Over the last few years, there has been much said about the rising wealth gap, especially in the United States. The film Inequality for All, from Robert Reich, and Thomas Picketty’s book Capital in the Twenty-First Century, have brought the issue of wealth inequality to the forefront.
While, of course, there will alway be a certain amount of wealth inequality, there are troubling implications when we get to the point where the wealth gap becomes wide enough that the middle class begins to disappear. Nick Hanauer’s special report in Politico also addresses some of the issues that come with high levels of wealth inequality.
According to the Pew Research Center, the wealthiest families have seen the best gains in net worth and wealth:
Wealth of middle-income families had been unchanged from 1983 to 1992, then grew sharply—by 43%—from 1992 to 2001, and continued to grow in the 2001-2007 period, by 18%. Net worth of middle-income families dropped 39% in the later years of the decade as the housing market crash and Great Recession wiped out the previous advances. Over the 1983 to 2010 period, only upper-income families registered strong increases in wealth.
Much of the net worth growth experienced by middle-income families can be attributed to “paper” wealth — the rise of investing (notably through employer-sponsored plans like 401(k)s) and skyrocketing home values. When the crash happened, many middle-income families found much of that accumulated wealth wiped out. While top income families also experienced losses, though, their relatively higher wealth meant that they didn’t face all of the same consequences.
Nobel-winning economist Paul Krugman asserts that the “watershed” economic period that marked the post-World War II era, and that was marked by the rise of a broad-based middle class, was basically engineered. Between strong protections for workers, a smaller disparity between CEO pay and worker pay, the rise of the social safety net, certain Depression-inspired regulations on financial institutions, and a top tax bracket of more than 90 percent (although very few people actually paid the top marginal rate), a place was opened for a broad-based middle class.
And it’s true that, today, most Americans, in genera, enjoy a higher standard of living, thanks to technology and other advancements. On top of that, there are those who point out that wage stagnation isn’t really the issue, since benefits can provide a boost in overall compensation.
But, even with all of this, the reality is that many Americans still live paycheck to paycheck, and hard work no longer guarantees that you will be able to earn a living for your family. As you can see, the reality is that there has been a switch when it comes to annual change in mean family income during the six decades from 1950 to 2010. Beginning in the 1980s, instead of seeing greater changes in income for those in lower income quintiles, the biggest increases were seen in the higher quintiles. Those gains meant that the wealthy were better able to weather the difficulties of the Great Recession, and many of them are back on track for great gains now.
However, the problem is not so much that there is wealth inequality. At issue is the concern that we are reaching levels of inequality similar to those seen just before the Great Depression. No one is saying that it’s a good idea for wealth inequality to disappear entirely. After all, the idea that you can do better than your parents, financially speaking, or that you could become a millionaire, is part of what continues to drive us.
So, while we will always have some level of income and wealth disparity, everyone starts getting worried when the wealth gap grows too wide. And, now that The United States no longer has the world’s richest middle class (Canada’s middle class has that distinction), many are starting to ask how we got here — and whether or not the wealthy have too much power.
The Issue of Social Mobility
Rather than concentrating on the idea of income and wealth inequality, some suggest that we look at the issue of social mobility. This makes sense, since social mobility has long been one of the hallmarks of the United States. Unfortunately, right now, the United States is experiencing an era of declining social mobility, as well as a growing wealth gap. This is tied to wealth inequality, since countries with high income inequality also tend to have low social mobility.
Part of the problem lies in the fact that those with higher degrees of wealth have access to opportunities and education that can help them achieve social mobility. The rising cost of college means that it is increasingly out of reach for many of the families that don’t qualify for grants, but who aren’t actually wealthy enough to afford college without taking on debt. A four-year college education isn’t always the answer to the education issue; there are plenty of ways to earn a good living with a marketable skill learned at a trade school or with an associate’s degree. However, this doesn’t address the fact that the wealthy have more chances to afford high-end schools, and garner the connections that lead to better jobs later.
And this doesn’t even address the disparity in education that you can receive at the elementary and secondary levels based on how wealthy you are. Students from wealthy families, who live in good school districts, automatically have a head start. These schools have programs and resources that poorer school districts can’t compete with, and wealthier students often end up ahead. Personally, I feel somewhat guilty that my son will be attending a great school in a highly-rated school district because we can afford to live in the district. I’m glad that he will get a first-rate education, but I also know that we are fortunate that we can afford to live in the school district. I know that he will have privileges and opportunities that many others won’t have.
Of course, opportunities don’t guarantee that someone will take advantage of what’s available. Additionally, inheriting wealth doesn’t guarantee that you will maintain it, since you could fritter it away. However, the fact remains that it is much easier to fall, in terms of social mobility, than it is to rise. And the barriers to rising “through the ranks” are becoming higher for those in lower income quintiles. You have a better chance of maintaining what wealth you have already than you do of moving up the income ladder these days.
The lack of social mobility also manifests in the way that systemic inequality can become a big problem. Insulated from the middle class and the poor, it’s easy to see why the rich have less empathy for others. And, as the rich become more influential in terms of political power and policy, it’s not a stretch to say that they will use that influence to promote more ways to maintain and grow their wealth, even if it is at the expense of those who don’t have as much. With the growing political power of the wealthy, some are concerned that the wealth gap will continue and that social mobility will decrease, making it harder for you to get ahead.
What Can YOU Do About Wealth Inequality?
For the most part, most of us agree that totally eliminating all wealth inequality is undesirable. However, it does make sense to be concerned about the growing wealth gap and the decrease in opportunities for the majority of Americans. The shrinking middle class is also a worry for many.
But what can you do about it in your life? How can you move forward and overcome some of the limitations that come with systemic wealth inequality?
Creating a situation in which you have financial independence is an important part of creating your own success. First of all, it can help to understand where rich people get their wealth. In many cases, it’s not because they are wage earners. Earned income is taxed at a higher rate than investment income. Long-term capital gains and dividends are currently taxed at favorable rates. The fact that the wealthy own assets that provide them with income that is taxed at a lower rate is a big deal. The asset wealth gap is part of the wider wealth gap. There’s a reason Mitt Romney has a lower effective tax rate than many of us do.
Consider starting to invest, so that you can grow your wealth. These days, it’s even easier than ever to start investing. If you have $25 and a computer, you can open an account with a low-cost brokerage and start investing in index funds.
You can also start a side business, just to add to income diversity. You can use this money to invest, or to put it to work in other ways. Income diversity can be a great way to help prevent you from falling prey to economic cycles as well, since it means that you aren’t beholden to one job.
And, finally, it makes sense to also stop worrying too much about the top one percent. Instead, focus on getting your financial house in order. Look for ways to build assets, reduce liabilities, and hone marketable skills. You might never become a millionaire or billionaire, but with planning and preparation you can live comfortably.