The Growing Wealth Gap

The booming economy has been a bust for millions of Americans. Most households have lower inflation-adjusted net worth now than they did in 1983, when the Dow was still at 1,000.

The top 1 percent of households have soared while most Americans have been working harder to stay in place, if they have not fallen further behind. Since the 1970s, the top 1 percent of households have doubled their share of the national wealth to 40 percent. The top 1 percent of households have more wealth than the entire bottom 95 percent. Financial wealth is even more concentrated. The top 1 percent of households have nearly half of all financial wealth (net worth minus net equity in owner-occupied housing), says economist Edward Wolff of New York University. Wealth is further concentrated at the top of the top 1 percent. The richest 0.5 percent of households have 42 percent of the financial wealth.

The total net worth of the median American household just about matches the projected sticker price of Ford's new supersized sports utility vehicle, the Excursion. Adjusting for inflation, the net worth of the household in the middle (the median household) fell from $54,600 in 1989 to $49,900 in 1997. Median financial wealth fell from $13,000 in 1989 to $11,700 in 1997.

The percentage of households with zero or negative net worth (greater debts than assets) increased from 15.5 percent in 1983 to 18.5 percent in 1995—nearly one out of five households. That's nearly double the rate in 1962 when the comparable figure was 9.8 percent—one out of ten households. The net worth of the poorest fifth of households averaged –$5,600 in 1997. That's down from –$3,000 in 1983.

Many households are deeper in debt. Debt as a percentage of personal income rose from 58 percent in 1973 to 76 percent in 1989 to an estimated 85 percent in 1997.

The growth in household debt has helped keep the economy growing despite wage stagnation at home and economic turmoil abroad—at a significant cost to many families and the nation's long-term economic health. “The unsustainable growth in debt,” says John Schmitt of the Economic Policy Institute, “undermines the stability of the recovery and threatens to magnify the impact of any downturn.” A rise in interest rates “could put some newly-indebted households over the edge. Even a mild increase in unemployment could produce a substantial rise in bad debts, private bankruptcies, and mortgage foreclosures.”

The stock market boom has sent the fortunes of some Americans soaring while leaving many others in the dust. At a 15 percent annual return—big by historical standards—investments double about every five years. The recent stock market has done much better than that.

From 1983 to 1998, the Standard & Poor's 500 Index (S&P 500), a much broader gauge of the stock market than the Dow, grew a cumulative 1,336 percent with dividends reinvested. If you had put $10,000 in the stock market in 1983, you could have more than $143,000 today. Unfortunately, most Americans didn't have the $10,000 to invest then, and they don't have it today. A million dollars invested by a wealthy American in S&P 500 index stocks in 1983 would have ballooned to $14.4 million by the end of 1998.

Between 1983 and 1995, the S&P 500 delivered a huge cumulative return of 582 percent (with dividends reinvested). At the same time, the median household net worth dropped 11 percent and the bottom 40 percent lost an incredible 80 percent. The top 1 percent, meanwhile, gained 17 percent.

Between 1995 and 1998, S&P 500 stocks had an annualized return of 30 percent. Most of it went to the top 10 percent of households.

Four out of ten households now own stock directly and indirectly, but most still don't own much. Almost 90 percent of the value of all stocks and mutual funds owned by households is in the hands of the top 10 percent. According to Edward Wolff, an estimated 42 percent of the benefits of the increase in the stock market between 1989 and 1997 went to the richest 1 percent alone. The bottom 80 percent of households split 11 percent of the gains.

The Wage Gap

Nine years into the longest peacetime expansion in U.S. history, average workers are still earning less, adjusting for inflation, than they did when Richard Nixon was president. Despite long-overdue wage growth since 1996, hourly wages for average workers in 1998 were still 6.2 percent below 1973, adjusting for inflation; weekly wages were 12 percent lower than in 1973. Nonfarm business productivity grew nearly 33 percent in the same period, according to the Economic Policy Institute.

What if wages had kept rising with productivity? What if they were 33 percent higher in 1998 than they were in 1973? The average hourly wage in 1998 would have been $18.10, rather than $12.77. That's a difference of $5.33 an hour—more than $11,000 for a full-time, year-round worker. The 30 cents workers gained in their hourly wages between 1997 and 1998 pales by comparison.

The pace of recent wage growth has already slowed despite tight labor markets in many parts of the country. The cumulative wages lost since 1973 will never be recovered—much less their lost investment potential.

The minimum wage has become a poverty wage. It was 19 percent lower in 1998 at $5.15 than it was in 1979, when it was worth $6.39, adjusted for inflation. The minimum wage used to bring a family of three, with a full-time worker, above the official poverty line. Now it doesn't bring a full-time worker with one child above the official poverty line.

Many Americans can't make ends meet today, much less build assets for the future. A recent study by the Urban Institute, Snapshots of America's Families, found that many families with incomes up to 200 percent of the federal poverty level—which they call lower-income families—had trouble supporting themselves and their families. Nearly three in ten lower-income families were unable to pay the mortgage, rent or utility bills at some point in the prior year. Nearly half of lower-income families reported worrying about or having difficulty affording food.

Low-income workers are turning increasingly to food banks and homeless shelters, which cannot keep up with the rising demand. In its 1998 survey of 30 major cities, the U.S. Conference of Mayors found that requests for emergency shelter by homeless families had risen 15 percent during the past year; 30 percent of the requests went unmet. The mayors also found that more than one-fifth of the urban homeless were employed. The mayors found that requests for emergency food increased an average of 14 percent during the past year. One out of five requests for food assistance went unmet.

A survey by Second Harvest, the nation's largest private network of food charities, found that nearly 40 percent of the households who received Second Harvest food in 1997 had at least one employed person. Recent visitors to a Greenwich, Connecticut food bank included “a cook from a local French restaurant, a construction worker, housekeepers from nearby estates who made the minimum wage, $5.15 an hour, and a woman who cared for the children of housekeepers” (New York Times, February 26, 1999).

According to the Washington-based Wider Opportunities for Women and the Boston-based Women's Educational and Industrial Union, the self-sufficiency standard (the level of income necessary to meet all basic needs, including taxes) for an adult and preschooler in high-cost Boston is $32,279—nearly twice the official poverty line for a family of four. In lower-cost Berkshire County, Massachusetts it's $24,678. No wonder many low-income workers—including growing numbers of former welfare recipients—can't make ends meet. Recent studies of former recipients and those combining work and welfare have found they typically earn between $8,000 and $10,800 annually. Most do not receive paid vacation, sick leave, or health benefits from their employers.

Retired people's incomes have long been said to rest on a “three-legged stool” of Social Security (and Medicare), private savings, and employer pensions. The stool is wobbling for some retirees and collapsing for others, as savings decline and pension coverage deteriorates.

Fewer than half of all workers (47 percent) were covered by pensions in 1996—down from 51 percent in 1979. To make matters worse, there has been a shift away from traditional “defined benefit” pension plans, which guarantee workers fixed retirement payments based on pre-retirement wages and years of service, toward “defined contribution” plans, such as 401(k)s, that take a chunk out of workers' paychecks and saddle employees with all the investment risk. According to the Economic Policy Institute, defined contribution plans accounted for 42 percent of all pension plans in 1997, up from 13 percent in 1975.

Lower-wage workers are far less likely than high-wage workers to be covered by any employer-sponsored retirement plan, further exacerbating the wealth gap. Only 16 percent of the lowest wage workers (the bottom fifth by income) were covered by employer-provided pension plans in 1996, versus 73 percent of workers in the top fifth. In addition to placing the investment risk on employees, defined contribution plans require employee contributions in order to receive company matching contributions, if offered. Many low-wage workers faced with the dilemma of choosing between feeding and housing their family today and saving for retirement in the future, do not participate in defined contribution plans even when given the option.

Home $weet Home

As the Children's Defense Fund observes, “Homeownership has long been a central part of the American dream. It is also a major source of financial security and stability for young families, and an essential means of accumulating the equity that has enabled countless families later to borrow money in order to stave off a crisis, send a child to college, or help start a family business.”

Fueled by low mortgage interest rates, the U.S. homeownership rate hit a record 66 percent in 1998, but for people under age 55, the rates were actually lower in 1998 than in 1982.

The biggest government support for home-ownership comes in the form of the tax deduction for mortgage interest on owner-occupied first and second homes. Unfortunately, much of the tax write-off goes to higher-income families. The more you can already afford to spend, the more the government subsidizes you. As the New York Times reports (January 10, 1999), for each dollar in tax savings from the mortgage-interest deduction “going to the average taxpayer making $200,000 or more, the average taxpayer in all lower income groups combined saves just 6 cents.”

For the fiscal year ending September 30, 1999, the mortgage deduction will add up to about $53.7 billion. That's $23 billion more than total 1998 federal spending by the Department of Housing and Urban Development (under $31 billion). The mortgage deduction costs 23 times as much as the credit for low-income housing investment ($2.3 billion).

While tax subsidies for affluent homeowners remained high, federal funding for low-income housing was cut by 80 percent from 1978 to 1991, adjusting for inflation. Not surprisingly, shortages of affordable housing have increased greatly.

The Racial Wealth Gap

While the racial income gap is terribly wide, the racial wealth gap is even worse. According to Edward Wolff, the median black household had a net worth of just $7,400 in 1995—about 12 percent of the $61,000 in median wealth for whites. Median black financial wealth (net worth minus home equity) was just $200—a mere 1 percent of the $18,000 in median financial wealth for whites. In the same year, nearly one out of three black households had zero or negative net worth, twice the rate among whites.

Hispanic households have even less wealth than blacks. The median Hispanic household had a net worth of only $5,000 in 1995—just 8 percent of whites. Median financial wealth was actually zero.

Because of employment, housing, insurance, and other discrimination, black and Latino families are far less likely than whites to own the homes in which they live. In 1995, the homeownership rate was 47 percent for blacks and 44 percent for Hispanics, about two-thirds the rate for white households (69 percent).

In 1999, the Kansas City Star analyzed mortgage applications taken by more than 500 area banks and mortgage companies from 1992 to 1997. As reported by Ted Sickinger, a former commercial loan officer, “lenders still reject minority mortgage applicants far more frequently than they do whites. Even high-income minorities are rejected more frequently than whites with lower incomes.”

Moreover, “most loans made in minority neighborhoods refinance existing debt and are made by companies that often charge higher interest rates and fees. In white neighborhoods, by contrast, most loans are made at market rates and go to buy homes—the kind of lending that helps borrowers build wealth.” Unlike the overt redlining of the past, the Kansas City Star found “discrimination with a smile.”

Melvin Oliver and Thomas Shapiro analyzed the asset gap in their book, Black Wealth/White Wealth. Even if differences in income, occupation, education, and other factors are removed from the equation, a difference of $43,143 in average net worth remained in 1988. They call it “the costs of being black.” For married couples, the difference was greater: $46,294. Housing discrimination is a major factor. Inheritance is another. White parents generally have far greater resources to pay for their children's college education, help them with their first home purchase, and bequeath them assets at death.

As Oliver and Shapiro observe, “Wealth signifies the command over financial resources that a family has accumulated over its lifetime along with those resources that have been inherited across generations.”

Inequality is a matter of life and death—and not just for the poor. In the words of the University of Washington International Health Program and Health Alliance International, “the greater the income differences within populations (whether of whole countries or of cities or larger administrative areas within countries), the worse their health. This helps explain why the United States, the richest and most powerful country in the world (spending more than any other on health care), ranks below 25th in the league of countries ordered by life expectancy. Income differences between rich and poor are bigger in the United States than in any other developed nation.”

A July 1998 report in the American Journal of Public Health found that higher income inequality is associated with increased mortality at all per capita income levels. “Given the mortality burden associated with income inequality,” the report concludes, “business, private, and public sector initiatives to reduce economic inequalities should be a high priority.”

Closing the Wealth Gap

Increased inequality is not the result of natural phenomena like sun spots or shifting winds. It is the result of over two decades of public policies and private corporate practices that have benefitted asset owners at the expense of wage earners.

Where are we headed? “The Atlanta-based Affluent Market Institute predicts that by 2005 America's millionaires will control 60 percent of the nation's purchasing dollars,” notes Jeff Gates in The Ownership Solution.

“Money makes money,” said Adam Smith, author of The Wealth of Nations, long ago. Immediate steps are needed to enable low- and moderate-income families to earn, save, and invest more money, and build asset security. Here are some of the recommendations we offer in Shifting Fortunes to narrow the wealth gap.

KidSave Accounts Act. Legislation advanced by Senator Robert Kerrey (D-NE) with bipartisan support would guarantee every American child $1,000 at birth, plus $500 a year for children ages one to five, to be invested until retirement. Through compound returns over time, the account would grow substantially, provide a significant supplement to Social Security and other retirement funds, and enable many more Americans to leave inheritances to their children. That would strengthen opportunities and asset-building across generations. At an 8.5 percent return, for example, $1,000 set aside at birth would be worth $250,000 at age 65; the additional $2,500 set aside in the child's first five years would be worth $470,000.

Broadening Employee Ownership. While the overall trend in wealth growth has been toward concentration, a significant exception is among employee owners. As of 1997, more than 8 percent of total corporate equity was owned by non-management employees, up from less than 2 percent in 1987. This ownership takes the forms of Employee Stock Ownership Plans (ESOPs), profit-sharing plans, widely granted stock options, and other forms of broad ownership. In 1997, average employee owners had about $35,000 in corporate equity above what they were able to save from their paychecks.

In The Ownership Solution, Jeff Gates urges us to look beyond wage and job policies to expand the ownership stake that workers and their communities have in private enterprise. There are a range of public policies that could promote broader ownership and reward companies that share the wealth with employees, consumers and other stakeholders. These include encouraging employee ownership through government purchasing, licensing rights, public pension plan investments, loans and loan guarantee programs, and so on.

Individual Development Accounts (IDAs). IDAs are like individual retirement accounts, but are targeted to low- and moderate-income households to assist them in asset accumulation. Participants in IDAs may have their contributions matched by public or private dollars. A number of private charities have financed pilot IDA programs through community-based organizations. A generous federally funded matching IDA program would provide significant opportunities for asset-poor households to build wealth. Participants could withdraw funds from IDAs in order to purchase a home, finance a small business or invest in education or job-training. Even small amounts of money can make a substantial difference in whether or not individuals get on the asset-building train.

Living Wages and Full Employment. People would obviously have greater ability to save if their wages were higher. Low real wages have pushed a growing number of families into debt. Decent wages would enable families to save money, purchase assets, and plan for the future. Wage remedies include higher state and federal minimum wages and the passage of living wage ordinances. Protecting the right of employees to organize and join unions also greatly increases their wage earning potential. Laws prohibiting employment discrimination on the basis of race, gender, and so on should be strongly enforced.

Of course, you can't earn wages if you can't find a job. Government policies should promote full employment and assure jobs for every American who needs one.

Expand Earned Income Credit and Raise No-Tax Threshold. Progressive tax policies can enable families to keep more money in their pockets. These include an expanded earned income credit, an increased personal exemption, and a higher no-tax threshold.

Income Equity Act. Taxpayers presently subsidize excessive corporate executive salaries. Rep. Martin Sabo (D-MN) has introduced legislation to cap the tax deductibility of all salaries and bonuses at 25 times the lowest-paid worker in a firm. It would provide an incentive to increase salaries at the bottom. In the 105th Congress, there were over 60 cosponsors for this bipartisan legislation.

Taxing Capital Gains Like Wages. The tax burden is being shifted off of large asset owners and onto wage earners. The Social Security payroll tax has taken an increasingly bigger bite out of the paychecks of most wage earners, especially low- and middle-wage earners since income subject to Social Security tax is capped (the cap is now $72,600). Meanwhile, taxes on capital gains have been reduced substantially. Because of the 1997 Taxpayer Relief Act, which gave relief to the rich by reducing the tax rate on long-term capital gains from 28 percent to 20 percent, many workers now pay a higher tax rate on income from wages than wealthy investors pay on realized capital gains. A fair tax system would not favor income from assets over income from wages.

The wealth gap poses serious consequences for our economy, our communities, and our democracy. It's time to reduce the wealth gap and strengthen national prosperity.                                         Z