Wealth and income are related but not identical. Income refers to a stream of money, wealth to a pool, often held in paper more durable than dollar bills, such as stock and bond certificates and real estate titles. Professor Wolff, who has built a career studying trends in wealth, breaks down the data on who owns wealth in America. Note that wealth in pensions is temporary as payments end when the worker and spouse die.
Wealth inequality in the United States hit a seventy-year high in 1998, with the top 1 percent of wealth holders controlling 38 percent of total household wealth. Focusing more narrowly on financial wealth, which excludes the value of equity in homes, the richest 1 percent of households owned 47 percent of the total.
A household in the middle—the median household—had wealth of about $62,000 in 1998. That amount is not insignificant, but consider that the top 1 percent’s average wealth is $12.5 million, more than two hundred times as much per household.
From 1989 to 1998, the top 1 percent’s share of wealth remained virtually unchanged, Federal Reserve Survey of Consumer Finance data show. Then wealth held by the top 1 percent fell in the recession year of 2001 to 33.4 percent. By 2010, the first recovery year after the Great Recession of 2008–9, the top 1 percent’s wealth rose to 35.4 percent of the national total.
How did this concentration of wealth come to pass? After the stock market crash of 1929, there ensued a gradual, if somewhat erratic, reduction in wealth inequality, which seems to have lasted until the late 1970s. Since then, inequality of wealth holdings, like that of income, has risen sharply.
If Social Security and other pension wealth are included (“augmented wealth”), the improvement between 1929 and 1979 appears greater, but the increase in inequality since 1980 is still sharply in evidence.
The rise in wealth inequality from 1983 to 1998 (a period for which there is comparable detailed household survey information) is particularly striking. The share of the top 1 percent of wealth holders rose by five percentage points. The wealth of the bottom 40 percent showed an absolute decline. Almost all the absolute gains in real wealth accrued to the top 20 percent of wealth holders.
CHANGES IN AVERAGE WEALTH HOLDINGS
Average wealth grew at a respectable pace from 1962 to 1983. It grew even faster from 1983 to 1989. By 1989, the average wealth of households was $244,000 (in 1998 dollars), almost two-thirds higher than in 1962. From 1989 to 1998, wealth growth slowed. In fact, mean marketable wealth grew only about half as fast between 1989 and 1998 as between 1962 and 1989 (1.2 versus 2.3 percent per year). Still, by 1998, average wealth had reached $270,000.
Average financial wealth grew faster than marketable wealth in the 1983–89 period (2.7 versus 2.3 percent per year), reflecting the increased importance of bank deposits, financial assets, equities, and small businesses in the overall household portfolio over this period. This reversed the relationship of the 1962–83 period, when financial wealth grew more slowly than marketable wealth (1.4 versus 1.8 percent per year). In the 1989–98 period, the gain in average financial wealth again outstripped net worth (1.7 versus 1.2 percent per year).
Average household income also grew faster in the 1983–89 period than in the 1962–83 period. Its annual growth accelerated from 1.5 percentage points to 2.7. Whereas in the first of the two periods, average income grew more slowly than average wealth (a 0.3 percentage point per year difference), in the latter it grew slightly faster (a 0.1 percentage point per year difference). However, in the 1989–98 period, income growth plummeted to 0.9 percent per year (0.2 percentage points per year lower than wealth growth).
The robust growth of average wealth disguises some changes in the distribution of that wealth. This becomes clear after examination of median (midpoint) rather than mean wealth.
Mean wealth is simply the average: total wealth divided by total number of households. If the wealth of only the top 20 percent of households increases (with nothing else changing), then mean wealth increases because total wealth increases.
In contrast, the median of the wealth distribution is defined as the level of wealth that divides the population of households into two equal-sized groups (those with more wealth than the median and those with less). Returning to the earlier example, if only the top quintile enjoys an increase in wealth, median wealth is unaffected even though mean wealth increases because all additional wealth accrues to people well above the median income. The median tracks what is happening in the middle of the wealth distribution.
When trends in the mean deviate from trends in the median, this is a signal that gains and losses are unevenly distributed.
The trend in median household wealth gives a contrasting picture to the growth of mean wealth. Median marketable wealth grew faster in the 1962–83 period than in the 1983–89 period (1.6 versus 1.1 percent per year). Median wealth also grew much more slowly than mean wealth in the latter period (a difference of 1.1 percentage points per year).
Overall, from 1983 to 1989, while mean wealth increased by 15 percent, median wealth grew by only 7 percent. This implies that the bulk of the gains were concentrated at the top of the distribution—a finding that implies rising wealth inequality. The 1989–98 period was a repeat of the preceding one. While mean wealth grew by 11 percent, median wealth increased by only 4 percent. That means inequality continued to increase.
RISING WEALTH INEQUALITY IN THE 1980S
Between 1983 and 1989 the most telling finding is that the share of marketable net worth held by the top 1 percent, which had fallen by ten percentage points between 1945 and 1976, rose to 37 percent in 1989, compared with 34 percent in 1983. Meanwhile, the share of wealth held by the bottom 80 percent fell by from 19 percent to 16 percent.
Between 1989 and 1998, inequality continued to rise, though at a more moderate pace. The share of wealth held by the top 1 percent increased by another percentage point (to 38 percent), though the share of the bottom 80 percent stabilized. That means there was a slight decline in the share held by the top fifth, except for the top 1 percent, who gained.
These trends are mirrored in financial net worth, which is distributed even more unequally than total household wealth. In 1998, the top 1 percent of families as ranked by financial wealth owned 47 percent of the total (in contrast to 38 percent of total net worth). The top quintile, or fifth, accounted for 91 percent of total financial wealth, and the second quintile accounted for nearly all the remainder. The bottom 60 percent of Americans had virtually no financial wealth.
The concentration of financial wealth increased to the same degree as that of marketable wealth between 1983 and 1989. The share of the top 1 percent of financial wealth holders increased by four percentage points, from 43 to 47 percent of total financial wealth. The share of the next 19 percent fell from 48 to 46 percent, while that of the bottom 80 percent declined from 9 to 7 percent. Between 1989 and 1998, the share of total financial wealth of the top 1 percent increased a bit more (by 0.4 percentage points) but the share of the bottom 80 percent recovered to where it was in 1983.
Income growth distribution, too, became more concentrated between 1983 and 1989. As with wealth, most of the relative income gain accrued to the top 1 percent of recipients, whose share of total household income grew by four percentage points, from 13 to 17 percent. The share of the next 19 percent remained unchanged at 39 percent. The bottom 80 percent of the income distribution sustained almost all of the (relative) loss in income. Their share of income fell from 48 to 44 percent.
Between 1989 and 1998, income inequality increased a bit more. While the share of the top 1 percent remained stable, the share of the next 19 percent rose by 0.6 percentage points and that of the bottom 80 percent correspondingly fell by 0.6 percentage points.
Another way to view rising wealth concentration is to look at how the increases in total wealth were divided over a specified period. This is calculated by dividing the increase in wealth of each group by the total increase in household wealth. The top 1 percent of wealth holders received 53 percent of the total gain in marketable wealth over the period from 1983 to 1998. The next 19 percent received 38 percent, while the bottom 80 percent received only 9 percent.
This pattern represents a distinct turnaround from the 1962–83 period, when every group enjoyed some share of the overall wealth growth and the gains were roughly in proportion to the share of wealth held by each in 1962. Over this period, the top 1 percent received 34 percent of the wealth gains; the next 19 percent claimed 48 percent. The bottom 80 percent got 18 percent, which is double their share of gains from 1983 to 1998.
Gains in the overall growth in financial wealth were also distributed unevenly, with 56 percent of the growth accruing to the top 1 percent and 36 percent to the next 19 percent from 1983 to 1998. The bottom 80 percent gained only 11 percent.
MEASURING WITH GINI
Finally, changes in wealth distribution can be assessed by looking at the Gini coefficient, a measure of inequality devised by the Italian sociologist Corrado Gini early in the twentieth century. This indicator is widely used to summarize data on the degree of inequality of income, wealth, or anything else of value. It ranges from 0 (exact equality) to 1 (one person owns everything); a higher Gini coefficient means greater inequality. This measure, like the others reviewed here, points to an increase in inequality: between 1983 and 1989 the Gini coefficient increased from 0.80 to 0.84. Between 1989 and 1998, the Gini coefficient remained at this high plateau.
This increase in wealth inequality recorded over the 1983–98 period—and particularly between 1983 and 1989—is almost unprecedented. The only other period in the twentieth century during which concentration of household wealth rose comparably was from 1922 to 1929. Then inequality was buoyed primarily by the excessive increase in stock values, which eventually crashed in 1929, leading to the Great Depression of the 1930s.
Despite the seemingly modest increase in overall wealth inequality during the 1990s, the decade witnessed a near explosion in the number of very rich households. The number of millionaires climbed by 54 percent between 1989 and 1998, the number of “pentamillionaires” ($5 million or more) more than doubled, and the number of “decamillionaires” ($10 million or more) almost quadrupled. Much of the growth occurred between 1995 and 1998 and was directly related to surging stock prices.
MORE RECENT DEVELOPMENTS: A POSTSCRIPT
The years from 1998 to 2007 saw rapid growth in both mean and median household wealth. Buoyed by large gains in both housing and stock prices, though particularly the former, median wealth climbed by 33 percent and mean wealth by 56 percent in real terms. Despite the fact that mean wealth grew faster than the median, wealth inequality remained relatively unchanged as measured by the Gini coefficient and by 2007 was almost exactly at the same point as in 1989. However, the ranks of the very rich continued to expand, with the number of millionaires climbing by 52 percent between 1998 and 2007 and the number of penta- and decamillionaires each growing by 94 percent.
Then the Great Recession hit in 2007, and house prices and stock prices plummeted by 24 and 26 percent in real terms, respectively. As a consequence, median wealth dropped by an astonishing 47 percent in real terms, while mean wealth was down by (only) 18 percent. Because median wealth fell much more than mean wealth, inequality surged over these years, with the Gini coefficient climbing from 0.84 to 0.87, about the same extent as it did from 1983 to 1989.
Adapted and updated from Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It. Updates from “The Asset Price Meltdown and the Wealth of the Middle Class,” NBER Working Paper No. 18559, November 2012.