Wealth Inequality in the US
By Roger Scher, Adjunct Assistant Professor
This post comments on an excerpt from a LinkedIn post on Thursday, May 12 from Mohamed El-Erian, President of Queens’ College (Cambridge) and former CEO of PIMCO, in which he said: “US stocks — and the NASDAQ in particular — made a valiant effort to rebound today … only to succumb as of now to another round of selling… As a result, the year-to-date losses in the index are now a staggering 28%.”
In addition to the 27% selloff by close of May 12th in the NASDAQ year-to-date, what is staggering is the 136% rise in this index in the 3 years to end-2021 (to 15,645, up from 6,635 at end-2018).
On no planet is it rational to have a more than doubling of such a stock market index in 3 years — that is, to perceive a more than doubling in the value of a future stream of corporate earnings of the companies in a broad index such as the tech-heavy NASDAQ. In theory, that is what you purchase when you buy the stocks in an index — a stream of future earnings.
This is why re-establishing 2-way price risk is important — so that market participants understand that stocks can move up and stocks can move down — not just up, up and away!
This is also why future economic historians may see this issue as the error of our times, not gearing monetary policy at least in part to containing this excess.
Who benefits from this excess caused by the financial trading of the wealthy? I think I answered my own question. Not the poor. See the chart above from Fed data showing that the top 1% of US households by wealth hold nearly 54% of the value of US equities, while the bottom 50% of households hold less than 1%.
Even though poorer households have little direct stake in the market, when markets crash, the recessionary effects negatively impact them more than the rich. Through job loss and reduced income.
This is not an indictment of capitalism. Quite the contrary, it is a call to at least think about using policy to curb excessive volatility in the interest of reducing income and wealth inequality, thereby shoring up the social fabric… and capitalism.
It’s a little bit better for poorer households, at least percentage-wise, as far as total net wealth is concerned. Total net wealth includes holdings of real estate, in addition to equities and other assets, and nets out debt such as mortgages.
The chart below, also from the Fed, shows that the bottom 50% of households by wealth held 2.6% of net wealth vs. nearly a third for the top 1% wealthiest households. But this disparity has been increasing over time, as the chart shows, just as income inequality has been rising. See the charts at the end that show how the US compares unfavorably on income and wealth inequality to OECD peers.
Net Wealth By Household Wealth Level — going in the wrong direction…
Net wealth disparity is increasing…
US Income & Wealth Inequality — a Comparative Perspective
Roger teaches Political Economy at NYU’s School of Professional Studies Center for Global Affairs, is the former Head of Country Risk at GE, and co-author of Ten Point Plan for the U.S. (https://countrysuccess.net/)