The Wealth Divide
The Growing Gap in the United
States Between the Rich and the Rest
An interview with Edward
Multinational Monitor, May
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.
Multinational Monitor: What is wealth?
Edward Wolff: Wealth is the stuff that
people own. The main items are your home, other real estate, any
small business you own, liquid assets like savings accounts, CDs
and money market funds, bonds, other securities, stocks, and the
cash surrender value of any life insurance you have. Those are
the total assets someone owns. From that, you subtract debts.
The main debt is mortgage debt on your home. Other kinds of debt
include consumer loans, auto debt and the like. That difference
is referred to as net worth, or just wealth.
MM: Why is it important to think about
wealth, as opposed just to income?
Wolff: Wealth provides another dimension
of well-being. Two people who have the same income may not be
as well off if one person has more wealth. If one person owns
his home, for example, and the other person doesn't, then he is
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
MM: What are the best sources for information
Wolff: The best way of measuring wealth
is to use household surveys, where interviewers ask households,
from a very detailed form, about the assets they own, and the
kinds of debts and other liabilities they have run up. Household
surveys provide the main source of information on wealth distribution.
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 Board's
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?
Wolff: The most common measure used, and
the most understandable is: what share of total wealth \ is owned
by the richest households, typically the top 1 percent. In the
United States, in the last survey year, 1998, the richest 1 percent
of households owned 38 percent of all wealth.
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
MM: What have been the trends of wealth
inequality over the last 25 years?
Wolff: We have had a fairly sharp increase
in wealth inequality dating back to 1975 or 1976.
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 hasn't gone up
nearly as dramatically as wealth inequality.
MM: What portion of the wealth is owned
by the upper groups?
Wolff: The top 5 percent own more than
half of all wealth.
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?
Wolff: The bottom 20 percent basically
have zero wealth. They either have no assets, or their debt equals
or exceeds their assets. The bottom 20 percent has typically accumulated
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 asset components?
Wolff: Things are even more concentrated
if you exclude owner-occupied housing. It is nice to own a house
and it provides all kinds of benefits, but it is not very liquid.
You can't really dispose of it, because you need some place to
The top 1 percent of families hold half
of all non-home wealth.
The middle class's 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?
Wolff: There you find something very striking.
Most people are aware that African-American families don't earn
as much as white families. The average African-American family
has about 60 percent of the income as the average white family.
But the disparity of wealth is a lot greater. The average African-American
family has only 18 percent of the wealth of the average white
MM: Are you able to do a comparable analysis
Wolff: It is hard to separate out husbands
and wives. Most assets are jointly held, so it is not really possible
to separate which assets are owned by husband and which by wife.
Even when things are specifically owned by one spouse or another,
the other spouse usually has some residual lien on the assets,
as we know from various divorce proceedings. If a pension account
is owned by the husband and the family splits up, the wife typically
gets some ownership of the pension assets. The same thing is true
for an unincorporated business owned by the husband. It really
is not that easy to separate out gender ownership in the family.
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?
Wolff: We are much more unequal than any
other advanced industrial country.
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?
Wolff: Part of it reflects underlying
increases in income inequality, but the other significant factor
is what has happened to the ratio between stock prices and housing
prices. The major asset of the middle class is their home. The
major assets of the rich are stocks and small business equity.
If stock prices increase more quickly than housing prices, then
the share of wealth owned by the richest households goes up. This
turns out to be almost as important as underlying changes in income
inequality. For the last 25 or 30 years, despite the bear market
we've had over the last two years, stock prices have gone up quite
a bit faster than housing prices.
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 illusion?
Wolff: I would say it was more of an illusion.
What did happen is that the percentage of households with some
ownership of stocks, including mutual funds and pension accounts
like 401(k)s, did go up very dramatically over the last 20 years.
In 1983, only 32 percent of households had some ownership of stock.
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 hasn't 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?
Wolff: I think there are two rationales.
The first is basically a moral or ethical position. A lot of people
think it is morally bad for there to be wide gaps, wide disparities
in well being in a society.
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?
Wolff: One reason we have such high levels
of inequality, compared to other advanced industrial countries,
is because of our tax and, I would add, our social expenditure
system. We have much lower taxes than almost every Western European
country. And we have a less progressive tax system than almost
every Western European country. As a result, the rich in this
country manage to retain a much higher share of their income than
they do in other countries, and this enables them to accumulate
a much higher amount of wealth than the rich in other countries.
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?
Wolff: I've proposed a separate tax on
wealth, which actually exists in a dozen European countries. This
has helped to lessen inequality in European countries. It is also,
I think, a fairer tax. 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 broader
kind of tax of this nature, 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.
MM: In broad outlines, how would you structure
such a tax?
Wolff: I would model it after the Swiss
system, which I think is a pretty fair system. It would be a progressive
tax. In the United States, the first $250,000 of wealth would
be exempt from the tax. That would exclude 80 percent of all families.
The tax would increase at increments, starting out at .2 percent
from about $250,000 to $500,000. The marginal rate would go up
to .4 percent from $500,000 to $1 million, and then to .6 percent
from a $1 million to $5 million, and then to .8 thereafter.
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 as well?
Wolff: I think we have to provide a much
broader safety net in this country.
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 don't 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.