Income inequality is increasingly acknowledged as a key economic issue for the world. The topic is a major theme at Davos this year. Economic inequality is also an increasingly common topic in U.S. politics.
A new study has found that economic mobility does not appear to have changed appreciably over the past thirty years, even as the wealth gap has grown enormously. The authors analyzed the probability that a child born into the poorest 20% of households would move into the top 20% of households as an adult. The numbers have not changed in three decades.
On the other hand, there is clearly a substantial accumulation of wealth at the top of the socioeconomic scale. The richest 1% of Americans now own 25% of all of the wealth in the U.S. The share of national income accruing to the richest 1% has doubled since 1980. In contrast, median household income has shown no gains, adjusted for inflation, since the late 1980’s and has dropped substantially from its previous peak in the late 1990’s.
Why is this happening?
The basic narrative for explaining increasing inequality is detailed in a well-known book from the mid 1990’s, The Winner-Take-All Society. There are two major trends. First, in an increasingly globalized market for labor, low-skilled labor faces enormous downward pressure on wages. Second, technology provides highly-skilled workers with enormous reach that allows them to maximize their productivity and economic leverage. At the same time, automation is displacing hordes of lower-skilled workers. In this type of economic model, an ever-increasing fraction of wealth accrues to a very small population.
The social implications of increasingly concentrated wealth are beyond the scope of this discussion. I will, instead, simply focus on some of the implications for individual investors. Perhaps most notable is that the fraction of Americans who are participants in the stock market is dropping. Only 52% of American adults own any stock (including in accounts jointly-held with a spouse). This includes both stock held directly and that held indirectly through mutual funds. This number is remarkable given that 65% of Americans owned stock as recently as 2007. These numbers are crucially important in any discussion of the economic recovery. The massive rally in the stock market in recent years has simply had no benefits for the 48% of Americans who are not invested. In fact, this number goes a long way to explaining some of the growth in inequality. While 81% of Americans with incomes greater than $75,000 per year have stock holdings, only 50% of those with incomes between $30,000 and $75,000 hold stock.
Increased concentration of wealth and lower propensity or ability to invest for median households both suggest that stock market participants represent an increasingly narrow population. This, in turn, has interesting implications for how the behavior of the market as a whole may change. College savings plans such as 529’s tend to hold equities. Having fewer families invested in the market probably also translates to lower college savings. Only 37% of Americans believe that the stock market is a good way to build wealth. Among those people with $100,000 or more, 50% see the stock market as a good way to build wealth. What are the disenchanted going to do with their money? How will a shrinking population of smaller investors change the market?
Economic inequality is a topic that will continue to emerge as a dominant political theme. All that is really clear, however, is that current trends point towards an American society that is increasingly comprised of a very thin tier of wealthy people and a massive population made up of everyone else.
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