By Karen Shaw Petrou and Matthew Shaw
On September 21, the Federal Reserve released its quarterly study of American’s net worth. As with the Fed’s earlier study on U.S. economic happiness, the release trumpeted the good news revealed in the latest aggregate data. For net worth, this means a new record in the second quarter, with national household net worth hitting an unprecedented $96.2 trillion. But, the Fed’s data do not go farther to show which Americans own how much of this giant sum. We do.
How Rich Are We Really?
Calculating a simple mean net worth (i.e., the sum of all households’ net worth divided by the total number of households) using the data contained in the Fed’s study and Census Bureau data on the number of U.S. households shows that the average net worth of U.S. households now exceeds $750,000. However, this obscures the fact that a large percentage of this wealth is held by a very small number of Americans. The most recent Census Bureau data from 2013 show that the median net worth of U.S. households (i.e., the net worth of the household in the statistical middle of all households) was then approximately $80,000. For comparison, the mean net worth of all U.S. households then was approximately $530,000. Assuming that the median net worth rose in lock-step with the averages derived from the most recent FRB and Census data, the median net worth at the end of the second quarter of 2017 would be almost $118,000. Clearly, averages are distorted to suggest a country far wealthier than it is for most people. Further, this median calculation may be too high. An analysis relying on these same data taking into account also the “wealth-growth rate” found that the median net worth of U.S. households is now about $98,000.
Data laid out in the chart below confirms that the suggestion that U.S. net worth is very high is true only for the happy few:
Why Wealth is Disproportionately Distributed
What the new Fed report does show is that the assets held by the wealthiest Americans did the best in 2016. This isn’t new – we have shown before that the wealthiest hold financial assets such as stocks and bonds and that these assets have dramatically outpaced the assets owned by low- and moderate-income households (largely their homes and savings accounts). This gap in wealth-accumulating assets is a longstanding feature of the U.S. economy, but the gap between rich and poor grew suddenly and dramatically worse in the wake of the 2008 financial crisis. As we have shown, one important reason for this is post-crisis monetary and regulatory policy.
Although the Fed may comfort itself with data indicating total U.S. household net-worth is at an all-time high, household wealth in holdings of corporate equities rose by $1.1 trillion in just the three months of 2017’s second quarter. The value of real estate (i.e., largely house prices) also rose, this time by $564 billion. Given the importance of home ownership as the wealth source for low- and moderate-income (LMI) households, this might seem like a good offset to gains by the wealthiest in the stock market (where few LMI households make investments).
However, it is very likely that these real-estate wealth gains also accrued to the highest-income Americans. This is because, as prior Federal Financial Analytics research has shown, the bulk of house-price increases has been enjoyed by the wealthiest Americans.
One source of wealth for LMI households with any savings are savings accounts, but their value actually fell slightly in the second quarter, likely due to some savings extraction by first-time homeowners and continuing pressures on LMI household wages.
The Fed’s data and all of the other numbers presented above show net worth – that is, the value of assets (not adjusted for inflation) less the debt a household has taken out to acquire them or to meet other, less tangible goals (e.g., education). In general, the older you are, the less debt you owe – your house is more fully paid off, your consumption-related debts (e.g., credit cards) have dropped, and any student loans are paid off. And, as Thomas Piketty clearly demonstrated in Capital in the Twenty-First Century, the more you have, the wealthier you get due to the benefit of the compound rate of interest on financial assets, the more remunerative assets offered to the wealthy, and relatively low tax rates on both marginal income and capital gains. Higher tax rates would likely curb growth and thus also adversely affect equality, but they do confiscate wealth and thus help to equalize it.
For as long as effective tax rates stay as they are or if they go lower, U.S. net worth will rise disproportionately for older, higher-wealth households absent fiscal and social-welfare policies that advance low-debt higher education, affordable and sustainable home ownership, and after-inflation returns on savings that promote wealth accumulation for those just starting out.