It’s Worse Than You Thought

By Karen Shaw Petrou and Matthew Shaw

Janet Yellen, Ben Bernanke, and Jerome Powell have each bemoaned U.S. economic inequality and then asserted that it’s everyone else’s fault.  On the blog and in our speeches, we counter that post-crisis monetary and regulatory policy had an unintended but nonetheless dramatic and destructive impact on the income and wealth divides.  In doing so, we often point to just how much worse and how much faster inequality became as post-crisis policy took hold.  Demographics, technology, and trade policy didn’t change anywhere near that much that fast.  Now, a new study from the Federal Reserve Bank of Minneapolis takes the story forward with a trove of data evaluating U.S. economic inequality from 1949 through 2016.  For all the recovery and employment the Fed cites in its equality defense, these data tell a far different tale.  

These sweeping, careful, and validated data for the first time merge the Survey of Consumer Finances conducted by the Economic Behavior Program of the Survey Research Center at the University of Michigan from 1948 to 1977 with the Fed Survey of Consumer Finances beginning in 1983. Combining all these data and correlating them through an awesome amount of heavy lifting, the new study analyzes U.S. income and wealth equality in far more depth over a considerably longer period of time than we’ve seen before. 

What did we learn?  This new dataset shows clearly that U.S. wealth inequality is the worst it has been throughout the entire U.S. post-war period.  We also know now that the U.S. middle class is even more “hollowed out” than we thought in terms of income, with any gains made by the lower-middle class sharply reversed after 2007.  And, using these unique data, we now also know that racial economic-equality disparities are as bad as they were before the civil rights era promised black Americans a seat at prosperity’s table.

What’s more:

• Looking at who has how much, this paper finds that the top 10% grew its income share fifteen percentage points (from 34.5 percent to 48.2 percent) from 1950 to 2016. Most of this inequality increase came after 1971, with later data showing a significant drop in income for the middle class.
• Wealth-share changes prior to 2008 were modest, as shown in the following chart (altered slightly to remove extraneous data);

• After 2008, middle-class wealth collapsed and the share of the top 10% surged six percentage points in less than a decade. This was the largest wealth inequality spike in post-war America.
• In 2016, half of the U.S. population had less real wealth than it did in 1971. Before the crisis, wealth-to-income ratios increased the most in the middle and bottom of the wealth distribution; after the great financial crisis, this ratio fell the most for these same households. 
• Educational shifts had a causal effect on overall trends since 1949, but demographic ones (i.e., aging) do not. As a result, the “aging-population” excuse for sharp inequality increases appears unpersuasive. 
• Using data not previously available, racial economic equality disparities are found to be pronounced both in 1950 and in 2016. Income disparities from before the civil rights era persist to this day, with the wealth gap also dramatically different.  Median wealth for black households is $15,000 versus $140,000 for white households.  Looking more deeply reveals still more significant disparities: the FRB-Minneapolis study finds that the typical black household is poorer than 80% of white households. 

As we have noted, the Fed walks on a far sunnier side of the street when it talks about economic gains demonstrated by net worth data.  The Fed tends to report net worth in aggregate terms, most recently finding that total household net worth is at an all-time high of $100.8 trillion.  Maybe that looks good in average terms, but U.S. median household net worth in 2016 was only $97,300.  It stood at $120,300 in 2007 and at $102,200 in 2004.  Note that all of these totals are in nominal dollars.  Adjusted for inflation, post-crisis U.S. median net worth is even worse from an economic-equality – not gross total – perspective.  

The reason financial policy is not just correlated with all these depressing data but also plays a causal role has to do with who owns what.  If all Americans owned the same percentages of stocks or derived their wealth in the same percentages from their homes, then wealth would generally rise or fall evenly across the wealth distribution even though the rich own more stock and bigger homes than those in the middle class or below.  However, financial-asset ownership – where the largest post-crisis gains have occurred – is concentrated among the wealthiest Americans.  Similarly, house-price increases are concentrated at the upper end of the price bracket in the most affluent coastal cities. 

In our next blog post, we’ll examine what the new Minneapolis paper tells us about how these asset-ownership disparities translate into economic inequality in the most recent U.S. data.  Suffice it to say here, as we did in our first post, that the Fed’s huge portfolio combines with ultra-low rates to realign asset-appreciation rates in ways that sharply make the rich still richer.