The Federal Reserve Board, which has done more than anyone in history to increase income inequality, has just issued a new report on income inequality.
That the inequality gap is wider than ever should come as no surprise, as the Federal Reserve Board has pumped up the stock market for about eight years now. Huge increases in Medicaid enrollment, SNAP (Supplemental Nutritional Assistance Program) enrollment and other government programs also didn’t help.
The Washington Post noted that, “The share of U.S. income held by the top 1 percent of households reached 24% in 2016, a record high, and the median net worth of white households, at $171,000, was nearly 10 times larger than for black households.”
The Post did note that minorities and those without college degrees showed the greatest gains as a percentage. Black households had an average net worth of just $13,600 in 2013 and it jumped almost 30% to $17,600 in 2016, while Hispanic households saw their net worth increase 46%, from $14,200 to $20,700 over the same period.
But having a net worth of $17,600 is nothing to celebrate. In its study, the Fed calculates net worth as including the value of homes, vehicles, savings accounts, retirement funds, and other stock and bond funds. A net worth of $17,600 is obviously not enough to subsist on or to support a family.
Government Programs Not Working
Decreasing income inequality has been the number one economic goal of the Democratic Party, and especially of Senators Bernie Sanders and Elizabeth Warren. So it’s ironic that during President Obama’s tenure he ceded control of the economy to the Federal Reserve.
The Fed’ s quantitative easing program drove stock prices higher, making the rich richer, while pushing interest rates lower, making those living off of fixed incomes poorer.
Even as the Fed reduces its bond portfolio, unwinding quantitative easing:
- Economic inequality is likely to continue getting worse.
- Economic inequality is the wrong issue; economic growth is much more important (even The New York Times agrees).
Why Income Inequality will Worsen
So why do the rich get richer while the poor struggle to get ahead?
Leveraging wealth. Those who have significant wealth to begin with have more money to invest, so they make more off of their investments even if they earn the same return as someone with little money.
If you have $100 million invested and earn a 10% return on it this year, you’ll have increased your net worth by $10 million. If you have $10,000 invested and earn 10%, you’ll have increased your net worth by only $1,000 — that’s a difference of $9,999,000, even when earning the same return.
That’s just basic math and nothing will change it. Over time, though, those with moderate means who save and invest can build wealth. Having $20,000 invested instead of $10,000, in the example above, would double the investor’s return to $2,000. As the base increases, compounding returns create more wealth.
Better opportunities. Americans with little wealth can’t qualify to invest in hedge funds, private equity and many other alternative investments, which offer an opportunity for greater returns. They can’t afford real estate — or at least real estate that’s likely to appreciate significantly in value.
Those with little wealth also pay higher fees for banking or to have their investments managed, because they are less profitable. It takes the same amount of time for a bank to open a checking account for someone with little money, but the bank will earn far less from someone with a $1,000 account than from someone with a $100,000 account.
Efforts to achieve equality don’t work. Efforts to achieve income equality typically involve taking more from the wealthy and giving more to the poor, but the wealthy already pay an inordinate share of taxes.
As we previously reported, “The top 1% of American earners earned 19.04% of the country’s gross adjusted income, but paid 37.8% of income taxes in 2015, based on IRS statistics reported by the Tax Foundation.”
Would taxing the wealthy more be fair? Would it help? If they’re already paying an inordinate share of taxes, why is inequality increasing? And what about the disincentive that more progressive taxes would have on job creation?
Growth vs. Income Inequality
While income inequality continues to increase, consumer income is recovering.
The Census Bureau reported that median household income was $59,039 last year, up an inflation-adjusted 3.2% after a 5.2% gain in 2015. While an analysis by the Economic Policy Institute found that changes in methodology for calculating income are partially responsible for the increase, income is at least moving in the right direction after many years of stagnation.
People earning more will spend more, increasing economic growth. People earn more when they graduate from college and develop careers.
The Fed found that people with college degrees have a median net worth of $292,100, over four times as much as those without bachelor’s degrees. And when they have a higher net worth, they have more money to invest, which can further boost their net worth.