Sunday, July 27, 2014
Two thoughts for Sunday on increasing inequality of wealth
- by New Deal democrat
A new study by the Russell Sage Foundation on changes in wealth is yet another piece of confirmation that "the American dream" has only been working for a select few at least since the turn of the Millennium. Two pieces of data in that study are of particular note.
First of all, the graph of median wealth per percentile since 1984 reveals that an important change happened shortly after 2000, but before the onset of the Great Recession:
Note that between 1984 and 2003, the increase in inequality did not involve the poor getting poorer (although studies of wages as opposed to wealth indicate wages for the lower percentiles were declining during that time). Rather, the more affluent pulled away.
After 2003, however, but before the onset of the Great Recession, the bottom 25% of households, whose wealth had previously at least kept even over the previous 20 years, experienced a real 30% decline in wealth.
This is the group most likely to live in apartments and who therefore did not benefit on paper from the housing bubble. Almost certainly this was due to the offshoring of blue collar labor that grew geometrically once China was granted "most favored nation" trading status in 1999. That this large decline for a large swathe of ordinary American households occurred during a time of overall economic growth was a calamity, and an indictment of the accompanying economic policy.
Secondly, a few words of caution in interpreting this table that accompanies the report:
While the table is certainly very powerful evidence of the precarious state of the median household, I would prefer to see a table that does not include housing wealth. This particular table mainly shows the impact of the housing bubble and bust on wealth. While "trading down" and cashing in the difference at retirement does occur, appreciation in housing value is most usually traded in for a larger house, or simply retained over the occupant's life.
Perhaps more importantly, this table does not adjust for age, and so must be treated with caution. For example, the household at the 75th percentile is found to be worth $260,000. I would regard a 25 year old who is worth $260,000 as upper middle class, if not borderline wealthy. They can already own the median house outright, have a nice car, and devote all of their wages or salary to long term saving for, e.g., retirement, and to discretionary spending. Pretty sweet.
On the other hand, a 65 year old worth $260,000, particularly when that includes wealth tied up in a house, is faring no better than lower middle class. Where pensions are a thing of the past, this household is going to live a very precarious old age.
Put another way, most 20-somethings are probably in the bottom 20% of households in terms of wealth (especially with student loans). At the other end of the spectrum, not infrequently the household with a net worth at the 90th percentile is also known as "mom and dad." They've lived beneath their means, and put away $10,000 a year or more throughout their working lives, and due to appreciation of those savings and probably some investments like mutual funds, seen the nest egg grow.
The last time I saw a study that spelled out wealth difference by percentile by age was over half a decade ago.
The Russell Sage Foundation data is powerful. As with all data, just sift carefully.