This post was guest authored by Olivia Snow Smith.
An expanding economy and rising asset values mean little if the growth accrues to a small percentage of the population. And that’s exactly what is happening in the United States right now.
Income inequality hit its highest level in at least 50 years, the Census Bureau reported recently. The Gini Coefficient is a longstanding measure of inequality, in which a 0 indicates perfect equality and a 1 indicates complete inequality. The U.S.’s number reached 0.485 in 2018, up from 0.482 in 2017 and higher than at any point since the agency started collecting the data in 1967 when the value was 0.397.
Though these differences appear small, they point to a stark reality: trillions of dollars in wealth flowing toward already wealthy people.
How is that possible amid an economy that’s growing?
One immediate reason is the tax cut President Trump signed into law last year. That overwhelmingly benefited wealthier Americans, and corporations. But there are deeper structural reasons why the rich did so well.
“The stock market went up a lot from 2017 to 2018 … which means those at the top likely had large capital gains, therefore leading to large rises in income,” Dean Baker, co-founder of the Center for Economic and Policy Research, told Politico.
Three states with starkest rises in inequality from 2017 to 2018 were places with wealthy pockets — California, Texas, and Virginia. But six other states — Alabama, Arkansas, Kansas, Nebraska, New Hampshire, and New Mexico — also showed substantial increases, according to the Census Bureau.
The bottom 50 percent of income earners who lost their wealth in the Great Recession, still have 32 percent less wealth than they did in 2003, according to an analysis of Federal Reserve data by The Wall Street Journal. On the flip side, the top one percent have doubled their overall wealth since 2003.
The long term effects of the Great Recession persist, and one affected area is housing. The number of families in the bottom half of the income pool who own a home fell to about 37 percent in 2016, down from 43 percent in 2017. For millennials ages 25 to 34, the homeownership rate is around 8 percentage points lower than it was for Gen Xers and baby boomers were when they were in the same age group.
Median household incomes grew less last year — they rose only 0.9 percent in 2018, compared with 1.8 percent in 2017, according to the Economic Policy Institute. But that number hides terrible racial disparities. In 2018, the median black household earned just 59 cents for every dollar of income the median white household earned (unchanged from 2017), while the median Hispanic household earned just 73 cents (down from 74 cents) for every white household dollar.
Rich and lower-middle-class people are affected differently by recessions. Households with wealth are able to use their high income as a safety net to protect them in times of economic turmoil. Households with little wealth do not have this luxury. In fact, predatory financial actors like payday and car title lenders, and banks with high overdraft fees, actually extract more wealth from families when they’re down, making it harder to climb out when a family’s income improves
The financial industry exhibits more altruistic patterns toward people with existing wealth. Among wealthier households, more than 85 percent of their worth is in the form of financial assets, like stocks, bonds, or stakes in private companies. In the years after the crisis, in an effort to revitalize the economy, the Federal Reserve kept interest rates near zero and bought bonds, which lent support to the prices of these assets. Low-wealth households did not benefit from this assistance, as half of Americans don’t own any stock at all.
Hence we are in a situation where rising stock market values and a growing economy are just not improving the economic outlook for most Americans. While the rising tide is lifting the yacht of wealthy elites, the rest of us are struggling to stay afloat.
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