Multinational Monitor  [Printer-friendly version]
May 1, 2003


The Growing Gap in the United States Between the Rich and the Rest

An Interview with Edward Wolff

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

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 better off.

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 Bloomberg.

MM: What are the best sources for information on wealth?

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 have.

MM: What have been the trends of wealth inequality over the last 25

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

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

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 no savings.

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 live.

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 family.

MM: Are you able to do a comparable analysis by gender?

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

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

Wolff: I think we have to provide a much broader safety net in this

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

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.