For Most Americans, Economic Pie is Shrinking

September 03, 1995|By EDWARD N. WOLFF

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.

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