Capital Ownership and Inequality

March 19, 2014
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Lots of interesting and thought-provoking reactions to our post yesterday on how the gains in U.S. productivity are shared.

One aspect of the debate that is often over-looked is the concentration of financial asset holdings in the U.S. economy. Who owns financial assets such as stocks and bonds in corporations tells us who has a direct claim to the income generated by capital. Here is the distribution of financial asset holdings across the wealth distribution. This is from the 2010 Survey of Consumer Finances:

 houseofdebt_20140319_1

 

The top 20% of the wealth distribution holds over 85% of the financial assets in the economy. So it is clear that the direct income from capital goes to the wealthiest American households. For more evidence on this pattern through history, see the working paper by Edward Wolff. He shows that the share of financial assets held by the top 20% of the wealth distribution has been increasing since 1983.

Now, workers that have no financial asset holdings may still have an indirect claim on the income produced by capital in the economy–for example, if the government taxes the income earned by capital and then redistributes it to workers that own no capital, workers have a claim on capital income through the government.

There is also the question of incorporating housing wealth in the graph above. How should we think about housing which is more broadly held? But it’s important to have the basic facts established to begin the debate. If you think the above chart is misleading or incorrect in some way, we are happy to hear why.

By the way, we are going to do a follow up post to the post on productivity gains based on a number of responses we received. There are definitely some interesting issues worth going through in more detail. When we have some more time!

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18 Responses to Capital Ownership and Inequality

  1. PN on March 19, 2014 at 4:28 pmi

    From a macroeconomic perspective, it is interesting to note that the trend towards capital over labor could be getting a push from the trend towards lower taxation. I wonder how this actually plays out in the data. Increasing gains to capital is seen in various countries and indeed worldwide (we get the oft cited statistic that the top-85 individuals hold wealth equivalent to the bottom 3.5 billion individuals). Oliver Wendell Holmes Jr. once quipped “I like to pay taxes. With them, I buy civilization.” to which perhaps we can add “improved equality in income distribution between capital and labor.”

  2. ColinTwiggs on March 19, 2014 at 4:29 pmi

    How do you treat stocks and bonds held by large institutions on behalf of their customers?

  3. Drew Yallop on March 19, 2014 at 4:49 pmi

    Pension funds, life insurance?

  4. Up the Down Escalator on March 19, 2014 at 9:20 pmi

    Ahem, how much of housing is actually fully owned by the tenant and how much is under a mortgage contract? The financial crisis demonstrated rather well that you don’t “own” your home until you no longer have a mortgage – the banks appear to be free to seize homes as long as they can fake the documents, whether you are current on your mortgage or not. And our legal system will rarely stop them. For these reasons partial equity should not be counted. And even with tenant ownership, govt entities still take people’s homes over very small tax delinquencies – see the DC govt for examples.

    Another question – how much wealth is owned by corporate institutions and not owned by any individual? Would be good to compare this to your brackets in real terms.

  5. Xenophon on March 20, 2014 at 7:48 ami

    Quick question:

    Does the inequality in capital ownership (financial assets in this case) relate directly to the productivity/income trend you present in your previous post?

    I am thinking that you can isolate a policy relationship between the production value of labor and profit distribution, which would explain both trends.

    • Michael on March 20, 2014 at 1:54 pmi

      It’s all related to the demise of unions, IMO. When labor has no say, capital gets whatever it wants – tax cuts, free-trade agreements, right-to-work laws, less regulations, Citizens United, etc.

  6. MJ on March 20, 2014 at 12:22 pmi

    I find your graph misleading. The parabolic concentration of wealth continues well into the top 20%. I would bet that the percentage owned by the second decile doesn’t equal the next 8%, and both are dwarfed by the top 1% (which itself has a parabolic distribution).

    The effect of this wide swath is to suggest that 20% of the populace is thriving, which I think is too broad given the rise in housing/healthcare costs. If the wealth is even further concentrated, what we have is a very small group controlling a massive quantity of wealth.

    • MN on March 20, 2014 at 8:10 pmi

      Agreed. Wealth researchers find that the GINI coefficient for wealth is somewhere in the .85 to .9 range, meaning wealth is not all that far from being totally unequally distributed. Its basically a story of the 1%: something like a third of stocks and half of bonds are owned by this group. Probably why any “wealth effect” from financial assets is weak or nonexistent.

      Also, it is important to remember that one person’s debt is another person’s asset: the percentage of Americans with negative net worth is now somewhere in the ballpark of 20%. That alone is an important fact for both inequality and instability.

      • MJ on March 21, 2014 at 12:34 pmi

        Thank you for the response.

        If we looked at it from an operational leverage perspective, the number for negative net worth is probably significantly higher. Even in the top half of the income distribution, how many households could survive a full year of unemployment from the primary income source (or both sources in a dual income household). Healthcare and food costs can be mitigated slightly, but people get sick, need to eat, and student loans/mortgages are always coming due.
        For the terms of actual negative net worth, I would postulate that the number may be higher than 20%, when mortgage debt and student loans are taken into consideration.

        Student loans topping 1 trillion would suggest that a majority of the population between 20-30 may have a negative net worth.

        That same cohort is also suffering from massive relative unemployment; unemployment which is unprecedented historically if we control for the level of education in the cohort (even if we controlled for type of degree). This has impacts on housing formation, as the cohort prefers lower levels of life obligation (parent’s basement, no children, etc).

        All of this could be views as economic opportunity, given that immediate fiscal and structural moves could be made to provide opportunity, which would create a virtuous cycle (aka, a reason for the fiscal multiplier STILL being above 1 in the US and being well above 1 in the EU zone).

  7. havnaer on March 20, 2014 at 1:53 pmi

    Three critiques -

    1. Hasn’t it been ever thus? Haven’t the wealthy and well-to-do always held the lion’s share of Financial assets (stocks, bonds, derivatives)? What makes this different than, say, 1960?

    2. How much of the “Richest 20%” is represented by Institutional investors (Banks, Hedge Funds, Retirement/Pension Funds) as opposed to Fat Cats?

    3. How much of the financial assets are owned by the lower 80% through Pensions and 401K invested through Institutional investors?

    • Richard on March 20, 2014 at 3:28 pmi

      “1. Hasn’t it been ever thus? Haven’t the wealthy and well-to-do always held the lion’s share of Financial assets (stocks, bonds, derivatives)? What makes this different than, say, 1960?”

      Wealth (in the US, at any rate) is significantly more concentrated now among the top couple percent than it was in 1960.

      “2. How much of the “Richest 20%” is represented by Institutional investors (Banks, Hedge Funds, Retirement/Pension Funds) as opposed to Fat Cats?”

      How much would that matter? Other than pension funds, the claims on the vast majority of the insitutional investors are also held by the top few percent. Who do you think invests in hedge funds?

      “3. How much of the financial assets are owned by the lower 80% through Pensions and 401K invested through Institutional investors?”

      The amount of assets that the lower 80% hold in 401K’s is piddly low.

      Pensions are really the only vehicle through which the lower 80% have claims on financial assets.

    • Michael on March 20, 2014 at 4:50 pmi

      What’s different now is the degree. For example, in 1960, the top 1% took home about 10% of income. Today, it’s about 23%. As we all know, the rich invest most of their income, so they are accumulating much more financial assets today than they were in 1960.

      Also, the return on equities is based on earnings. Today, after-tax Corporate Profits are about 11% of GDP. In 1960, profits were only 6% of GDP – which is their long-term average.

      So the wealthy are accumulating a larger share of financial assets which are worth more than their average value (as a % of GDP).

      Meanwhile, that increase in profits has come at the expense of wages – which are down to 44% of GDP from 51% in 1960. Is it any wonder why the middle class is drowning in debt and unable to consume enough to get the economy back to potential?

  8. dwb on March 20, 2014 at 3:47 pmi

    Completely meaningless graph, because it tells me nothing about the demographics of who owns the assets. I strongly suspect that a very large share of financial assets are directly our indirectly owned by retirees or near retirees. To make it simple, if the economy consisted of 1 60 year old, 4 35 year olds, I would fully expect the 60 year old to own most of the financial assets (to retire and live off off).

    In fact, about 15% (ish) of the population is over 65.

    I have seen #s that seniors (over 50) own 77% of financial assets. If we really want to get to the bottom of this “puzzle” we need to understand why and who holds these assets.

  9. Daublin on March 20, 2014 at 4:20 pmi

    I’m confused by what this is intended to show.

    It should be understood that the top 20% are just plain much more wealthy than everyone else. If you plotted “total wealth” rather than “financial holdings”, I believe you’d get a graph that looks much like this one.

    That said, the very wealthy probably do have a higher fraction of their wealth tied up in financial holdings. You can only buy so many houses and cars and other physical goods before you just don’t have anything reasonable to spend it on. After that point, the only thing left to spend it on is finances.

    Other things equal, this seems like a good thing. Wealthy people end up spending their money financing the economy, and they do it in a way that they have strong incentives to make the economy grow.

    Another factor to consider is that, especially over the last few decades, a large percentage of the pay of higher-income employees is in the form of company stock. I am not sure such an employee should be counted as more of a “capital holder” than someone who is paid in cash.

    To go back to the beginning, I am not sure what you are trying to show.

    • Richard on March 20, 2014 at 10:46 pmi

      “Other things equal, this seems like a good thing. Wealthy people end up spending their money financing the economy, and they do it in a way that they have strong incentives to make the economy grow.”

      Except that other things can’t remain equal.

      You have an implicit assumption here that efficient allocation of capital is what makes the economy grow, rather, than, say, demand (and mass consumer preferences).

      However, if more of the wealth is concentrated in folks who don’t have to spend money than in those who do, demand _has_ to slacken. You then have something like our current situation, where you have lots of capital sloshing around the system (short-term interest rates are zero, after all), lower than normal velocity of money, and weak demand (same as lower velocity of money) leading to low growth.

  10. Jay on March 20, 2014 at 8:26 pmi

    “But it’s important to have the basic facts established to begin the debate. If you think the above chart is misleading or incorrect in some way, we are happy to hear why.”

    This is lifted straight from the SCF. You should read the entire document before blindly regurgitating data from it…

    “Two common and often particularly important types of retirement plans are not included in the assets described in this section: Social Security (the federally funded Old-Age and Survivors’ Insurance program (OASI)) and employer-sponsored defined-benefit plans. OASI is well described elsewhere, and it covers the great majority of the population.”

    Last time I checked OASI is 100% invested in US Treasuries (bonds) and pension funds are invested in financial assets (bonds/stocks).

  11. Tim Worstall (@worstall) on March 21, 2014 at 4:27 ami

    What DWB says.

    Think through the lifetime savings effect. New households are formed in peoples’ 20s, usually with zero assets. Financial wealth then rises (on average of course) with age.

    I’ve have no doubt at all that this isn’t all of the effect but it is at least some of it.

  12. Jonathan S on March 21, 2014 at 7:50 ami

    I would echo what Collintwiggs and Drew Yallop said.

    I don’t have the numbers at my fingertips (I am after all a comment troll and not a U Chicago researcher after all!) but even with the decline in Defined Contribution plans you have many workers in the middle-class with indirect but real exposure to equity markets. Particularly in government pension plans, if equity markets do quite well then those pension plan promises are a lot closer to reality. If not then while the workers/retirees are theoretically not directly exposed to equity markets, they have real “counter-party” risk if equity markets do poorly.

    Of course even this is not free of feedback effects. A rising equity market may simply lead governments to contribute less into pension plans leaving the same underfunding gap. But still, even after adjusting for these factors, I think real financial asset “exposure” is significantly greater than a simple cut of direct ownership.