of consumer income, a heavy and potentially insupportable burden. As a result, nearly one in five households has negative net worth, and bankruptcy filings have doubled since 1990.

Consumer advocates also worry about the large numbers of homeowners taking out home-equity loans on the basis of what may be speculative increases in their homes’ value. In an economic downturn, with a rise in unemployment, home prices could drop precipitously, putting more middle-class households into bankruptcy and sparking a wave of home foreclosures.

The Racial Wealth Gap

The wealth gap is particularly stark for blacks and Latinos. In 1995, the median black household had a net worth of just $7,400, (compared to $61,000 for whites). Median net worth excluding home equity was only $200 for blacks (compared to $18,000 for whites). Nearly one in three black households had zero or negative wealth. Latino households are even worse off — their median net worth was $5,000 including home equity and zero otherwise. Half the Latino population in the United States have more debts than assets.

The racial wealth gap reflects the reality that wealth accumulation occurs over generations, as parents pass on assets to their children in the form of homeownership, savings and estates. Past and present racial discrimination in asset-building, including slavery, Jim Crow laws, discriminatory employment, insurance and bank lending practices, have kept many people of color from getting on the asset-building train.

The maldistribution of wealth in the United States jeopardizes both our economy and our democracy. To close the wealth gap, we need policies that raise wages and equalize earnings. Higher minimum wages and stronger state and local living wage ordinances are a first step. But workers aren’t likely to share in growth and productivity gains without increased unionization and tougher state regulations that limit overtime and outsourcing.

The Wealth Gap: A Political Issue

With personal savings rates at an all-time low and with the proportion of workers covered by private pension plans declining, it is likely that many Americans will retire with little or no personal savings. In response to public anxiety about the asset gap, a few Democrats have made modest efforts to address the issue.

President Clinton in January proposed expanding individual savings through the establishment of "USA Accounts." These would function like Individual Retirement Accounts except that lower-income taxpayers would receive federal matching funds for any savings that they put aside. Funds could be withdrawn before retirement for asset-building activities, like purchasing a home.

Senator Robert Kerrey (D-NE) introduced legislation to create what he calls "KidSave Accounts." The federal government, under this plan, would provide $3000 to every child, which, if invested at 7% per year (an ambitious goal) could increase in value to $175,000 by age 65. Funds would be available for retirement and would, hopefully, reduce the numbers of households with zero net worth.

Two Yale professors, Anne Alstott and Bruce Ackerman, proposed a more ambitious asset-building program in their book, The Stakeholder Society. Under this scheme, each American upon reaching his or her 20s, would receive $80,000 — a "stake" to invest in business start-ups, education, or other asset-building activities. Financed initially by progressive taxation, the idea is to level the wealth-building playing field, though $80,000 is still a far cry from the $100 billion that Bill Gates’ heirs stand to inherit.

These proposals, with their focus on individual security and market-based solutions, fail to address the political and economic dangers of the over-concentration of wealth. Moreover, they are offered in the context of privatizing social security and dismantling social safety nets. Progressive reforms must address those structures of the economy that foster great inequality rather than shoehorning people into individual wealth-building schemes. A bolder program would include wealth taxation, fairer income taxation, broader worker ownership, and the accumulation of public and community-owned assets.  n

Resources: Chuck Collins, Holly Sklar and Betsy Leondar-Wright, Shifting Fortunes: The Perils of the American Wealth Gap. To order, call 877-JOIN-UFE.

Chuck Collins is codirector of United for a Fair Economy in Boston. He is coauthor with Holly Sklar and Betsy Leondar-Wright of Shifting Fortunes: The Perils of the American Wealth Gap.

Copyright © 1999 The Economic Affairs Bureau, Inc.