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Wealth Inequality in the US

By Roger Scher, Adjunct Assistant Professor

Source: Federal Reserve Data show the top 1% of wealthiest US households’ percentage holding of stocks and mutual funds, the next 9% wealthiest, the next 40% wealthiest, and the bottom 50% of households’ (by wealth) percentage holding of stocks and mutual fund shares.

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…

Source: Federal Reserve Going in the wrong direction — Inequality of wealth has increased over time, with the top 1% of households by wealth holding nearly one-third of net wealth at Q421 vs. 2.6% for the bottom 50% of households by wealth. This compares unfavorably with over 30 years ago in Q489, when the top 1% held less than one-quarter of net wealth and the bottom 50% held 3.5%.

US Income & Wealth Inequality — a Comparative Perspective

Sources: OECD & national governments Notes: Latest data. The poverty rate is the percent of the population falling below the poverty line, defined as 50% of median disposable income. GINI index is a measure of the inequality of income distribution — the higher the number the more unequal the income distribution. Both income & poverty are measured after taxes & transfers. Wealth inequality shows the bottom 40% of households’ (bottom 2 quintiles in terms of net wealth) and the top 1% of wealthiest households’ percentage holding of net wealth (wealth minus debt). The bottom 40% of US households have negative net wealth. Income & poverty data are 2019 for US and Canada, and 2018 for Germany. Wealth data are 2019 for US and Canada and 2017 for Germany. In part, OECD wealth data differ from the Fed because they are different years.

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/)

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