Atelier 15, article 8

© Chuck Collins :
(from Dollars & Sense)

The Wealth Gap Widens
By Chuck Collins(*)

                   During the 1920s, the wealthy accumulated such exorbitant stocks of cash, they
                   couldn’t spend it all. Instead, they played the stock market, fueling a rapid run-up
                   in stock prices. Lower and middle income households, on the other hand, lacked
                   wealth enough to meet their needs and were forced to borrow heavily.

                   Many historians believe that this combination of growing personal debt and a
                   widening wealth gap destabilized the economy and precipitated the Great
                   Depression. A similar fault line underlies today’s economy.

                   While the media trumpets rising economic growth and soaring Dow Jones, signs
                   are emerging that the current boom, like that of the 1920s, is founded on vast
                   inequities of wealth and is financed by growing consumer debt.

                   From 1983 to 1998, stock prices rose 13-fold, so that $100 invested in stocks
                   in 1983 would be worth $1300 today. Conventional wisdom has it that everyone
                   benefits from a rising market. After all, nearly half the population now owns some
                   stocks, a much higher proportion than two decades ago.

                   However, very few have sizable stock holdings. In 1995, the most recent year
                   for which detailed data is available, nearly three-quarters of stock-holders held
                   less than $5,000 worth, including stock in retirement plans and mutual funds.
                   Wealth in the United States is now as maldistributed as it was in 1929. Financial
                   assets like stocks and bonds remain concentrated in relatively few hands, with the
                   richest 10% of the population owning 88% of stocks and 90% of bonds. The
                   personal wealth of Bill Gates alone exceeds the combined holdings of 40% of the
                   U.S. population. Consequently, when the stock market climbs, a relatively few
                   wealthy households reap most of the gains.

                   Even among the top 10%, wealth is highly concentrated. A mere 1% of
                   households, each with at least $2.4 million in net worth (assets minus debts), now
                   own 40% of the nation’s wealth, twice the share they claimed two decades ago.
                   According to economist Edward Wolff of New York University, the
                  concentration of wealth is even more dizzying if home equity is taken out of the
                   equation (wealth in housing is the most widely-dispersed of assets). Excluding
                   equity in homes, the richest 1/2 of 1% together (about 450,000 households) now
                   own 42% of the nation’s financial wealth.

                   Thanks to a combination of rising profits, high real interest rates, skyrocketing
                   CEO pay, and a booming stock market, the inflation-adjusted net worth of the
                   richest 1% swelled by 17%, between 1983 and 1995. For others, the boom has
                   been a bust. Thanks to falling wages, low savings levels to begin with, and rapidly
                   rising personal debts, the poorest 40% of households lost an astounding 80% of
                   their net worth.

                   While the rich racked up gains measured in the millions, the 40% at the bottom
                   saw their average net worth shrink from $4,400 to a meager $900. And despite
                   endless media cheerleading about the rising Dow making millionaires of the
                   middle-class, the middle fifth of American households have actually lost 11% of
                   their net worth since 1983.

Falling Wages increase the Wealth Gap

                   Behind the wealth gap lurks the wage gap, the fact that wages have fallen short of
                   inflation for the past two decades. Although wages rose in 1997 and 1998, real
                   weekly earnings for average workers are still lower than they were in the 1970s.
                   Had wages risen at the same rate as productivity, hourly workers would today
                   earn an additional $5.33 an hour or $11,000 a year — that could be used to
                   purchase assets.

                   Instead, households are borrowing heavily to make up for stagnant wages. The
                   U.S. savings rate — the percentage of personal income not spent each year — is
                   less than zero, meaning that the typical U.S. household spends more than it earns.
                   Debt service now eats up 17% of consumer income, a heavy and potentially
                   insupportable burden. As a result, nearly one in five households has negative net
                   worth, and bankruptcy filings have doubled since 1990.

                   Consumer advocates also worry about the large numbers of homeowners taking
                   out home-equity loans on the basis of what may be speculative increases in their
                   homes’ value. In an economic downturn, with a rise in unemployment, home
                   prices could drop precipitously, putting more middle-class households into
                   bankruptcy and sparking a wave of home foreclosures.

                   The maldistribution of wealth in the United
                   States jeopardizes both our economy and our
                   democracy. To close the wealth gap, we
                   need policies that raise wages and equalize
                   earnings. Higher minimum wages and
                   stronger state and local living wage
                   ordinances are a first step. But workers
                   aren’t likely to share in growth and
                   productivity gains without increased
                   unionization and tougher state regulations that
                   limit overtime and outsourcing.

The Wealth Gap: A Political Issue

                   With personal savings rates at an all-time low
                   and with the proportion of workers covered
                   by private pension plans declining, it is likely
                   that many Americans will retire with little or
                   no personal savings. In response to public
                   anxiety about the asset gap, a few Democrats
                   have made modest efforts to address the
                   issue.

                   President Clinton in January proposed
                   expanding individual savings through the
                   establishment of "USA Accounts." These
                   would function like Individual Retirement
                   Accounts except that lower-income
                   taxpayers would receive federal matching
                   funds for any savings that they put aside.
                   Funds could be withdrawn before retirement
                   for asset-building activities, like purchasing a
                   home.

                   Senator Robert Kerrey (D-NE) introduced
                   legislation to create what he calls "KidSave
                   Accounts." The federal government, under
                   this plan, would provide $3000 to every
                   child, which, if invested at 7% per year (an
                   ambitious goal) could increase in value to
                   $175,000 by age 65. Funds would be
                   available for retirement and would, hopefully,
                   reduce the numbers of households with zero
                   net worth.

                   Two Yale professors, Anne Alstott and Bruce Ackerman, proposed a more
                   ambitious asset-building program in their book, The Stakeholder Society. Under
                   this scheme, each American upon reaching his or her 20s, would receive
                   $80,000 — a "stake" to invest in business start-ups, education, or other
                   asset-building activities. Financed initially by progressive taxation, the idea is to
                   level the wealth-building playing field, though $80,000 is still a far cry from the
                   $100 billion that Bill Gates’ heirs stand to inherit.

                   These proposals, with their focus on individual security and market-based
                   solutions, fail to address the political and economic dangers of the
                   over-concentration of wealth. Moreover, they are offered in the context of
                   privatizing social security and dismantling social safety nets. Progressive reforms
                   must address those structures of the economy that foster great inequality rather
                   than shoehorning people into individual wealth-building schemes. A bolder
                   program would include wealth taxation, fairer income taxation, broader worker
                   ownership, and the accumulation of public and community-owned assets.

(*) Chuck Collins is codirector of United for a Fair Economy in Boston. He is coauthor with
Holly Sklar and Betsy Leondar-Wright of Shifting Fortunes: The Perils of the American Wealth Gap.