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Income, Not Wealth

People keep asking me, as I make the rounds hawking my book about income inequality, why I don’t focus on wealth inequality instead. The distribution of income in the United States is skewed toward the rich, but the distribution of wealth is skewed much more heavily toward the rich. Why didn’t I write a book about that?

This question has come up even more frequently since the Federal Reserve earlier this week issued its report, Changes In Family Finances From 2007 To 2010. The report got more media attention than I expected, mainly because the numbers were so dramatic. Whereas median family income fell about 8 percent during that period, which covers the 2007-2009 recession and the first year of the present (weak) recovery, median net worth fell about 39 percent. The losses varied dramatically according to how wealthy you were. Among those in the bottom fourth of wealth distribution, the median loss was 100 percent. In other words, the typical lower-income family lost all its wealth. Meanwhile, those in the top tenth of wealth distribution experienced a median loss of only 6 percent. The typical higher-income family lost, percentage-wise, hardly any of its wealth.

Why aren’t I more worked up about the wealth divergence than about the income divergence?

One reason is that nearly all of the wealth lost by the nonaffluent was make-believe. The recession, you’ll recall, was caused by the bursting of a housing bubble brought on by the issuing and frantic securitizing of sub-prime (i.e., junk) mortgages. Banks sought out low-income people who couldn't afford to buy a house and conned them into taking on a debt obligation they’d never be able to meet. Then they sold these crap mortgages to other banks, who bundled them with other crap mortgages and turned them into crap securities. When the house of cards came down a huge amount of “wealth” was wiped out in the housing sector, but that wealth had always been premised on the false assumption that poor folks would be able to pay mortgages they never should have gotten saddled with in the first place. The sub-prime crash was a tragedy for low-income people, but not because they lost their “wealth.” Rather, it was because they lost their homes, and eventually (when the entire economy went south) their jobs. The value of those houses had always been an illusion, and their true owners had really been the banks.

Another reason I don’t concern myself much with the distribution of wealth in the U.S. is that most people don't have any. If you own a house what you've really got (until you pay off your mortgage) is debt. About half of all households own stock (usually through mutual funds) but only about one-sixth possess stock holdings worth $7,000 or more. Eighty-one percent of all stocks are owned by by the top 10 percent. Overall, the top 10 percent possesses about three-quarters of all the wealth in the U.S. (By comparison, it possesses about 45 percent of the income.) So wealth is pretty much a non-issue for most people. 

Should wealth be shared more equally? Absolutely. But the U.S. government has never really been in the business of redistributing wealth in any direct way. Wealth is typically not taxed. Income is taxed. Taking away a person's wealth is expropriation. Taking away a person's income—some of it, anyway—is merely asking that person to pay his or her fair share to support the operations of government. It's hard enough persuading voters to allow that.

A final reason I’m not much interested in wealth is that it isn’t the true measure of economic well-being in our society, and hasn't been since we stopped being a farm-based economy. Before industrialization wealth—in the form of land—mattered a lot, because you needed it to plant crops, feed your family, and bring the surplus to market. But after industrialization the true index of well-being became income. Factory workers didn’t grow their own crops. They purchased them at the grocery. To make those purchases they needed a regular paycheck. The Progressives, because they were the first equality-minded folks to make peace with industrialization, also became the first to pay serious attention to income distribution, and income has been economists’ chief benchmark ever since. Wealth typically intersects with public policy only when it's converted into income, or when it's passed from one generation to the next (which is itself a kind of income).

I don’t mean to discourage anyone out there from saving. We all need to save money to send our kids to college, to buy our first house, and to retire. But the truth is that most of us don't save very much. The labor economist Teresa Ghilarducci recently told New York Times columnist Joe Nocera, “the 401(k) is a failed experiment.” When the Baby Boom starts retiring en masse and finds it can't pay the bills, it won't be moaning about its wealth. It will moan about its income.