The sharp rise in income inequality in the United States is well-established. But what about wealth inequality? Income represents the flow of cash that a household earns every year, whereas wealth is the total stock of assets that a household owns, either through accumulation or inheritance.
Wealth is as important as income for thinking about overall well-being. For example, wealth may be more important than income in predicting who can send their kids to an expensive college. And wealth also represents control. Corporations are controlled by shareholders. So a higher concentration of wealth naturally implies that fewer individuals control the decisions made by firms in the economy. Similarly, non-profit organizations (including universities) and political parties pay special attention to their wealthy donors.
How has wealth inequality changed over the years? This has been a difficult question to answer in the past because wealth is highly concentrated to begin with, and we do not have good time-series data on the wealth holdings of the very rich. For example, data sets such as the Federal Reserve’s Survey of Consumer Finances (SCF) do not capture the super-rich.
Emmanuel Saez and Gabriel Zucman have preliminary work that approaches this question from a new angle. We want to emphasize that their work is preliminary research – and initial results may change as the researchers take a closer look.
Here is the bottom line from the preliminary findings: the top 0.1% of the wealth distribution has seen a dramatic rise in the fraction of total wealth held, rising from a steady level of 10% from the 1940s to the 1970s, to over 20% in 2013. Here is the key chart:
The top 0.1% have seen incredible gains over the past 30 years that have take them to the same fraction of national wealth that they enjoyed in the 1920s.
The other interesting finding in the Saez-Zucman study is that the increase in wealth is primarily about the top 0.1%. When we look at the top 1% excluding the top 0.1%, there is no gain. Here is another chart:
The gray and black line show that the top 1% to 0.1% have not seen large increases in the share of total wealth. Instead, the rise is completely driven by those in the top 0.1%. These are the very richest households in the country.
Simple measurement is often a bit boring, but it is also absolutely crucial for thinking about the overall economy. Saez and Zucman have taken an initial step toward measuring wealth inequality in the United States, and it shows a rising amount of inequality driven by the very top of the wealth distribution.
Here are some more details for those interested. The basic methodology used by Saez and Zucman exploits the fact that we can measure quite well from the IRS the flow of income to individuals generated by assets. The income flows would be dividends, interest payments, or rental income from real estate owned and rented out. We actually used a similar technique in previous research to get the net worth of a zip code.
The key difficulty then becomes capitalizing these income flows to get a value of the underlying assets generating the income. Capitalization requires accurate measure of the flows of income generated by assets, and assumptions on the rate of return we should expect the assets to generate. This is the crucial part of the Saez and Zucman study, and one likely to get the most scrutiny. A clever test the authors did was to examine how their capitalization technique works for wealthy foundations, for which they have both the income and wealth. In other words, they can test their methodology on a sample of IRS returns where they actually know wealth. It does pretty well.
Please see the slides for more details.