Exclusive Commentary

Wealth Inequality in America: Two Views

Reid Cramer, New America Foundation and Stuart Butler, Heritage Foundation - Posted March 15, 2013


A recent YouTube video called “Wealth Inequality in America” has received millions of views and a number of responses from across the ideological spectrum. Created by "Politizane," this video was inspired by a study by economists Dan Ariely at Duke University and Michael L. Norton at Harvard University. Spotlight asked two commentators to weigh in on the viral video.

 

Spotlight on Wealth Inequality Goes Viral
Reid Cramer, New America Foundation

Inequality is hardly a new American phenomenon, but last week it finally went viral. Over the last three decades, the distribution of income in the U.S. has become increasingly skewed. Median incomes remained largely flat, while the most dramatic growth occurred among the top one percent. The Great Recession, however, has changed the dynamics, and the surge of inequality is most apparent when we shine the spotlight on wealth rather than income.

The bursting of the housing bubble and the stock market tumble led to a gigantic loss of wealth and income shocks. But stock prices have now rebounded, and the Dow Jones recently surpassed its highest level, a mark not seen since 2007. Those who hold their wealth in stocks – a group highly concentrated among the top ten percent – have seen their losses largely recouped.

The same can't be said for the overwhelming majority of households. The bottom half of all families, who basically don’t own any stocks, saw their share of total net worth reduced over 50 percent as a result of the recession. Families in the bottom fifth of income saw their net worth decline from $8,500 to $6,200 from 2007 to 2010. Those families in the next fifth also faced a decline from $39,600 to $25,600. 

For homeowners, declining housing prices have taken a toll on their balance sheets. Foreclosures went up and housing equity went down. The divergence between home values and security prices is the new driver of economic inequality, separating the lower, middle, and upper-middle from those at the very top. It is a story of wealth, not income.

The impacts are profound, tipping the scales of political power toward the few, undercutting the foundations of a meritocratic society, and leaving fewer resources available for everybody else to deploy.

It is the ability to accumulate and control a pool of assets that is inextricably linked to the types of economic security most American families aspire to achieve. Having access to even small amounts of savings can create a valuable degree of economic resiliency where people are better able to weather uncertainties. This means wealth and assets are particularly consequential for the non-wealthy. Assets need to be democratized, rather than concentrated.

Wealth consolidation creates new barriers to economic mobility, which is particularly apparent when considering the widening racial wealth gap. Prior to the recession, the average African American and non-white Hispanic family owned ten percent of the wealth of the average white family. Recent findings estimate that this figure has been cut in half to five percent.

Americans may tolerate temporary inequalities in the service of economic advancement, but we don't want to live in a society where you have little chance of moving up the economic ladder if you grow up poor. Yet upward mobility from the bottom is weak, and will not improve, if we allow current wealth inequalities to persist.

The state of wealth inequality in America is a choice, clearly reflected in a set of regressive tax policies that have shifted the burden away from accumulated capital. Without policy action, persistent inequality will undermine a more fair and equitable economy and threaten our democracy.

Policy interventions are necessary to ensure all families are offered opportunities to save and accumulate assets over the long term. We can do a much better job sharing our prosperity. If we are successful in these efforts, we can be hopeful that generations to come will live in a society where individual outcomes are not determined by circumstances of race, class, or birth.

Reid Cramer is director of the Asset Building Program at the New America Foundation.

 


Building a Savings Culture to Generate Wealth
Stuart Butler, Heritage Foundation
 
Eye-popping charts highlighting wealth differences get our attention, but they can lead us to overlook our real economic opportunity problems. Even if we were to aggressively redistribute wealth in America, before long, the gap would start widening again. Rich people keep saving and reinvesting, and get wealthier as a result. But, unlike previous generations or their peers in other countries, low-income Americans don’t save, causing them to become relatively poorer.

Some would say it’s simply because they don’t have any money—but it is not that simple. The savings habit remains very strong among certain groups, such as Asian Americans, but it has virtually vanished among others. And while the most poor have nothing left after paying for basic necessities, it’s not true that saving is less possible today for low-income households than it was in the past.

Consider this—a 2008 study by the Commission on Thrift found that American households with incomes below $12,400 actually put aside an average of $645 each year for the future, but they do it in the form of lottery tickets. Saving that money, rather than throwing it away on Powerball, means a family could accumulate almost $90,000 over a working life. If that were the common pattern, it would have a big impact on wealth inequality.

The collapse of the savings culture in low-income communities is corrosive. It undermines wealth accumulation and economic mobility.

Saving has been replaced, unfortunately, by the culture of the lottery ticket and the payday lender. There are now more payday lenders than McDonald’s franchises in four of our five most populous states.

There are a number of things we can do to fix this.

First, we need to recognize that building a ladder of upward mobility involves a number of building blocks, including strengthening family and other social institutions, structurally reforming our K-12 system, and fostering savings. As New York Times columnist David Brooks has explained, the opportunity and wealth gap has many cultural causes.

Fortunately, several groups and initiatives are charting out ways to increase wealth accumulation in poorer neighborhoods. For instance, the Family Independence Initiative innovatively uses data sharing to spur the inclination to save. EARN in San Francisco combines teaching financial literacy and matched savings approaches to boost saving.

Second, we need to employ creative solutions. For example, other effective strategies have involved turning the lottery player’s gambling instinct into a wealth-creation instinct through “prize-linked savings.” Save to Win pools the interest that would be paid through credit union accounts and offers it instead as prizes to account holders. The result: big increases in savings by low-income households and other previous non-savers. The innovative social entrepreneurs at SaveUp use a sweepstake model to strengthen the desire to save and reduce debt.

Rebuilding the fundamental process of wealth accumulation in low-income neighborhoods will be a long process, but that is the way to decisively change the long-term pattern of wealth in America. Making Warren Buffet a bit less rich is not going to do so.

Stuart Butler is a distinguished fellow and the director of the Heritage Foundation’s Center on Policy Innovation.

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