Wealth and income inequity are defining issues forthe United States.
The wealthiest 10 percent possess 76 percent of the nation’s wealth. The calculations of Edward Wolff, a New York University economist, show the following disturbing statistics based on an imaginary total of 100 people in America:
- The top person in the nation (one person in the imaginary scheme of only 100 people) owns 33 percent of all the property, stock market, and anything else that can be owned. Thus, in this stratosphere he (most likely male) owns 33 percent of everything;
- The next four people own 28 percent combined, or each owns 7 percent of everything (not too shabby);
- The next five people own 14 percent combined, or each owns 2.8 percent of everything;
- The next 10 people own 12 percent combined, or each owns 1.2 percent of everything. The above 20 people account for 87 percent of the total wealth. Clearly these folks are the upper class. Next comes the shrinking middle class, formerly the backbone of the nation and envy of the world.
- The next 20 people own 9 percent combined, or each owns 0.87 percent;
- The following 20 people own 3 percent combined, or each owns 0.15 percent.
The above tally accounts for 60 of the one hundred imaginary people and 99 percent of the wealth. The remaining 40 people are out of luck because unfortunately they have virtually nothing to own. Statistically, these bottom 40 people have a negative net worth; namely, they owe more than they own. While some in this group are transient—a new college grad with student loans or an industrious dual-earning young couple with a mortgage, most of the 40 folks struggle day-by-day and either came from or are about to begin multi-generational hardship. Translating these one hundred imaginary people to the 326 million in the country should make all of us reflect on the current economic status of America and its consequences.
WEALTH VS. INCOME:
The important distinction between income and wealth cannot be overstated. Income is money coming into a family, while wealth is a family’s assets—items like savings, real estate, and businesses minus debt. The United States Census Bureau defines income as money received on a regular basis by working— salary, wages, social security/other retirement payments, and welfare —minus payments for personal income taxes, social security, union dues, Medicare deductions, etc.
Wealth is what people own. The sum of all one’s assets minus liabilities equals wealth. The poorest people or families may get by as long as they have incoming money from a job. However, poor folks have no wealth or reserve and little or no money in the bank; thus any income interruption, possibly due to something out of their control such as a recession or a hurricane, is catastrophic.
The wealthiest families may have low earned income because they are not working but have high unearned income from dividends, capital gains, and other assets. Investment income is the engine that keeps wealthy families wealthy. Recessions or stock market downturns are stressful but not devastating because markets typically recover.
Wealthy families may transiently lower their standard of living but never experience the hardship level of a poor family who are struggling to get food on the table. Financially successful retirees offer another example of the differentiation between wealth and income. These folks who planned and saved may have little income but high wealth.
Unfortunately, only a minority of the population is in this enviable position; one in three retirees has no retirement savings according to a Federal Reserve 2015 survey.
SOCIOLOGY OF WEALTH:
Wealth and income combined comprise a family’s total opportunity, typically multi-generational, to secure a desired standard of living. Depending on the inheritance tax laws, family wealth or poverty is usually passed onto children. The ability to change social classes has been an important attribute in America where we previously had a large and dominant middle class. Now with income and wealth inequity, we have what many believe is an unhealthy bi-modal distribution of wealth, namely the rich and the poor.
In addition to providing both short- and long-term financial security, wealth often bestows self-perpetuating social prestige and political power.
Wealth removes restrictions, provides comfort, offers options, and allows risk-taking—way more so than without abundant assets. The standard of living for the middle class is dependent on wages. The wealthy class depends on investments. The growing disparity between the very wealthy and the lower and middle classes is no longer sustainable according to a 2014 Harvard Business School survey of 1947 alumni.
CAUSES OF WEALTH INEQUITY:
The rich get richer and the poor get poorer, is a sadly true aphorism. Wealthy people invest and reap fortunes from stocks, dividends, interest, trusts and other forms of unearned income. And unfortunately, people who are already just getting by financially cannot get past the day-to-day needs of existence to save enough money to invest. Sixty-two percent of families headed by single parents are without savings or other financial assets according to David Grusky’s Social Stratification: Class, Race, and Gender in Sociological Perspective.
Net indebtedness precludes investing, thereby perpetuating dependence on current salary and wages. Any disruption from work or unforeseen expense—car breakdown, new tires, medical illness, hurricanes, etc.—pushes those already financially precarious over the fiscal edge.
The disparity between the rich with unearned income and the poor with no reserve is now being compounded multi-generationally. Rich kids potentially have access to better education or have easier ability to network with other wealthy people, all of whom may have better investment options, thus perpetuating the high rate of unearned income.
Fortunately, public education in America has been a great equalizer. The importance of keeping excellent public educational opportunities for all cannot be overemphasized.
Estate and inheritance taxes remain controversial. While people object to further taxation, death taxes can aid in accelerating class mobility by decreasing the wealth transfer among generations. Family farmers with large tracts of land, an illiquid asset, are stressed when transferring property to their children. In other nations at other times with different cultures, the first born son of a wealthy family was disproportionally advantaged. Ultimately, this male primogeniture culture did not reward merit, thus decreasing productivity, subsequently resulting in stagnation in the economy.
Another notable exception to generational wealth is found in the reported data about successful family owned businesses. While a significant number pass to the second generation, 13 percent last three generations and only three percent survive four generations. Short sleeves to short sleeves is another aphorism with a certain amount of truth.
Children who are brought up in wealthy families do have advantages but also may catch a disease called “affluenza” that saps their motivation to work hard, requires instant gratification, and consequently encourages living a purposeless life of leisure.
Inequity equals less economic growth. Everyone from the top 1 percent and especially the middle class suffers when the economy stagnates or worse still evolves into a recession or depression. Federal Reserve Chair Janet Yellen stated in a congressional hearing, “There is no question that we’ve had a trend toward growing inequity. This trend can shape and determine the ability of different groups to participate equally in a democracy and have grave effects on social stability over time.”
Loss of the middle class has consequences for all. Wealth disparity creates fertile ground for insecurity, class clashes, political instability, and ultimately lawlessness with subsequent loss of freedom from fear. Extremely high levels of wealth inequity are “incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies,” according to economist Thomas Piketty in Capital in the Twenty-First Century.
He continues, “The risk of a drift towards oligarchy is real and gives little reason for optimism about where the United States is headed.”
Around the world, countries with maldistribution of wealth and power are not as productive or content as America has been over the past century. Whereas politicians focus on the next election cycle, statesmen can lead the way for future generations by growing the middle class, encouraging meritocracy and decreasing income and wealth inequity. By encouraging self-motivated altruistic people to participate fully in our economy and government, we will grow the middle class and re-create a sustaining environment of economic, social, and societal well-being.
We have opportunities to educate everyone, encourage industriousness, and leave a legacy for the next generations of Americans.