Conservative economic policy has one central idea: Just create a bigger pie, and everyone will have a bigger slice. In fact, conservatives predict that if we cut the rich a bigger piece by lowering their tax rates, the resulting growth will enlarge everyone else's slice too. This was the core idea of Reagan's tax cuts, and it is central to such current conservative goals as lower capital gains taxes.
Unfortunately, since the 1980s the great majority of Americans have not been getting bigger slices from a growing pie. As many people have noted, median family income has failed to grow. The picture is even more stark for gains in wealth than for gains in income. New research, based on data from federal surveys, shows that between 1983 and 1989, the top 20 percent of wealth holders received 99 percent of the total gain in marketable wealth, while the bottom 80 percent of the population got only 1 percent. Few people realize how extraordinarily concentrated the gains in wealth have been. Between 1983 and 1989, the top 1 percent of income recipients received about a third of the total increase in real income. But the richest 1 percent received an even bigger slice -- 62 percent -- of the new wealth.
The most recent data suggest these trends have continued. My preliminary estimates indicate that, between 1989 and 1992, 68 percent of the increase in total household wealth went to the richest 1 percent -- an even larger share of wealth gain than between 1983 and 1989.
As a result, the concentration of wealth reached a postwar high in 1992, the latest year for which data are available. Growing inequality in the distribution of wealth has serious implications for the kind of society we live in. Today, the average American family's wealth adds up to a comparatively meager $52,200, typically tied up in a home and some small investments.
While Forbes magazine each year keeps listing record numbers of billionaires -- in 1994 Forbes counted 65 of them in the United States -- homeownership has been slipping since the mid-1970s. The percentage of Americans with private pensions also has been dropping. And, with their real incomes squeezed, middle-income families have not been putting savings aside for retirement.
The number of young Americans going to college has also begun to decline, another indirect sign of the same underlying phenomenon. In fact, international data now indicate that wealth is more unequally distributed in the United States than in other developed countries, including that old symbol of class privilege, Great Britain.
Economic worries may be at the root of much of the political anger in America today, but there is almost no public debate about the growth in wealth inequality, much less the steps needed to reverse current trends. The increasing concentration of wealth in the past 15 years represents a reversal of a trend that had prevailed from the mid-1960s through the late 1970s. The share of total wealth owed by the rich depends, to a large extent, on asset values and therefore swings sharply with the stock market, but some trends stand out.
During the 20 years after World War II, the richest 1 percent of Americans (the super rich) generally held about a third of the nation's wealth. After hitting a postwar high of 37 percent in 1965, their share dropped to 22 percent as late as 1979. Since then, the share owned by the super rich has surged -- almost doubling to 42 percent of the nation's wealth in 1992, according to my estimates.
Two statistics -- median and mean family wealth -- help to tell the story of growing wealth inequality in America. A median is the middle of a distribution, the point at which there are an equal number of cases above and below.
Median family wealth represents the holdings of the average family. Mean family wealth is the average in a different sense: total wealth divided by the total number of families. If a few families account for a large bulk of the nation's wealth, the mean will exceed the median.
The changing ratio between the mean and the median is one measure of wealth inequality. Data from the 1983, 1989, and 1992 Survey of Consumer Finances, conducted by the Department of Commerce, show that mean wealth has indeed been much higher than the median: $220,000 vs. $52,000 in 1992.
And mean wealth has grown more rapidly -- by 23 percent from 1983 to 1989 and by another 12 percent in the following three years, while median wealth increased by only 8 percent between 1983 and 1989 and then barely moved up at all from 1989 to 1992. As a result, between 1983 and 1989, the ratio of mean to median wealth jumped from 3.4-to-1 to 3.8-to-1.
Data for 1992 are incomplete. However, the figures available indicate that the ratio of mean to median wealth saw another steep rise between 1989 and 1992, from 3.8-to-1 to 4.2-to-1.
By the 1980s the United States had become the most unequal industrialized country in terms of wealth.
The top 1 percent of wealth holders controlled 39 percent of total household wealth in the United States in 1989, compared with 26 percent in France in 1986, about 25 percent in Canada in 1984, 18 percent in Great Britain and 16 percent in Sweden in 1986.
The concept of wealth used here is marketable wealth -- assets that can be sold on the market. It does not include consumer durables such as automobiles, televisions, furniture and household appliances; these items are not easily resold, or their resale value typically does not reflect the value of their consumption to the household. Also excluded are pensions and the value of future Social Security benefits.
Part of the explanation for growing wealth concentration lies in what has happened to the different kinds of assets that the rich and the middle class hold. Broadly speaking, wealth comes in four forms: homes; liquid assets, including cash, bank deposits, money market funds, and sav
ings in insurance and pension plans; investment real estate and unincorporated businesses; and corporate stock, financial securities and personal trusts.
Middle-class families have more than two-thirds of their wealth invested in their own home, which is probably responsible for the common misperception that housing is the major form of family wealth in America. Those families have another 17 percent in monetary savings of one form or another, with only a small amount in businesses, investment real estate and stocks. The ratio of debt to assets is very high, at 59 percent.
In contrast, the super rich invest more than 80 percent of their savings in investment real estate, unincorporated businesses, corporate stock and financial securities. Housing accounts for only 7 percent of their wealth, and monetary savings another 11 percent.
Their ratio of debt to assets is under 5 percent.
Viewed differently, more than 46 percent of all outstanding stock, over half of financial securities, trusts and unincorporated businesses and 40 percent of investment real estate belong to the super rich.
Thus, for most middle-class families, wealth is closely tied to the value of their homes, their ability to save money in monetary accounts and the debt burden they face. But the wealth of the super rich has a lot more to do with their ability to convert existing wealth -- in the form of stocks, investment real estate, or securities -- into even more wealth, that is, to produce "capital gains."
According to my estimates, the chief source of growing wealth concentration during the 1980s was capital gains. The rapid increase in stock prices relative to house prices accounted for about 50 percent of the increased wealth concentration; the growing importance of capital gains relative to savings explained another 10 percent.
Increased income inequality during the decade added 18 percent, as did the increased savings propensity of the rich relative to the middle class. The declining homeownership rate accounted for the remaining 5 percent or so.
In short, wealth went to those who held wealth to begin with. These trends raise troubling questions. Will the increasing concentration of wealth further exacerbate the tilt of political power toward the rich? Might it ultimately set off a political explosion? Is it compatible with renewed economic growth?
Diffusing wealth more broadly will not be easy. Some of the causes of growing income and wealth inequality lie in changes in the global economy for which no one has any ready policy response. However, the experiences of European countries as well as our neighbor Canada, which are subject to the same mar
ket forces, suggest that shifting the tax burden toward the wealthy would spread wealth more widely.
In the United States, marginal income tax rates, particularly on the rich and very rich, fell sharply during the 1980s. Although Congress raised marginal rates on the very rich in 1993, those rates are still considerably lower than they were at the beginning of the 1980s. And they are much lower than in the Western European countries with more equal distributions of income and wealth.
Another strategy to consider is direct taxation of wealth. Almost a dozen European countries, including Denmark, Germany, the Netherlands, Sweden and Switzerland, have taxes on wealth.
A very modest tax on wealth (with marginal tax rates running from 0.05 to 0.3 percent, exempting the first $100,000 in assets) could raise $50 billion in revenue and have a minimal impact on the tax bills of 90 percent of American families. On the other side of the ledger, the financial well-being of the poor and lower-middle class would be much improved by social transfers similar to Canada's, including child-support assurance, a rising minimum wage and extension of the earned income tax credit.
None of these measures appears politically feasible today. Instead, the current majority leader of the House is promoting a flat tax that would cut in half income tax rates for the rich and entirely eliminate taxes on capital gains.
Many prominent Republicans have embraced the flat tax and argued that it should be central to the 1996 election. The rush to give the rich an even bigger piece of the pie ought to be stimulus enough to start a national conversation about where America's wealth is going.
Edward N. Wolff is an economics professor at New York University. Reprinted with permission from the American Prospect, Summer 1995. Copyright New Prospect Inc.