U.S. Wealth Inequality: Not Increasing with Time
My last two columns addressed American income inequality and tax fairness. Today, the latest on wealth inequality, another aspect of current debates on proposed tax increases.
Income refers to all money or in-kind benefits folks receive in each period of time – typically, a month or year – less the income-based taxes they pay. Wealth is the net value of all one owns, less amounts owed.
Alleged increases in U.S. wealth inequality became a big issue with the publication in 2014 of Thomas Piketty’s book, Capital in the 21st Century. Although he later recanted some of the book’s claims and data on which he relied, Piketty and others subsequently published analyses trying to prove wealth (and income) inequality increased disturbingly in recent decades.
In a 2019 paper “Exploring Wealth Inequality”, Ryan Bourne and Chris Edwards summarized serious methodological flaws in the book found by economists and other experts. They also showed subsequent analyses by Piketty, Emmanuel Saez and Gabriel Zucman substantially overstated growth in U.S. wealth inequality since the mid-1970s.
Correcting their assumptions and using better data, the wealth share of America’s richest one percent has been essentially flat since the 1960s or rising slightly, according to a summary by Scott Lincicome, “Lies, Damned Lies, and Inequality Statistics”.
The 2020 paper “Social Security and Trends in Wealth Inequality” by three Wharton researchers found that: “top wealth shares have not increased in the last three decades when Social Security is properly accounted for.” The reason: “by 2019, Social Security wealth represents 59% of the wealth of the bottom 90% of the wealth distribution.” That’s a lot of wealth the others ignored.
A 2021 analysis by five Boston Federal Reserve Bank researchers, “Wealth Concentration in the United States Using an Expanded Measure of Net Worth”, reinforced and extended the Wharton conclusions. They found that standard measures of household net worth and wealth inequality omit the value of social security and retirement funds.
Summarizing their results, Lincicome concludes the standard measures, “significantly understate the wealth of most Americans and overstate U.S. wealth inequality.” He adds, “As economist David Weil notes, adding other forms of government ‘transfer payments’ would further improve these results.”
Lincicome concludes, “So, once again, troubling depictions of wealth inequality—often cited to justify more government redistribution—become far less troubling after considering the full picture of people’s wealth, especially existing government distribution programs.” “Once again” refers to the fact the same problems beset the redistributionists’ claims about income inequality.
Lincicome also notes that inequality assessments often (almost always) fail to track individuals’ actual experiences and choices. “So, for example, we’ll see ‘troubling’ trends for generic buckets of people in the same income or wealth brackets (the ‘one percent’ or the ’99 percent’ or whatever), even though the actual people in those buckets change regularly—especially over the long time horizons used in the inequality literature.”
He adds, “the standard ‘buckets’ (or ‘cross-section’) approach can significantly distort one’s assessment of how the U.S. economy is actually performing across decades—a real-world performance that can only be determined by tracking real people (a ‘panel approach’).”
Data from David Splinter for the methodologically erroneous cross-section approach for 1980-2014 indeed shows that low-wealth statistical deciles (not people) saw no increase while the highest one percent group in 2014 did significantly better than their 1980 peers.
But using the methodologically correct approach, considering the actual group of folks who had the lowest wealth levels 1980, we find they had by far the highest increases in their wealth levels by 2014. And the 1980 one-percenters had the lowest growth rates in their wealth to 2014.
Across the board, panel data – that is, the actual experience of actual people, not the comparison of different groups at different times – shows growth in wealth levels was higher for poorer folks and slower for richer folks.
Moreover, individuals’ choices and behaviors statistically explain much of the differences in income growth rates. For example, differences in performance-based pay – such as overtime, commissions, bonuses or tips within the same occupation – explain much wage inequality.
Likewise, choices such as staying in school to graduate from high school and college, getting and staying married, working full-time, etc.).
Tax increases don’t help any of that.