May 2003 - VOLUME 24 - NUMBER 5
An Interview with Edward Wolff
Edward Wolff is a professor of economics at New York University. He is the author of Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It, as well as many other books and articles on economic and tax policy. He is managing editor of the Review of Income and Wealth.
|In the United States, the richest 1 percent of households owns 38 percent of all wealth.||
Multinational Monitor: What is wealth?
MM: Why is it important to think about wealth, as opposed just
Wealth strictly financial savings provides security to individuals in the event of sickness, job loss or marital separation. Assets provide a kind of safety blanket that people can rely on in case their income gets interrupted.
Wealth is also more directly related to political power. People who have large amounts of wealth can make political contributions. In some cases, they can use that money to run for office themselves, like New York City Mayor Michael Bloomberg.
MM: What are the best sources for information on wealth?
Of these household surveys there are now about five or six surveys that ask wealth questions in the United States probably the best source is the Federal Reserve Boards Survey of Consumer Finances.
They have a special supplement sample that they rely on to provide information about high income households. Wealth turns out to be highly skewed, so that a very small proportion of families owns a very large share of total wealth. Most surveys miss these families. But the Survey of Consumer Finances uses information provided by the Internal Revenue Service to construct a special supplemental sample on high income households, so they can zero in on the high wealth holders.
MM: How do economists measure levels of equality and inequality?
This is the most easily understood measure.
There is also another measure called the Gini coefficient. It measures the concentration of wealth at different percentile levels, and does an overall computation. It is an index that goes from zero to one, one being the most unequal. Wealth inequality in the United States has a Gini coefficient of .82, which is pretty close to the maximum level of inequality you can have.
MM: What have been the trends of wealth inequality over the last
Prior to that, there was a protracted period when wealth inequality fell in this country, going back almost to 1929. So you have this fairly continuous downward trend from 1929, which of course was the peak of the stock market before it crashed, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s.
Income inequality has also risen. Most people date this rise to the early 1970s, but it hasnt gone up nearly as dramatically as wealth inequality.
MM: What portion of the wealth is owned by the upper groups?
In 1998, they owned 59 percent of all wealth. Or to put it another way, the top 5 percent had more wealth than the remaining 95 percent of the population, collectively.
The top 20 percent owns over 80 percent of all wealth. In 1998, it owned 83 percent of all wealth.
This is a very concentrated distribution.
MM: Where does that leave the bottom tiers?
A household in the middle the median household has wealth of about $62,000. $62,000 is not insignificant, but if you consider that the top 1 percent of households average wealth is $12.5 million, you can see what a difference there is in the distribution.
MM: What kind of distribution of wealth is there for the different
The top 1 percent of families hold half of all non-home wealth.
The middle classs major assets are their home, liquid assets like checking and savings accounts, CDs and money market funds, and pension accounts. For the average family, these assets make up 84 percent of their total wealth.
The richest 10 percent of families own about 85 percent of all outstanding stocks. They own about 85 percent of all financial securities, 90 percent of all business assets. These financial assets and business equity are even more concentrated than total wealth.
MM: What happens when you disaggregate the data by race?
MM: Are you able to do a comparable analysis by gender?
What we do know is that single women, or single women with children, have much lower levels of wealth than married couples.
MM: How does the U.S. wealth profile compare to other countries?
Perhaps our closest rival in terms of inequality is Great Britain. But where the top percent in this country own 38 percent of all wealth, in Great Britain it is more like 22 or 23 percent.
What is remarkable is that this was not always the case. Up until the early 1970s, the U.S. actually had lower wealth inequality than Great Britain, and even than a country like Sweden. But things have really turned around over the last 25 or 30 years. In fact, a lot of countries have experienced lessening wealth inequality over time. The U.S. is atypical in that inequality has risen so sharply over the last 25 or 30 years.
MM: To what extent is the wealth inequality trend simply reflective
of the rising level of income inequality?
MM: A couple years ago there was a great deal of talk of the democratization
of the stock market. Is that reflected in these figures, or was it an
By 2001, the share was 51 percent. So there has been much more widespread stock ownership, in terms of number of families.
But a lot of these families have very small stakes in the stock market. In 2001, only 32 percent of households owned more than $10,000 of stock, and only 25 percent of households owned more than $25,000 worth of stock.
So a lot of these new stock owners have had relatively small holdings of stock. There hasnt been much dilution in the share of stock owned by the richest 1 or 10 percent. Stock ownership is still heavily concentrated among rich families. The richest 10 percent own 85 percent of all stock.
As a result, the stock market boom of the 1990s disproportionately benefited rich families. There were some gains by middle class families, but their average stock holdings were too small to make much difference in their overall wealth.
MM: Apart from the absolute level of wealth of people at the bottom
of the spectrum, why should inequality itself be a matter of concern?
If that is not convincing to a person, the second reason is that inequality is actually harmful to the well-being of a society. There is now a lot of evidence, based on cross-national comparisons of inequality and economic growth, that more unequal societies actually have lower rates of economic growth. The divisiveness that comes out of large disparities in income and wealth, is actually reflected in poorer economic performance of a country.
Typically when countries are more equal, educational achievement and benefits are more equally distributed in the country. In a country like the United States, there are still huge disparities in resources going to education, so quality of schooling and schooling performance are unequal. If you have a society with large concentrations of poor families, average school achievement is usually a lot lower than where you have a much more homogenous middle class population, as you find in most Western European countries. So schooling suffers in this country, and, as a result, you get a labor force that is less well educated on average than in a country like the Netherlands, Germany or even France. So the high level of inequality results in less human capital being developed in this country, which ultimately affects economic performance.
MM: To what extent is inequality addressed through tax policy?
Certainly our tax system has helped to stimulate the rise of inequality in this country.
We have a much lower level of income support for poor families than do Western European countries or Canada. Social policy in Europe, Canada and Japan does a lot more to reduce economic disparities created by the marketplace than we do in this country. We have much higher poverty rates than do other advanced industrialized countries.
MM: Do you favor a wealth tax?
MM: In broad outlines, how would you structure such a tax?
It would not be a very severe tax. In fact, the loading charges on most mutual funds are typically of the order of 1 or 2 percent. It would not be an onerous tax, but it could raise about $60 billion annually. Eighty percent of families would pay nothing, and 95 percent of families would pay less than $1,000. It would really only affect very rich families.
MM: Do you recommend non-tax approaches to deal with inequality
There are lots of things that we should do to strengthen our income support system. We can expand the Earned Income Tax Credit, which is now a fairly substantial aid to poor families, but which can be improved.
The minimum wage has fallen by about 35 percent in real terms since its peak in 1968. We should think about restoring the minimum wage to where it used to be. That would help a lot of low-income families.
The unemployment insurance system is in a real mess; only about one third of unemployed persons actually get unemployment benefits, either because they dont qualify or because they exhaust their benefits after six months. Typically the replacement rate is about 35 or 40 percent. In the Netherlands, the replacement rate is 80 percent. Our unemployment insurance system is much less generous than in other industrialized countries and can certainly be shored up.
Of course, the welfare system is in a total state of disrepair, since it provides very restrictive coverage. Even before the switchover from AFDC to TANF with the 1996 welfare reform bill, real welfare payments had declined by about 50 percent between 1975 and 1996. So we had already experienced an enormous erosion in welfare benefits, even before we adopted this new system.
We are much more unequal than any other advanced industrial country.
|You have this fairly continuous downward trend from 1929, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s.|
|If you think about taxes that reflect a family's ability to pay, a family's ability to pay is a reflection of their income, but also of their wealth holdings. A wealth tax would not only produce more tax revenue, which we desperately need, but it would be a fairer tax, and also help to reduce the level of inequality in this country.||The stock market boom of the 1990s disproportionately benefited rich families. There were some gains by middle class families, but their average stock holdings were too small to make much difference in their overall wealth.|