LITMIR.BIZ

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Fundamentals

      Throughout this book, I refer to “economic inequality” even though much popular discussion focuses on “income inequality.” The reason to focus more broadly on economic inequality is that there are at least two key components that determine the have-a-lots, have some, and have-nots in the US and across the globe.

      First indeed comes income. This is what you and others in your household earn from the fruits of your labor (i.e., from your job), the benefits you get from the government minus the taxes you pay, and what you earn from your savings accounts and investments (including pension income and capital gains). Although different ways to count “income” in the Tax Code have different statistical effects, income is often and I think rightly measured after taxes to capture the equality impact of changing taxation policy.

Most income measures also and again rightly capture “transfer payments” – welfare, tax credits for purposes such as child care or education, public pensions such as Social Security, and other government income. Income equality is also affected – a lot – by capital income – that is, how much we earn on investments such as stocks, bonds, and savings accounts and whether we realize a profit when we sell our home or any of our investments. Very few measures of income equality look also at how far our income goes to maintaining a comfortable life – what we used to call being middle class. However, in this book, I'll look not only at what you earn, but also at what you have left over to spend on day-to-day essentials without going still more deeply into debt.

In short, income is what you earn and wealth is what you keep. Wealth is usually measured as net worth – i.e., the value of owned assets minus any debt needed to accumulate them. This is the right way to assess equality since debt burdens not only chew up income to make us poorer, but also expose us to the acute risk of personal bankruptcy or home foreclosure. Because the value of the assets wealthy households own – stocks and bonds – soared since 2010, and these households have little to no debt, they have done very, very well.¹ Wealthy households that depend on financial assets are also more resilient households than lower-income ones for whom the main source of wealth is a home. It's of course far easier to sell a few stocks or bonds to tide one over a hard patch or even a crisis such as COVID than to sell one's abode.²

Worse, the real inflation-adjusted value of the most important asset for many Americans – our homes – stayed flat after 2010 even as markets soared.³ Putting many of us farther away from any hope of wealth accumulation, homeownership was increasingly out of reach because of the debt burdens that rose sharply after 2010. This is now record-breaking,⁴ due in part to the huge cost younger Americans bear to fund their educations. Before COVID created its own economic catastrophe, student debt exceeded 100 percent of income for US millennials with student debt and is an astounding 372 percent of income for the least well-off.

Failing to combine both income and wealth into considerations of economic inequality quickly leads one astray. Working these income and wealth drivers into specific cases, one can see that thrifty retirees with large real-estate holdings able to leave a large inheritance look relatively poor based on “income” but quickly show up among America's most prosperous once wealth is considered. Conversely, two young people beginning their working careers might look similar in terms of income, but the one given a large house down payment by his or her parents is a good deal wealthier and has far better long-term equality prospects than the other, who not only lacks parental support, but may well also pay large student-loan bills that cut deeply into consumption capacity and long-term wealth accumulation. Affluent parents are a great comfort to their relatively wealthy millennial offspring, with 63 percent of them saying that their own retirement security depends on inheritance from parents, grandparents, and even friends.

Looking only at income also masks the inability of low- and moderate-income (LMI) households to amass the wealth needed to move into the middle class through capital-income-generating savings accounts or growing home equity. Having a small or even no cushion against the unexpected means that households can quickly lose what little they have after something as minor as a blown tire, let alone an event as eviscerating as the economic shutdown due to the novel coronavirus. Data from the Federal Reserve show just how close many of us with relatively robust incomes were to the edge even if our income pushed us into the nominal middle class – 37 percent of American adults (almost 100 million) feared that they could not handle an unexpected bill of only $400 no matter the seeming prosperity of late 2019.⁵ Even a small rainy-day fund is essential for household resilience, but as COVID hit in April 2020, almost one-third of Americans lacked a rainy-day fund of more than three months.⁶

Income and wealth may also not tell the whole inequality story. Conservatives disputing that America is in any way unequal avert their gaze from income and wealth to look only at what we own regardless of how much debt we took out to get it.⁷ I do not use this approach because consumption is distorted by many factors, not least the fact that the richer one is, the more one saves rather than spends in proportion to income and the less debt is needed to fund consumption.⁸ Further, measuring equality by how many cars, televisions, or air conditioners a household owns (as is sometimes done) confuses the often-larger numbers in lower-income households – two cars may well mean two earners are needed to maintain the same income found in a higher-wealth household with just one (probably more expensive) car.

However, one approach to “multidimensional” economic equality incorporates consumption data with income and wealth in a very interesting way. A Federal Reserve study examined households with the largest amounts of income, wealth, and consumption to see how households along these three dimensions fare from an economic-equality perspective.⁹ Using this three-dimensional approach shows an even more unequal America after 2008 well ahead of COVID.

In 2007, half of all households that were in the top 5 percent of income were also in the top 5 percent of households in consumption and wealth. By 2016, 60 percent of the households with top 5 percent wealth were also in the top 5 percent of consumption or income. These gains for the top 5 percent in income, consumption, and wealth came at the expense of almost everyone else – the bottom 80 percent of households saw their share of income, consumption, and wealth fall still farther.

Who Has How Much

Unsurprisingly, economists have many ways to study income, wealth, distribution, and even how many households or individuals should be counted.¹⁰ Still, I've found no objective, time-tested data to suggest that the United States is anything like the equality powerhouse President Trump asserted.

      First to income and some hard numbers that make inequality all too real. One could of course assess the US in COVID's wake to make a strong inequality argument, but this might be countered by those saying it's unfair to take a snapshot of the US at the worst of times. So let's look instead at the end of 2019, the best of times since 2010. This is compelling evidence that Mr. Trump was wrong and the need to repair the inequality engine is urgent.

According to the Fed,¹¹ 26 percent of adults in 2019 had a family income of less than $25,000, which was just about the federal poverty level for a family of four in the contiguous US. Another 10 percent had a family income above $25,000 but below $40,000. Thus, more than one-third of Americans had family income below

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