Setting the Record Straight on Wealth Inequality

There’s this sense that wealth inequality keeps getting worse and worse. And as a result, the rich are getting richer; billionaires are leaving the rest of us behind. Is this true?

 

The data actually tell us: Not recently. In the three years leading up to 2020, real wealth inequality among American households declined, according to the Federal Reserve’s Distributional Financial Accounts.

 

Before we get into the details, there’s a reason to like this new dataset over others for wealth data. The DFA includes sources of wealth that are often neglected, like defined benefit pensions, that are left out of other surveys. That means more actual wealth of those at the bottom of the distribution is captured.

 

The pattern of wealth growth over the 2017-20 period is best described in two phases: before the pandemic and during the pandemic. From the end of 2016 through the end of 2019, real wealth for the bottom half of households grew at an annual rate of 17 percent, while real wealth for the top 1 percent of households grew at a 5 percent pace. Since 2017, real wealth for the bottom half of households grew at almost four times the pace of that of the top 1 percent.

 

Not only that, real wages for the poorest households and the middle class increased at the fastest real rate in decades.

 

What about once the coronavirus pandemic began? After all, there were many news reports of the wealth of billionaires rising. The truth is more complicated than that. By the end of 2020, aggregate real wealth held by the bottom half of households was 22 percent above its pre-pandemic level, while aggregate real wealth among the top 1 percent of households was up 10 percent. That is, quite simply, a historic anomaly for wealth to grow during a recession.

 

The experience of the Great Recession is an obvious comparison to make.

 

During the 2008-09 recession, real wealth held by the bottom half of households fell by a staggering annualized rate of 37 percent. While the top 1 percent of households also faced substantial wealth losses, in percentage terms they faced a much smaller contraction of 14 percent. Whereas real wealth of the top 1 percent had regained its pre-2008 peak by 2013, it took more than a decade, and the 2017 tax cuts, for real wealth of the bottom half of households to recoup the steep losses of 2008-09.

 

So what explains the sharp decline in inequality in recent years? The answer is better economic policy. The 2017 Tax Cuts and Jobs Act lowered tax rates for workers and business across the income spectrum, and the Trump Administration’s regulatory overhaul ended costly regulations that made it harder to start and run a business. The economic gains were substantial. Lower tax rates and fewer burdensome regulations encouraged more investment and more hiring, which ultimately benefited all workers and led to higher wages.

 

There is an all-too-common refrain about inequality constantly increasing. But the data contradict those claims that rising inequality after the 2008-09 financial crisis had nothing to do with policy choices. With a better understanding of the patterns of wealth inequality in recent years, we might hope that critics would not be so quick to dismiss the growth-enhancing policies of the 2017-2020 period.