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Thursday, June 26, 2014

Inequality Increases

An analysis by researchers at the University of Michigan shows a drastic increase in wealth inequality since 2003.  Wealth inequality among U.S. households has nearly doubled over the past decade.

Households in the 95th percentile of net worth had 13 times the wealth of the median household in 2003. By 2013, this disparity had increased almost twofold, with the wealthiest 5% of Americans holding 24 times that of the median.

In dollars terms, the median wealth of a US household was $87,992 in 2003, and by 2013 had decreased 36% to $56,335. In contrast, the richest 10% actually saw their net worth increase from 2003 to 2013, with the highest gains going to the top 5%. The median wealth of the households in the top five percent grew over 12% during the same time period, from $1,192,639 to $1,364,834.

The study also shows similar wealth inequality growth between median and poor households. In 2013, the 50th percentile held 17.6 times the wealth of the least wealthy 25%—over twice the disparity found in 2003.

According to the study’s lead author, Fabian T. Pfeffer, more than half of the median household’s wealth in 2007 was in home equity. By comparison, the median household in the richest 5th percentile held only 16% of their wealth in home equity, with the lion’s share being kept in real assets, including business assets (49%) and financial instruments like stocks and bonds (25%). Pfeffer explains that because stocks have recovered more quickly than the real estate market—the S&P reached its pre-recession high in March of 2013, while home prices are still far from their 2006 peak—average households were hurt far more than richer Americans when the housing bubble popped. When home equity is excluded from household wealth, the impact of the housing crash on average Americans is especially clear. A median household’s total net worth declined by $42,000 between 2007 and 2013, but their wealth held in non-real estate assets declined by only $6,900. The Great Recession’s disproportionate impact on real estate allowed the richest households, who could afford to diversify their investments, to grow wealth even during a deflating housing market.

Another concern for middle income households is that many sold off investments during the recession in order meet expenses, and are now less able to enjoy the benefits of a recovering economy. “Part of the lack of recovery is that they [median American households] had to divest,” says Pfeffer. “The troubles will stay with them for the next couple of decades as they try to reclaim these assets.”

His research confirms what economists like best-selling author Thomas Piketty have been saying for years: that returns to capital have been increasing at a rapid pace over the last century, creating a persistently swelling gap between the wealth of the haves and the have-nots. “I don’t see many hopefully signs that we’re going to get back to where we were 10 years ago,” Pfeffer says.

Some have claimed inequality is less important as long as all Americans see wealth gains over time. The rich may get richer faster, but that might not matter if the poor and middle class are also seeing their wealth increase. Pfeffer disagrees. A rising tide may lift all boats, but the Michigan professor points out that wealth not only tends to determine political influence, but also that wealth inequality greatly affects the opportunities available to the children of the middle class, especially in terms of education. “The further families pull apart [in net worth], the more disparate the opportunities become for their offspring,” he says.

The annual CapGemini/RBC survey of investors worldwide showed the number of households with more than $1 million in investable wealth rose almost 15 percent to 13.7 million in the year through 2013. Their total wealth rose almost 14 percent to $53 trillion, it estimated.

Both the ranks of the rich and their collective wealth have now risen 60 percent since 2008, the survey showed, and those fortunes are expected to rise a further 22 percent by 2016. By contrast, world economic output has expanded just 16 percent over the past five years and the slow, sub-par recovery and subdued wage growth for most workers sharpens the political divide. Near zero interest rates and money printing designed to kickstart credit growth and job creation helped stabilize the situation but has had the side-effect of inflating the financial assets and real estate holdings of the richest even further.

"Consumers and workers are paying far more than corporations to finance governments’ austerity efforts," said Luca Paolini, strategist at Swiss wealth manager Pictet. "This is politically unsustainable and is sure to reverse."

Estimates of the amount of cash that non-financial U.S., European and Japanese companies are sitting on is as high as $5 trillion - twice the levels of 10 years ago. The CapGemini/RBC survey showed rich investors still stored a whopping 27 percent of their expanding portfolios in cash or equivalents through last year - more than they held in any other asset class and twice pre-crisis levels. Many economists reckon the fear of re-investing is simply due the dire state of the world economy and expectation of paltry growth for years to come. But the fact that cash continues to pile up regardless shows the depth of the concern that change is at hand. "Business conditions are about to become harsher," Paolini said.

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