Wealth Inequality and Stock Market Gains

March 7, 2014
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For the past couple of years, the quarterly release of the Federal Reserve Flow of Funds data has been cheered because it has shown a sharp rise in household wealth, particularly of financial assets. We agree this is good news, but the aggregate headline numbers are incomplete.

It is crucial to think carefully about the distribution of these wealth gains. We have already shared some thoughts on the distribution of housing wealth gains — see our last post. But we also wanted to address the rise in financial asset values such as the stock market.

An indisputable fact is that the distribution of financial assets is heavily skewed to the rich. In fact, the top 20% of the wealth distribution owns over 80% of the financial assets in the economy! So when the aggregate Flow of Funds data show a rise in financial asset values, it is important to remember that the rise primarily benefits the rich. Here is the fraction of total financial assets held by the top, middle, and bottom quartile of the U.S. population in 2010.

houseofdebt_20140307_1

Why might this matter? Our own research shows that the spending of poorer households is more sensitive to wealth movements. If stock market wealth is concentrated among the very rich, who are less likely to spend out of an increase in wealth, rising stock market wealth will have a  smaller impact on spending. Indeed, research suggests that the effect of increases in stock market wealth on spending are weak.

So while the aggregate headline number on household wealth is important, we must remember who in the population is getting richer. This will be a common theme in our posts going forward: the rise in wealth inequality means we should look beyond the aggregate numbers and think carefully about who in the population is affected.

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One Response to Wealth Inequality and Stock Market Gains

  1. Dennis on March 13, 2014 at 12:32 ami

    Wait, if these are quartiles, there should be 4 groups, not three.

    Plus dividing into poorest 20%, middle 20%, and richest 20% leaves out 40% and makes me think you meant to do quintiles. But then only listed 3 of the 5 quintiles?

    Some weirdness here.