Causes of Wealth Inequality in the United

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CAUSES OF WEALTH INEQUALITY IN THE UNITED STATES 14

Causesof Wealth Inequality in the United States

States

The world is full of personal wealth. The Allianz Global reportindicated that the total amount of individual affluence amounts to $153 trillion. The riches are sufficient to pay thrice the amount ofoutstanding sovereign debt in the world. The 2013 report indicatedthat the overall personal wealth increased by more than 7% as aresult of household savings. In the US, private prosperity isestimated at 63.5 trillion United States Dollars, and it is thebiggest in the world (Mankiw, 2013).

Inequality andpoverty are the biggest problems facing the contemporary world(Norris et al., 2015, p. 5). The current concern is that economicdevelopment is inequitably distributed. Statistics indicate that thetop one percent well-to-do individuals own 65 times more than thebottom half of the total population in the world (Norris et al.,2015, p. 15). In the United States, economic measures show that theaverage total revenue of the top prosperous individuals has growncompared to the income earned by lower income groups. Theinflation-adjusted incomes of top ten percent wealthy peopleincreased by 220 percent compared to their lower income counterpartsthat only grew by 18 percent (Stiglitz, 2012, p. 24).

Most Americans earn a living by working and consider occupation asboth morally and economically imperative. The earnings in the form ofwages are used to fuel the economy whereby, employment begets thespending that results in additional work. The cycle of work creates aconsumer-driven capitalism. However, financial crisis events such asthose witnessed in 2007 and 2008 have the possibility to reverse thevirtuous cycle and spinning the economy downwards at a momentum thatis hard to break. Job losses result in reduced spending thatexterminates additional jobs, which further curtails spending(Mankiw, 2013).

History of Wealth Inequality.

Various studies have revealed that the top 1% individualshistorically held American wealth since the 18th century. The topaffluent owns 40 to 50 percent of the major cities such as New York,Boston, and Charleston. However, the inequality was not as severe asin the 20th century. A stable wealth distribution mechanism reducedsharply after World War II. There was a decline in the wealthinequality during the 70’s caused by a drop in stock prices thatmade the wealthy lose some of their wealth. In 1980, the rate ofwealth concentration increased up to the year 1998 before the crashof the economy in the late 2000’s. The increase in affluencebetween 1980’s and 2000’s was greatly due to tax cuts for therich and the defeat of labor unions. In overall, a majority 42% ofall wealth created between the 80’s and 90’s went to theprosperous 1%. The top twenty percent of households received 94% ofthe wealth while the bottom 80% only received 6% of all the createdfinancial wealth (Wolff, 2010).

Current Wealth Composition Of The Top 10% In The United States

Private Assets Ownership

In the United States, the top 1% households were associated with amean household income of fifteen million United States dollars in theyear 2010. The families’ income of the following cohort of top 20percent is estimated at one million dollars. In contrast, the bottomforty percent were associated with negative fourteen thousanddollars. In the same year, the top 1% owned 35% of all privatelyowned wealth while the next 20 percent owned 53.5%, summing to 88.5%.The statistics indicate that 79 % of the population owns less than12% of the privately owned resources (Wolff, 2010).

Non-ownership and Financial Wealth

Concerning financial wealth, the top 1% of households owns 35% of allprivately owned stocks, 64.5% of the financial securities and 63% ofbusiness equity. The top 1% also owns a majority 80% of the non-homereal estate. Regarding financial wealth, it is possible to concludethat the top 10% of households own the whole of America sincefinancial wealth is what counts (Wolff, 2010).

Inheritance and Taxes

The figures obtained from inheritance and estate taxes tell a similarstory. The research by the Federal Reserve Bank of Cleveland revealedthat a minority 1.6% receive more than one hundred dollars in theform of inheritance. Another 1.1 % receives inheritance approximatedbetween fifty and one hundred thousand dollars in contrast to 97.3%who receive nothing (Wolff, 2012).

Knowledge About Wealth Gaps

In terms of knowledge, Americans remain uninformed about the wealthdistribution concerning net worth. A majority of Americans believethat the richest households own approximately sixty percent ofAmerican affluence. They lack the knowledge that the top 20 percentowns a majority eighty-five percent of the wealth. On the other hand,Americans believe that the bottom 40 % owns 20% of the treasures,which is significantly different from research studies indicating thepoor controls less than ten percent of the riches (Wolff, 2012).

Objective

Wealth equality is similar to fairness and is significant value insocieties. Inequality signals a lack of income-earning opportunities.It reflects that individual segments of the society are at adisadvantage and affects macroeconomic stability. It also affectsgrowth by concentrating the power to make decisions in the hands of afew. It can lead to sub-optimal utilization of resources and increasethe risk of crisis. The aim of this paper is to evaluate the possiblecontributors to wealth inequality by assessing the nature of economicconditions such as the depressions and their associated effects onwealth distribution.

Research question:Whydo the rich keep getting richer while the situation of low-incomehouseholds deteriorates?

ANALYSIS

Means ofWealth Acquisition

According to Adam Smith, economics is a science of national wealth.It is the study of material things produced by labor, land, andtechnology to satisfy human needs. Among the key characteristics ofcapital is materiality. It is produced by human labor and can meetpeople’s needs. Finally, wealth has an exchange value. Classicaleconomists from the 18th and nineteenth century observed that land,labor, technology and capital are the key factors of production. Landrefers to the gifts by nature while labor is the human effort. Itincludes all previously made riches that are applied to thegeneration of new wealth. Capital does not equal to money, buthuman-made goods such as machinery or buildings made to facilitatethe multiplication of wealth. People aim at producing more wealththan they consume or destroy. Consequently, the behavior has led tothe creation of surplus capital goods. The surrounding factories,computers, railroads, and trucks evidently indicate the excess money.They stand ready to assist humanity in the multiplication of theirwealth (Mankiw, 2013).

The Relationship Between Means Of WealthAcquisition And Inequality.

In broad terms,there are two ways where a man can create income. The first is bycontributing to the society and second is by extracting revenue fromthe community. Contribution to the society entails providing valuableproducts in the form of goods and services. Wages are earned whenpeople provide valuable services in the form of labor. For example, amechanic can buy a car, repair, and sell it for a higher price. Thedifference between the buying price and the selling price serves asthe cost of labor to the mechanic. Capital returns occur when peopleuse equipment to add the value of their wealth. For example, amechanic could use time-saving tools in the process of fixing thevehicle, and the profit is a capital return for the use of such tools(Stiglitz, 2012, p. 79).

The secondapproach to earning money is commonly referred to as economic rent.The income does not result from adding value to the community, butfrom extracting the society’s wealth. Earners of economic rentobtain money without providing services corresponding to the valuethey get in return. For example, land agents get money from thepeople, but they do not add any human-made wealth to the community.The fundamental problem associated with economic rent is the resourcedepreciation effect. The more the money extracted, the fewer theresources left available to pay for people’s goods and services.Since most people obtain money from the society, they leave a smallershare of resources for people who add value to the society such asthe employees, independent contractors, and small business owners(Stiglitz, 2012, p.219)

DisparitiesIn Production And Income As Contributors To Inequalities

According to Mishel and Kar-Fai (2012), the top 10% of householdsshare a huge part of the income created from 1979 to 2007. The top10% shared 59% of the gains while the very top 0.1% seized adisproportionate 36% of the overall income compared to only 41%shared by the bottom 90% of households. The first key contributingfactor to the findings is income inequality as depicted by thecompensational differences between the middle and lower classes offamilies. Productivity growth provides the basis for improving theliving standards.

The hourly compensation of the majority non-supervisory workers grewin tandem to production for the period 1948-1973. After 1973, therewas an increase in productivity that accelerated further after 1995yet the growth in workers compensation witnessed a modest growth overthe same period. Productivity increased by 80.4% while the hourlycompensation rates only increased by 39.2%. The stagnation in incomesimplies that the majority, 80%, of workers in the American economyfailed to benefit from the growth in productivity. Although theeconomy could afford a higher pay, it neglected to provide to a bignumber of workers (Mishel &amp Kar-Fai, 2012).

Terms Of Trade

The second barrier to income equality is the wedge created by termsof trade. The Terms of trade in America indicate that there is afaster growth in the price of items purchased by workers relative tothe prices of what they produce. The wedge emanates from theconversion of production into the real output that is adjusted forinflation as indicated by the Gross Domestic Product (GDP). Incontrast, the mean hourly compensation of workers is converted intoreal GDP based on price changes of what consumers buy. The revenuefrom national output has grown at a slower rate than the price ofconsumer products. Consequently, a similar growth in real output(after modification for inflation) is adjusted for changes inconsumer purchases, prices of investment goods and exports while realwages are adjusted for changes in consumer purchases only. Thedifferential treatment leads the prices of consumer products toincrease faster than the prices of the products they create. It alsoindicates that if the workers consumed microprocessors, machine toolsand grocery, their growth in wages could be in tandem with theincrease in production (Mishel &amp Kar-Fai, 2012).

Effect of Industry Practices on the Wealth Gap

Shapiro et al. (2013) observe that the increases in income serve as asource of wealth accumulation for American families. The averagedollar increase in revenue within a 25-year period (1984-2009),resulted in an increase of 5.19 per dollar for the affluent comparedto 69 cents for the poor households. The significant difference inwealth accumulation from similar income gains emanates from longexistent discrimination patterns in hiring, training, access tobenefits and promotion at the workplaces. The discriminatory factorshave further hindered the accumulation of riches for low-incomefamilies that dominate fields that do not offer employer-basedretirement plans. The poor also dominate in employment areas thatfail to provide food services, support, and administration hamperingthe rate of savings by the financially weak households. As a result,the impoverished families only manage to save for emergency purposeswhile their rich equals can save well beyond the emergency thresholdto invest.

Effect Of Home Ownership On The Wealth Gap

According to Shapiro et al. (2013), homeownership is a significantindicator of the wealth gap in the United States of America. Thepolicy brief observes that residential segregation created by the USgovernment has a long legacy and explains most of the challengesfaced by African-American families in increasing their equity andbuying homes. The brief observes that residential segregationartificially lowers the demand for houses by placing a forced ceilingon home equity for the low-income families in non-whiteneighborhoods. Consequently, prosperous households end up purchasinghomes and building their equity eight years before low-incomeearners. Segregation further enables the wealthy to give inheritancesin the form of family assistance for down payments due to theirlonger history of affluence accumulation. The forced ceiling on homeequity drives low-income households to engage in risky mortgages thatfurther increases their vulnerability to foreclosure due to thevolatile nature of prices. The fact that the wealthy can accesscredit makes their rate of home ownership higher by 24 percentcompared to that of low-income families.

Effect Of Depression On The Wealth Gap.

The national report card blames the vast depression for the reversalin capital ownership. The great recession caused a sudden end to highrates of growth experienced in 1983 to 2007. From the year 1983 to1989, the average increase in capital was 1.1 percent per annum.Besides, growth accelerated to 1.3 per anum between 1989 to 2001 andlater rose to 2.9 between 2001 to 2007. After the depression, theaverage prosperity plummeted by 47 %. The Gini coefficient of wealthincreased steadily from 0.8 in the year 1983 to 0.83 in 1989. Theratio remained unchanged between 1989 and 2007 and later increasedafter the depression to 0.87. The time trends in income and wealthinequalities are a great contrast. The difference of revenue depicteda great rise in the Gini income coefficient from 0.48 in 1983 to 0.52in 1989. The great depression caused a decline in income inequalitiesas the Gini coefficient fell from 0.57 to 0.55 in the year 2007(Grusky et al., 2014).

Shapiro et al. (2013) observe that the 2007-2009 depressioncontributed to the increase in the affluence gap since it led to thedestruction of housing wealth due to foreclosure. According toShapiro, poor households concentrate their riches in home ownershipat 53% compared to the well off at 39%. The explosion of the housingmarket resulted in the foreclosure of 21 percent for low-incomefamilies compared to 12 percent of their affluent counterparts. Inoverall, half of the collective wealth of the low-income householdswas destructed by the great depression compared to their wealthyequals due to the high concentration of riches in home ownership. Theextensive destruction of assets belonging to low-income familiesfurther widened the wealth gap (Shapiro et al., 2013).

Education

Mishel and Kar-Fai (2012) note that education is a key determinant ofeconomic success. A college degree is an essential determinant oflifetime income and wealth. Although schooling is supposed to serveas an equalizer in the society, research on the impact of Americanschools over a 25 year period (1984- 2009) indicates differentresults. The study reveals growing education gaps in the rate ofcollege completion since family income serves as a great determinantof educational success. College readiness is heavily dependent on theK-12 American school system. Parental income inequalities result insegregation of students from poor backgrounds. Neighborhoodsegregation has escalated in the recent past thereby, leavingstudents from poor backgrounds in low-quality schools. As a result,the students are lesser prepared for college.

The cost of American college education has further increased by sixtypercent in the past two decades. The increase has forced studentsfrom poor backgrounds to hold on part time jobs instead of studyingfull-time until graduation. The need to keep the jobs reduces theircollege completion rates due to financial considerations. The gapbetween graduate students from well-off and poor backgrounds isestimated at 31%. In the year 1972, well-off households spent fivetimes per child on college education compared to poverty-strickenfamilies. The difference in educational expenditure between the twohad increased to nine to one, which indicates that upper-incomefamilies had almost doubled their cost of children education. Incontrast, the expenses by poor households only rose by 20 percent(Mishel &amp Kar-Fai, 2012).

Social Cultural Factors

Shapiro et al. (2013) note that social and cultural factors play asignificant role in widening the affluence gap in America. The25-year policy brief on the causes of a widening wealth gap revealedthat marriage increases the worth of the affluent by $75,635 while ithas no effect on low-income families. Single children from affluenthouseholds are likely to have a positive net worth due to thefinancial assistance obtained from their parents, access towell-paying jobs, and home ownership. Consequently, unions of thewealthy result in past emergency level savings and provide anopportunity to save and create riches.

In contrast, marriages involving low-income families have a greaterlikelihood of merging two low-level wealth portfolios that fail toelevate the family’s savings. Although the number of income earnersthat bring resources determines the amount of savings, the impact ofmarriage in needy families is not substantial as compared to thewell-to-do. Most of the poor households do not marry out of theirwealth gap (Shapiro et al., 2013).

Inheritance

Grusky et al. (2014) observe that inheritance serves as a keydeterminant of wealth accumulation. The majority of Americans inheritvery little or no money at all. The well-off are six times morelikely to acquire family riches compared to poor households. The richreceive ten times more inheritance compared to their counterpartsfrom poor households. Besides, the inherited wealth is likely to beconverted into cash by the affluent where one dollar turns to 91cents. In contrast, one dollar only converts to 21 cents of wealthfor the poor. Besides, the amount of inheritance adds to the alreadyacquired richness by the well-to-do as opposed to the poor who haveto save for emergency purposes before they accumulate wealth.

Conclusion and Recommendations

The above analysis indicates that the top 10 percent of householdsown a disproportionate 59% of American wealth created in the past 24years. The differential in wealth creation is caused by the availablemeans of affluence acquisition where a minority 10% owns the factorsof production. The minority 10% heavily utilizes economic rent toextract wealth from the society and leave fewer resources to pay thepeople who add value to the community.

Specifically,the top 10% rich households shared 59% of the overall income comparedto 41% shared by the 90% poor households. Income inequalities aresignificantly caused by compensational differences between the middleand lower class families. The period between 1948 and 1973characterized the equal growth of productivity and revenue while theperiod after 1973 witnessed earnings that were non-commensurate tothe increase in production.

In the short term, policymakers should concentrate on creating equalrevenue earning opportunities targeting employment income andeducation. In the long-run, policies should control inheritance as itplays a prominent role in the concentration of riches among the few.

Income related policies include increasing the minimum wage paid to10.10 per hour. The current remuneration for top CEOs is 273 timeshigher than that of the average workers. The differential income hasgrown ten times within a period of ten years. The approach can bail46 million people out of poverty and add 2 billion workers into thenation’s overall group of real income earners. Increasing theminimum wage does not affect employment and has a neutral effect oneconomic growth. It puts additional money in the pockets of theworkers who in turn spend it in the businesses within theircommunity. The increased expenditure further stimulates demand forgoods and services that help in stimulating the economy.

Educational policies should help children from poor backgrounds tograduate from college. The government should allow American studentsto refinance their student debts that currently exceed 1 trilliondollars. The majority of federally backed student loans are offeredat an interest rate higher than 6 percent whereas the government canborrow at a much lower rate. Allowing the students to refinance theirdebts not only boosts their ability to pay but also motivates morestudents to attend and complete college.

References

Grusky, D., Varner, C., Mattingly,M., Poulin, M., &amp Chou, A. (2014). The poverty and InequalityReport. The StanfordCenter on Poverty and Inequality.Stanford Universitypress.https://www.bartlett.ucl.ac.uk/dpu/publications/latest/publications/dpu-working-papers/WP119.pdf

Mankiw, G. (2013). Defending theone percent. Journal ofEconomic Perspectives,1(1)1-25 Retrieved fromhttp://scholar.harvard.edu/files/mankiw/files/defending_the_one_percent.pdf

Mishel, L.&amp Kar-Fai,G. (2012). Why aren’t workers benefiting from labour productivitygrowth in the United States? InternationalProductivity Monitor,23(1)1-43Retrieved fromhttp://www.csls.ca/ipm/23/IPM-23-Mishel-Gee.pdf

Norris,E.,Kochhar,K.,Suphaphiphat,N.,Ricka, F.&amp Tsounta,E.(2015). Causes and consequences of income inequality: A globalperspective. IMFStaff Discussion Note.Retrieved fromhttps://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf

Shapiro , T., Meshede T. &ampOsoro, S. (2013). Theroots of the widening racial wealth gap: Explaining the black-whiteeconomic divide research and policy brief. Instituteon Assets and social policy (ASP).Retrievedfromhttp://iasp.brandeis.edu/pdfs/Author/shapiro-thomas-m/racialwealthgapbrief.pdf

Stiglitz, J.(2012). Theprice of inequality: How today`s divided society endangers ourfuture.New York, NY: W.W. Norton.

Wolff, E. (2010). Recent trends inhousehold wealth in the United States: Rising debt and themiddle-class squeeze – an update to 2007. WorkingPaper No. 589.Annandale-on-Hudson, NY: The Levy Economics Institute of BardCollege.

Wolff, E. N. (2012). The assetprice meltdown and the wealth of the middle class. New York,NY: New YorkUniversity.

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