Chapter 8
Wealth in America

All communities divide themselves into the few and the many. The first are the rich and the well-born; the other, the mass of the people.

—Alexander Hamilton, 1787

Wealth is collected assets—cash, commodities, stocks, bonds, businesses, and properties. In the United States a small percentage of people have enormous wealth and the rest of the population has far less wealth. Is this a natural and acceptable result of capitalism or an economic injustice that must be righted for the good of society? This is a debate that has raged since the nation was founded. Some people believe that the accumulation of great wealth is available to anyone in America as the reward for hard work, ingenuity, and wise decision-making. Other people believe that American political, business, and social systems are unfairly structured so as to limit wealth-building by certain segments of the population.

THE COMPONENTS OF WEALTH

The components of wealth can be divided into two broad categories: tangible assets and intangible assets. Tangible assets are things that have value in and of themselves. Examples include gold, land, houses, cars, boats, artwork, jewelry, and all other durable consumer goods with recognizable value in the marketplace. These are material possessions. Intangible assets are financial devices that have worth because they have perceived value. The most obvious examples are stocks and bonds. Other devices often counted as intangible assets include pensions (which are promises of future income), life insurance policies with cash value, and insurance policies on tangible assets, because they protect valuable resources.

The federal government does not measure the overall wealth of individual Americans or the population as a whole. It does compile data on related economic indicators that include wealth assets. These measures are called net worth and personal income.

Net Worth

Net worth is the sum of all assets minus the sum of all liabilities (such as debts). The Federal Reserve (the Fed) computes the aggregate net worth of households and nonprofit organizations on a quarterly and annual basis. These values are published in tabular form in "B.100 Balance Sheet of Households and Nonprofit Organizations" as part of the Federal Reserve Statistical Release Z.1: Flow of Funds Accounts of the United States. Table 8.1 shows the net worth data available as of June 2006 for the first quarter of 2006.

ASSETS

Overall, American households and nonprofit organizations (NPOs) had assets of $66 trillion in the first quarter of 2006; of this, $26 trillion was in tangible assets and nearly $40 trillion was in financial assets. Figure 8.1 provides a breakdown of assets by category for 1994 through 2005. Over this period tangible assets increased from roughly one third of total assets to around 40%. The Fed includes only three components in tangible assets: real estate, NPO equipment and software, and consumer durable goods. As shown in Figure 8.2, real estate holdings totaled $22.2 billion, making up nearly 85% of all tangible assets. (See Figure 8.2.)

Financial assets were much more diverse, as shown in Figure 8.3. The largest components were pension fund reserves ($11.1 trillion, or 29% of the total), proprietors' investment (or equity) in unincorporated businesses ($6.8 trillion, or 17% of the total), and deposits ($6.3 trillion, or 16% of the total). Deposits include monies in checking and saving accounts and in money market funds.

LIABILITIES

Assets alone do not provide an indication of the nation's wealth status. Debts and other obligations, known as liabilities, must be subtracted. These liabilities totaled $12 trillion during first-quarter 2006. (See Table 8.1.) Credit market instruments accounted for the vast majority of this total, at $11.8 trillion. Home mortgages ($8.9 trillion) were the single largest credit market instrument, followed by consumer credit ($2.1 trillion).

TRENDS IN NET WORTH

As shown in Table 8.1, the net worth of American households and NPOs totaled nearly $54 trillion in the first quarter of 2006. Figure 8.4 compares this value to net worth values calculated by the Fed for the years 1999 to 2005 and first quarter 2006. Following a downward trend that lasted through 2002, net worth has increased slightly each year through first quarter 2006.

Personal Income

The U.S. Department of Commerce's Bureau of Economic Analysis (BEA) collects data on the personal income of Americans. Figure 8.5 shows the breakdown of personal income by source for 2005, when the total was $10.2 trillion. More than half (56%) of personal income was from wages and salaries. Another 14% was attributed to employer-provided benefits. Interest income and proprietors' income each accounted for 9% of the total. Proprietors' income is income earned by sole proprietorships, partnerships, and tax-exempt cooperatives. The remainder of personal income was from net transfer receipts (6%), dividends (5%), and rental receipts (1%). Net transfer receipts are mostly government social benefits such as old-age, survivors, disability and health insurance; unemployment insurance; veterans benefits; and family assistance funds.

In 2005 compensation (wages, salaries, and employer-provided benefits) amounted to more than $7 trillion and accounted for 70% of total personal income. Figure 8.6 shows the historical annual percentage of personal income comprised of compensation. After rising in the 1960s, the percentage began a gradual decline. As illustrated in Figure 8.7, the percentage of personal income from proprietors' income has also declined since 1960. But the contribution to personal income from receipts on assets—interest and dividends—has increased over this time period.

DEMOGRAPHICS OF UNEMPLOYMENT

Although the contribution of compensation to personal income has decreased in recent decades, it still accounts for the largest portion of personal income. Thus, employment factors are extremely important to a discussion of wealth and its distribution. Table 8.2 shows the civilian unemployment rate by demographic characteristics for the years 2000 through 2005. In 2005 the overall rate of unemployment for all civilian workers was 5.1%. The average was lower for white workers (4.4%) than for minorities (10%). The lowest unemployment rate for any demographic group was 3.8% among white men age twenty years and older. The highest rate was 36.3% among minority males age sixteen to nineteen years.

POVERTY IN AMERICA

Poverty is defined and measured in different ways by different government entities. At the federal level it is measured using two methods: poverty thresholds and poverty guidelines. Poverty thresholds are set by the U.S. Census Bureau, which also tracks poverty populations in the United States. The thresholds specify minimum income levels for different sizes and categories of families. For example, in 2005 the poverty threshold for a family of four including two related children in the household was $19,806 per year, according to the Census Bureau.

Poverty guidelines are published by the U.S. Department of Health and Human Services (HHS) for the forty-eight contiguous states, Washington, D.C., Hawaii, and Alaska. According to the HHS, the poverty guidelines are a "simplification" of the poverty thresholds and are used for administrative purposes, such as determining eligibility for specific federal programs. The most recent guidelines were published in the Federal Register on January 24, 2006.

The Poverty Rate

The U.S. Census Bureau calculates the number of people in poverty and the poverty rate using the poverty thresholds. The most recent data were collected during calendar year 2004 as part of the Current Population Survey, Annual Social and Economic Supplement—a sample survey of approximately one hundred thousand households around the United States. The data were presented and discussed in Income, Poverty, and Health Insurance Coverage in the United States: 2004 (August 30, 2005, http://www.census.gov/prod/2005pubs/p60-229.pdf).

According to the report, nearly thirty-seven million Americans lived at or below the federal poverty level in 2004. This represents 12.7% of the population. The number of people in poverty has varied widely over the past few decades. In 1960 there were forty million Americans living in poverty. This value dropped to fewer than twenty-five million people in the early 1970s and then began increasing, reaching near the forty million mark during the early 1990s. The number declined to around thirty-one million in 2000 and then rose throughout the early 2000s.

The poverty rate was around 22% in 1960, dropping to around 11% in the early 1970s. The poverty rate topped 15% during the early 1990s and then decreased to around 12% in 2000, before it began to rise again.

There were dramatic demographic differences in the U.S. poverty rate in 2004. The differences by race and ethnicity were as follows:

• Non-Hispanic whites—8.6%
• Asian-Americans—9.8%

• Hispanics—21.9%
• African-Americans—24.7%

The poverty rates for Hispanics and African-Americans were virtually unchanged from 2003. The rate for non-Hispanic whites increased slightly, from 8.2% in 2003. The rate for Asian-Americans decreased from 11.8% in 2003.

Other demographic differences were also significant. The poverty rate in 2004 for those under age eighteen was 17.8%, compared with 11.3% for people ages eighteen to sixty-four, and 9.8% for people age sixty-five and older. Among family types, the highest poverty rate, by far, was experienced by families headed by unmarried females (28.4%). By contrast, the poverty rate for families headed by unmarried males was 13.5%, and for those headed by married couples it was only 5.5%.

The Working Poor

According to the U.S. Bureau of Labor Statistics (BLS) publication A Profile of the Working Poor, 2004 (May 2006, http://www.bls.gov/cps/cpswp2004.pdf), about 7.8 million people were classified as "working poor"—those people who are in the workforce at least twenty-seven weeks per year but whose income still falls below the poverty level. Just over 6% of American women were among the working poor, compared with 5% of men. Women from all racial and ethnic groups except Asian-Americans were more likely to be among the working poor than men from any racial or ethnic group. African-American women had the highest percentage of working poor (12.5%) of all racial and ethnic groups of either sex.

Although most of the working poor were white (nearly 72%), a greater proportion of African-American and Hispanic workers were among the working poor (10.6% each of African-Americans and Hispanics, versus 4.9% of whites). Just over 10% of all working teenagers ages sixteen to nineteen were among the working poor. The rate was almost double (19.5%) for African-American teens.

Poverty rates varied greatly by educational attainment and occupation. Just over 15% of those in the labor force with less than a high school diploma were among the working poor, compared with only 1.7% of college graduates. In general, management and professional occupations, which tended to require higher levels of education, saw lower amounts of poverty among workers (1.9% were classified as working poor). Occupations in industries such as services and natural resources tended to have more workers living in poverty: 11.2% of service workers were poor in 2004, as were 14.6% of those who did farming, fishing, or forestry work and 8.3% of workers engaged in construction and extraction occupations.

Analysts consider three continuing problems in the labor market to be responsible for most poverty among working people: low wages, periodic unemployment, and involuntary part-time work. (Involuntary part-time workers are described by the BLS as "persons who, in at least 1 week of the year, worked fewer than 35 hours because of slack work or business conditions, or because they could not find full-time work.") A large majority (80%) of the working poor who typically worked full time experienced at least one of these conditions in 2004.

WEALTH DISTRIBUTION

In January 2006 the Federal Reserve Board issued a report titled "Currents and Undercurrents: Changes in the Distribution of Wealth, 1989–2004" (Arthur B. Kennickell, corrected June 22, 2006, http://www.federalreserve.gov/Pubs/FEDS/2006/200613/200613pap.pdf). The report relies on data collected during the 2004 Survey of Consumer Finances (SCF). The SCF is a survey conducted every three years by the Fed in cooperation with the Internal Revenue Service to collect detailed financial information on American families. The Fed report traces changes in wealth distribution between 1989 and 2004 based on computed net worth values. Table 8.3 shows the distribution of net worth across this time period. All values were computed using 2004 dollars to compensate for the effects of inflation between 1989 and 2004.

In 1989 more than a fourth of families (26.5%) had a net worth of less than $10,000. At the other end of the spectrum, 10.8% had a net worth of at least $500,000. In 2004 the portion of families with a net worth of less than $10,000 was 22.7%, down 3.8 percentage points from 1989. By contrast, the percentage of families in 2004 with a net worth of at least $500,000 had risen by more than half, up 6.9 percentage points to 17.7%.

Gini Coefficients

The Gini coefficient is a mathematically derived value used to describe the inequality in a data distribution. It was developed during the early 1900s by the Italian statistician Corrado Gini (1884–1965). The Fed used the Gini coefficient to measure the extent of the inequality in the distribution of wealth among American families. When used to compute wealth inequality, a value of zero indicates perfect equality, while a value of one indicates that all wealth is held by only one family. The Fed calculated a Gini coefficient of 0.7863 for net worth in 1989 and a value of 0.8047 for net worth in 2004. This indicates that a greater amount of wealth became concentrated in the hands of families at the upper end of the spectrum. In other words, the Gini coefficients suggest that the rich got richer, and the poor got poorer over this time period.

Concentration Ratios

Economists use concentration ratios to show the proportion of wealth held by certain groups within a population. Table 8.4 tabulates the proportion of total net worth and total gross assets held by specific percentile groups as calculated in the Fed report. The ratios shown in the upper table indicate that in 2004 just over one-third (33.4%) of total net worth was held by the wealthiest 1% of families (the families at the 99-100 percentile). The other two-thirds of total net worth was held by the other 99% of families. Another way to look at the data is that the poorest half of the families (those in the 0-50 percentile) held only 2.5% of all net worth in 2004. This value is down from a high of 3.6% in 1995—a decline deemed "significantly different" in the report.

The lower table in Table 8.4 shows the concentration ratios for total gross assets. In 2004 the wealthiest 1% of families held 29.5% of total gross assets. The poorest 50% of families held only 5.8% of total gross assets. This marked a decline from the assets they held in 1992, 1995, and 1998.

WEALTH DEMOGRAPHICS

In February 2006 the Fed released another report on wealth titled "Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances" (Federal Reserve Bulletin, http://www.federalreserve.gov/pubs/bulletin/2006/financesurvey.pdf). The report examines changes in family income and net worth between the SCFs conducted in 2001 and 2004. Overall it found that average pretax family income decreased by 2.3% between 2001 and 2004. (Income values were adjusted for the effects of inflation.) The Fed also analyzed the median pretax family income. The median is the value at which half of the values are greater than the median and the other half are less than the median. Between 2001 and 2004 the median pretax family income increased by 1.6%.

Table 8.5 shows family net worth by demographic characteristics for the 1995, 1998, 2001, and 2004 SCFs. Between 2001 and 2004 the median net worth of all families grew from $91,700 to $93,100, an increase of 1.5%. The mean (average) net worth grew from $421,500 to $448,200, an increase of 6.3%. The Fed notes that the wealth increase was most pronounced for families in the middle-income range.

A variety of factors are cited for overall changes in wealth between 2001 and 2004; most notable are:

• An increase in homeownership combined with strong growth in real estate appreciation (increase in value over time)
• A decrease in wages

• A decrease in stock ownership and investment income
• An increase in the amount of debt held relative to total assets

The report notes that average wages declined by 3.6% between 2001 and 2004. The median wage also decreased, by 6.2%. The Fed concludes that wealth growth over this time period was weak compared with strong growth experienced between 1992 and 1995 and between 1995 and 1998. Also, the wealth growth between 2001 and 2004 was not consistent across most demographic groups as it had been in the earlier periods.

Race

As shown in Table 8.5, the mean net worth of white families in 2004 was $561,800, while for minority families it was $153,100. The median net worth of white families was $140,700, while for minority families it was $24,800.

Wealth grew for both white and minority families between 2001 and 2004; in fact, the growth for all minorities grouped together outpaced the growth for white families. The average and median net worth of white families increased by 8.3% and 8.6%, respectively. The average and median net worth of minority families increased by 23.7% and 29.8%, respectively.

However, the report notes that African-American families lagged behind other minorities in wealth growth. The median net worth of African-American families grew from $20,300 in 2001 to $20,400 in 2004, an increase of around 0.5%. The average net worth increased from $80,700 to $110,600 over this period, an increase of 37%. This suggests that only a very small number of African-American families improved their net worth, and those families were at the top of the wealth class. By contrast, median and average net worth both increased by more than 8% for white families. This indicates that a greater number of white families improved their financial condition and the gains were more evenly distributed among the wealth classes.

Other Demographics

The data in Table 8.5 indicate that families with the highest average net worth in 2004 had the following characteristics:

• A head of household between age fifty-five and sixty-four years old
• A head of household with a college degree
• A self-employed head of household
• Living in the Northeast
• Owning a home

Comparison of data from 1995 and 2004 shows that all demographic groups improved their average net worth over this time period. However, there are variations in median changes. For example, the mean/average net worth of families with a head of household younger than thirty-five increased from $53,200 in 1995 to $73,500 in 2004. Their median net worth, however, decreased from $14,800 to $14,200. The same trend is evident for families headed by a person with no high school diploma and for nonhomeowners. In each case, mean/average net worth increased, but median net worth decreased. The Fed acknowledges that the reasons for this disparity in the growth of mean and median net worth are complex but attributes it to distributional changes within the demographic groups.

Nonfinancial Assets

Nonfinancial assets are large material items such as real estate, business-related machinery, and automobiles, as well as ownership in businesses. Table 8.6 shows that 92.5% of American families held nonfinancial assets in 2004. The highest percentage of families (86.3%) owned at least one vehicle. A majority (69.1%) owned their primary residence. Smaller percentages owned other residential property (12.5%), had business equity (11.5%), held equity in a nonresidential property (8.3%), or held some other nonfinancial asset (7.8%). As expected, families with higher incomes were more likely to have nonfinancial assets.

Families in the lowest twentieth percentile of income, nonhomeowners, and families in which the head of household was not working were least likely to hold

nonfinancial assets. There was a notable difference among races: 95.8% of white families held nonfinancial assets in 2004 compared with 84% of minority families.

Financial Assets

Table 7.3 in Chapter 7 shows the percentage of families holding financial assets in 2004 by demographic characteristics. The data indicate that 93.8% of all families held some type of financial asset. Most common were transaction accounts (checking, savings, money market deposit accounts, money market mutual funds, and call accounts at brokerages)—91.3% of families held these accounts. Nearly half of families (49.7%) had retirement accounts. Note that this category does not include Social Security benefits and certain employer-sponsored defined benefit plans. Nearly a quarter of families (24.2%) had cash value life insurance policies. Smaller percentages held stocks (20.7%), savings bonds (17.6%), pooled investment funds (15%), certificates of deposit (12.7%), and bonds (1.8%). Ten percent of families held financial assets of other types.

Overall, families most likely to hold financial assets were those in the highest income brackets, those with a head of household age seventy-five or older, those with a self-employed head of household, and homeowners. Comparison among races indicates that 97.2% of white families held financial assets in 2004, compared with 85% of minority families. The largest difference lies in retirement accounts. More than half (56.1%) of white families had retirement accounts, compared with only 32.9% of minority families. Stock ownership also showed disparities. More than one quarter (25.5%) of white families owned stocks in 2004, compared with only 8% of minority families.

WEALTH INEQUALITY—IS IT A PROBLEM?

Although the data are clear that wealth inequality exists in America, there is contentious debate about whether or not this condition poses a problem to the economy and to society. A certain amount of inequality is built into a capitalist economy by its very nature. But with immense wealth growing rapidly among the already richest 1% of Americans, and a correspondingly shrinking middle class, many economists worry that the perceived economic success of the 2000s may be just an illusion.

Wealth Inequality Seen as Harmful

The debate over wealth inequality has always been a politically partisan issue, with those on the "right" arguing that the market should be allowed to adjust itself with regard to wages and income and those on the "left" maintaining that widespread financial inequality causes numerous social and economic problems. This latter viewpoint was explained at length in an opinion piece published in the New York Times on October 20, 2002. In "For Richer" commentator Paul Krugman asserts that wealth inequality has severe economic, political, and social consequences for the nation.

Krugman asserts that wage controls and other measures taken by the government during the Great Depression and World War II created a broad and stable middle class in the United States. An abundance of high-paying unionized manufacturing jobs ensured that less-educated working class people could maintain a standard of living similar to that of highly educated professionals. Krugman believes that changing social attitudes—a "new permissiveness"—have permitted wealth inequality to grow unchecked since the 1970s. Krugman uses as an example the enormous growth in the salaries of chief executive officers (CEOs) of major corporations. He claims that ideas about corporate responsibility and financial prudence kept CEO salaries in check until the 1970s and 1980s, when a new societal attitude emerged that Krugman describes as "greed is good." Krugman notes that in 1970 the top one-tenth of 1% of American taxpayers had average earnings that were seventy times as much as the average American. By 1998 the same segment had incomes that were three hundred times that of the average American. Yet there has not been an uproar among the middle and lower classes about wealth inequality.

Krugman believes that policy makers perpetuate wealth inequality in America and that the United States is becoming a plutocracy—a system in which the wealthy control the power of government. He points to the estate tax as an example. This is a federal tax assessed against a person's wealth when that person dies. There are numerous deductions and loopholes that prevent the tax from being assessed against the entire value of an estate. (As discussed in Chapter 9, as of 2005 the first $1.5 million of an individual's estate or the first $3 million of a married couple's estate was exempt from the estate tax.) Krugman writes that in 1999 only the top 2% of estates in the United States paid any estate tax at all. Possible elimination of the estate tax is an ongoing topic of political discussion, despite the very limited number of people that would be affected. Krugman maintains that this move toward estate tax elimination is driven by wealthy, politically conservative, policy makers (and media outlets that are friendly to them) who seek to convince the public that the estate tax threatens the economic security of middle-class Americans.

Krugman concludes: "as the gap between the rich and the rest of the population grows, economic policy increasingly caters to the interests of the elite, while public services for the population at large—above all, public education—are starved of resources. As policy increasingly favors the interest of the rich and neglects the interest of the general population, income disparities grow even wider."

In August 2006 journalists Steve Greenhouse and David Leonhardt wrote in their New York Times article, "Real Wages Fail to Match a Rise in Productivity" (August 28, 2006, http://www.nytimes.com/2006/08/28/business/28wages.html?ex=1158984000&en=c9d8a39c0a1dbcbe&ei=5070): "With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers." What this means for the larger economy, according to Greenhouse and Leonhardt, is that a greater share of money goes back into companies rather to workers' paychecks: "In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department." Ultimately, this means that less money is available to average workers to spend as consumers. By contrast, Greenhouse and Leonhardt cite an analysis by economists Emmanuel Saez and Thomas Piketty, who note that "in 2004, the top 1 percent of earners—a group that includes many chief executives—received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago."

Wealth Inequality Seen as Not Harmful

On the other side of this issue are those who believe that wealth inequality does not pose a problem to the American economy or social system. This viewpoint is generally associated with conservative political thinking, which holds that market forces must be allowed to adjust themselves without government interference. One idea that is regularly expressed by politicians in this camp is that what's good for the rich is good for the rest of us. This philosophy was espoused by President Ronald Reagan, who championed "trickle down" economic policy—economic actions (such as tax cuts beneficial to the wealthy) that encourage greater investment in business growth, thus increasing employment, wages, and other benefits to those in the middle and lower classes.

An article in the June 2003 edition of the conservative journal National Review argues that income inequality is not harmful to America. In "Rich Man, Poor Man: How to Think about Income Inequality—Hint: It's Not as Bad as You May Think," commentator Kevin A. Hassett rebuts many of the criticisms leveled against income inequality. In fact, Hassett asserts that evidence shows that income inequality in very poor undeveloped countries probably limits economic growth, but not so in wealthy developed countries, where economies and income inequality grow together.

Hassett believes that unease over wealth inequality is driven by social views on the "basic justice" of society, but he argues that there are similarly compelling arguments against taking from the rich to benefit the poor. Hassett says, "In the real world, differences emerge between citizens because of both luck and choices. Virtually every circumstance is a mixture of these two cases. This distinction is important, because it makes it difficult, if not impossible, to conceive of scenarios where justice clearly supports forceful redistribution." Also, Hassett notes that taking resources from the rich limits their ability and incentive to start and grow businesses, which will ultimately hurt American workers even more. He concludes that on a global scale, nations emphasizing free-market capitalism (such as the United States) have done a better job of raising the standard of living of their poor than nations in which socialist views have encouraged more equitable distribution of wealth.