Even before the Great Recession hit, a number of researchers and academics were sharing observations on the divergent paths of those in the middle and on the bottom compared to those at the top and very top. Median wages have been relatively stagnant, and, more importantly, had become divorced from productivity gains. And while poverty has persisted for large segments of the population, the share of income controlled by those at the top has continued to climb. These have been long-term trends which began to take shape in the early 1980s. Two questions have been on my mind. First, what about wealth? Second, what's been the connection between the Great Recession and inequality in America?
New data from the Federal Reserve make it clear that wealth has assumed a leading role in the inequality story. Their Survey of Consumer Finances offers one of the fullest accounts of the family balance sheet. Unfortunately, it is conducted only every three years. The good news is that the last two surveys (2007 and 2010) offer a means to examine the impact of the Great Recession.
Here is what the Fed reported about the changes in wealth holdings. Between 2007 and 2010, the average family saw their wealth decline 39 percent. During the same period, median incomes dipped 8%. The 39% drop in wealth speaks to the severity of the recession but the impact was not experienced equally. Families in the top ten percent by income actually saw their net worth increase almost two percent.
Those at the top had their wealth holdings increase and almost everybody else experienced a drastic decline. That's inequality by definition. Check out the visual (rollover to see the absolute figures).
Here's another perspective on the same phenomenon. This time the families are ranked by their net worth holdings rather than income. Those in the bottom 25% had their (admittedly small) wealth holdings completely wiped out. Families in the next three groups experienced big drops but at increasingly declining rates. The top 10% were relatively immune from the impact of the Great Recession, experiencing a wealth loss of 6.4%.
These charts offer new and illuminating information. While we have known for years that median incomes have stagnated even as there were income gains at the very top, the re-concentration of wealth is an emerging phenomenon. And it appears that the Great Recession has changed the dynamics at play.
Some have argued that they can't get too worked up about this because the wealth was ephemeral and reflected elevated home values that were inflated by the housing bubble. Some of the wealth that appeared on family balance sheets was certainly derived from housing. Those in the middle held their wealth primarily in homes, while those at the top had more diversified portfolios. And now it is the very divergence of home values and stock prices that has become and will continue to be a primary driver of inequality in the foreseeable future. This matters because public policy efforts have focused on stabilizing the financial markets but have failed to help families whose assets have been eroded (through no fault of their own) by the instability of housing markets.
And not all of the lost home equity was a result of the housing bubble. People are worse off than they were before the housing bubble took hold. The net worth of the average family is 27% below where it was in 2001. That is not just a lost decade; it is a debacle and a major blow to the middle class. The tragedy here is that the sub-prime virus inflected the whole housing market, and needlessly trapped millions of unsuspecting families.
I think the ownership of wealth and the ability access financial resources is consequential, but it can mean different things to different people. At the low end, we usually don't think of it as wealth but rather as savings or access to resources that can be tapped strategically. Increasing savings and assets, along with income, is one of the keys to economic stability and upward mobility. Even small amounts can prevent debilitating downward spirals that might be triggered by a job loss or income event. The recession has actually provided support for the claim that asset holdings help people cope with unexpected events and increase their resiliency. In this respect, wealth and assets are a very significant measure of economic well-being, one that will become increasingly important as income volatility rises with declines in job stability.
And for those in the middle, wealth and assets are a foundation of economic security. There's a strong a case to be made that the wealth lost in the Great Recession hit those in the middle and upper-middle class the hardest. Just look at the charts. These families may not have had massive wealth holdings to begin with but these assets were going to be used to send children to college or build a bridge to a secure retirement. Many families have been forced to revise their plans. We should be collectively concerned about creating opportunities for more families to build up their wealth holdings. It is a big problem if it's happening only at the very top.
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