Quick Solution to the “Rich-Poor Gap”
The gap between the richest and poorest Americans widened even as the U.S. economic recovery gained traction in the years after the recession, the Federal Reserve said.
Average, or mean, pretax income for the wealthiest 10% of U.S. families rose 10% in 2013 from 2010, but families in the bottom 40% saw their average inflation-adjusted income decline over that period…
Before reviewing this new survey data on the recovery, it is worth noting that in recessions the rich lose more than the poor. They have more to lose, after all. Wealthy people usually have money invested in the stock market and in real estate. When a recession hits, stock and real estate prices fall, often by a lot.
Poor and low-income people often rent, and rents usually don’t increase during a recession (the rent is too darn high, after all). Middle and high income people nearly always own one or more homes. A 2011 report:
Since the peak in 2006, home values nationally are down 29.5 percent, Zillow says. Compared to this time last year, prices are down 8.2 percent nationally.
Most middle and high income people not only owned one or more homes, when the recession hit, but most had borrowed to buy homes which leveraged their losses, so the 30% average price drops wiped out home equity for millions.
The widely watched Dow Jones Industrial Average hit its all-time high on October 9, 2007, closing at 14,164.43. Less than 18 months later, it had fallen more than 50% to 6,594.44 on March 5, 2009 (Source: About News)
Investors are usually not as leveraged in the stock market as they are with their home mortgages, but many owned financial instruments that were as leveraged, since they held portfolios of derivatives based on often shaky home loans.
The 2007-2009 financial turmoil and recession was a big political and economic mess, and, many argue, was made worse by the government interventions that followed. For more on this see The House that Uncle Sam Built (pdf here).
However, if reduced income and wealth inequality are the goals, recessions provide an effective means. The 2007-2009 recession dramatically reduced wealth inequality in the United States and Europe. Rich people lost a boatload of money, far more than the poor because one, they had more to lose, and two, most had invested in stock and real estate.
The WSJ article noted this part of reality: “During the recession, income distribution narrowed as top-earning families saw their incomes fall.”
Poor and low-income people lost too, with many losing their jobs and those who recently managed to become homeowners near or at the housing peak, lost everything and more. Federal Reserve, Fannie Mae, and Freddie Mac policies combined with over-enthusiastic companies in the real-estate ecosystem to pump up the housing bubble (as discussed in The House That Uncle Sam Built and many books and other articles.)
So, back to the original Federal Reserve study, it should be no surprise that recovering from a recession increases the “gap” between rich and poor in much the same way that recessions decrease the gap. As stock prices recover it stands to reason that the people who own stocks will benefit. Poor and lower-income people usually don’t own stock or have other savings or investments, so steadily rising stock markets won’t raise their income or wealth directly.
The Wall Street Journal article continues:
Widening income inequality has gained increasing attention over the past year from economists, policy makers and the wider public amid concerns over the uneven gains of the economic recovery.
This quote refers to studies by Thomas Piketty and colleagues research claiming increased income and wealth disparities in recent decades. Piketty’s book was a smash hit (for an economist), titled Capital in the Twenty First Century. See earlier posts on the income inequality debate and the book here and here.
NCFCA LD topic: Resolved: In the realm of economics, freedom ought to be valued above equity.
More from the WSJ article, drawing from the Federal Reserve survey:
Average income rose last year from 2010 for homeowners, non-Hispanic whites and households headed by a person with a college degree. Average income fell for renters, nonwhite and Hispanic families and households headed by someone without a high-school diploma.
The median net worth of American families tumbled during the recession years. While the situation has stabilized, families haven’t regained their lost ground, Thursday’s report revealed. Median net worth fell 2% in 2013 from 2010, while average net worth was basically flat.
Statistics can mislead, and students debating equity and equality issues should be familiar with averages, means, and medians.
Thirty percent of the 40.8 million foreign born residing in the United States in 2012 entered between 2000 and 2009, 7 percent entered since 2010 …
Consider the WSJ/Federal Reserve report: “Median net worth fell 2% in 2013 from 2010, while average net worth was basically flat.” Median means the middle, so with half of households above and half below, the median income fell slightly (by 2%). One factor pulling that median down is the 2.8 million immigrants that arrived since 2010. Some rich immigrants, but most far below average, mean, and median incomes.
Don Boudreaux discusses other issues, disagreements and debates on income measurements and cost-of-living adjustments with income statistics in this LearnLiberty.org video (linked earlier with Robert Reich video on inequality):