Wealth Inequality in the United States

It’s a fact that all Americans have learned to live with, that the wealth inequality rates in the United States are growing increasingly dangerous. In fact, America’s wealth is distributed so unevenly that the bottom 90% of families hold as much income combined as the top 0.1% of families. The inequality problem has been known to be on the rise for decades; however, this issue has recently become a controversial issue in the United States due to the report issued by two economists, Emmanuel Saez from the University of California at Berkeley and Gabriel Zucman from Columbia University, at the London School of Economics. These two economists have devoted years of their time, collecting income tax records and associated data to compile a paper that proved the growth of inequality since 1913. Their astounding paper has begun to address the issue of inequality and has set the basis for attacking the issue in recent weeks.

The Analysis on Wealth Inequality

Since 1913, wealth inequality in the United States has been skewed by fluctuating tax policies, financial crises, and debt that would affect both shares of wealth. “Wealth” is the term that is used to describe the assets owned by families subtracted by the debts that they owe. Unsurprisingly, the total wealth held by the top 0.1% has been growing for the last 4 decades, calculated by numerous surveys conducted by the London School of Economics. Saez and Zucman show that, as a result of a competitive capitalist society, the United States has an inequality crisis that must be addressed, stating that:

Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years. From the Great Depression in the 1930s through the late 1970s there was a substantial democratization of wealth. The trend then inverted, with the share of total household wealth owned by the top 0.1 percent increasing to 22 percent in 2012 from 7 percent in the late 1970s.

Their analysis of the topic also featured a graph to help describe the “substantial democratization of wealth” in the late 1970s and 1980s.

Capture

This chart encompasses the rate of inequality in the United States for the last 100 years. Ever since the end of the Great Depression, the wealth share of the bottom 90% of families was on a steady rise due to steady growth in home ownership, collapsing wealth within richer households, and middle class income growth. As democratization came to a close in the mid 1980s, the inequality rates rose; the bottom 90% of families held a little over 35% of national wealth as of 1980, then the total wealth of the bottom 90% slowly fell to a meager 22% in 2012, compared to a steady climb in the wealth held by the top 0.1%.

The climb in inequality since the mid-1980s to recent years can be attributed to a rise in the incomes of the 0.1% of families which include the families of senior executives and successful entrepreneurs. A collection of income and estate taxes shows that the tax policies since the late 1970s have become less progressive as the decades went past. The top 0.1% were allowed to gain and keep their share of wealth, in a sense, as the rest of America lost money. However, in the 1980s, the bottom 90% of America had earned quite a lot of money, restoring the balance in the share of money between the families. The rising pensions, along with the housing bubble and income growth, could have been attributed for this. Ever since the housing bubble “popped” and the financial recession began, the United States has not recovered in the terms of wealth equality.

This issue of inequality also shows that there is a problem in income equality. As described earlier, wealth is the total amount of assets held by a family subtracted by the amount of liabilities, like debts and mortgages whereas income is the amount earned by a family every year. The two economists that addressed the wealth inequality problem also stated:

The share of total income earned by the top 1 percent of families was less than 10 percent in the late 1970s but now exceeds 20 percent as of the end of 2012. A large portion of this increase is due to an upsurge in the labor incomes earned by senior company executives and successful entrepreneurs.

Therefore, it almost works like cause and effect. If the income for the top 0.1% rises, tax policies stay less progressive, and the bottom 90% is under debt, then a problem of wealth inequality will begin, which is exactly what is occurring today.

Effects of Inequality

What makes the report by Saez and Zucman so momentous is the capability to calculate this huge problem. By addressing this problem, the two economists show that the estimates made in the last couple of years have been much farther away from the reality of the situation, where the 0.1% of America holds exactly as much money as the bottom 90% of the nation. This means that each family would be worth a breathtaking $73 million on average, and by combining the 160,000 families in the top 0.1%, they are equal to the total amount of wealth owned by the bottom 90% of America. What does this mean, however, for the average American, who is part of the bottom 90%? It means that those who have a lot of money, from Mark Zuckerberg to Paris Hilton, will keep their money. Without building progressive tax policies to make sure that the very, very rich stop becoming richer, the wealthiest of America will keep their money. It is essential that these tax policies do not only include income tax, but estate tax as well. The combination of the two will prevent inherited wealth from being passed down from generation to generation along with the prevention of a growing inequality rate.

If the richest of the rich keep their money, the United States will return to 18th century values, where marrying into riches is an easier route to success than any other, and the high inequality rates will lead to a collapse of intergenerational mobility. America is famous for having the opportunities to succeed, but is the United States becoming a place where the opportunity of becoming successful can only be a dream? The London School of Economics also stated that:

Economic disadvantage for the overwhelming majority translates into ill health, missed educational opportunity, and—increasingly—the familiar symptoms of depression: alcoholism, obesity, gambling, and minor criminality.

The effects of inequality permeates through society since those who won’t have the same opportunities as the richest of the rich, will resort to criminality. It seems like the system of democratized wealth, at the moment, is only a dream; yet, by implementing progressive tax policies and a substantial growth of the middle class, the United States can restore that balance once again. The elimination or reduction of debt for the middle class, along with support from the government in restoring the balance of wealth can be the only solution to solving the inequality problem. Will progressives come back to fix the system and restore equality once again? Or will we live in a world where intergenerational mobility is close to impossible, resorting to 18th century values?

Bibliography

Wealth inequality in the United States since 1913: Evidence from capitalized income tax data“, by Emmanuel Saez and Gabriel Zucman, National Bureau of Economics Research Working Paper, October 2014.”Forget the 1%.” The Economist.

“Forget the 1%.” The Economist. The Economist Newspaper, 8 Nov. 2014. Web. 16 Nov. 2014. <http://www.economist.com/news/finance-and-economics/21631129-it-001-who-are-really-getting-ahead-america-forget-1&gt;.

“Wealth Inequality in America: It’s Worse than You think.” Fortune Wealth Inequality in America Its Worse than You Think. Web. 16 Nov. 2014. <http://fortune.com/2014/10/31/inequality-wealth-income-us/&gt;.

“Wealth Inequality in America.” The Guardian. Web. 16 Nov. 2014. <http://www.theguardian.com/business/2014/nov/13/us-wealth-inequality-top-01-worth-as-much-as-the-bottom-90&gt;.

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