Wealth inequality in the United States


Wealth inequality in the United States

Wealth inequality in the United States refers to the unequal distribution of financial assets among residents of the United States. Wealth includes the values of homes, automobiles, businesses, savings, and investments [Hurst, Charles E. "Social Inequality: Forms, Causes, and Consequences", page 31. Pearson Education, Inc., 2007] . Those who acquire a great deal of financial wealth do so primarily through the appreciation of fiscal portfolios. For this reason, "financial wealth" involves only stocks and mutual funds, and other investments and is subject to much greater inequality than net worth alone. Various sociological statistics suggest the severity of wealth inequality "with the top 10% possessing 80% of all financial assets [and] the bottom 90% holding only 20% of all financial wealth." [Hurst, page 34]

Net worth is defined as the difference between total assets (includes both tangible assets such as homes and vehicles and intangible such as stocks and checking accounts) and total liabilities (debt, loans, etc.) [Keister, Lisa A. and Stephanie Moller: “Wealth Inequality in the United States”, page 64. Annual Review of Sociology, 2000]

While the standard of living of the working and middle classes is dependent upon income and wages, the rich tend to rely on wealth, distinguishing them from the vast majority of Americans.Gilbert, D. (1998). "The American Class Structure: In an Age of the Growing Inequality". Belmont, CA: Wadsworth.] Melvin L. Oliver and Thomas M. Shapiro propose that wealth signifies the opportunity to “make it” in life; wealth is not used for daily expenditures or factored into a budget but when coupled with income it comprises the family’s total opportunity “to secure a desired stature and standard of living, or pass their class status along to one’s children”. [Grusky, David B. ‘’Social Stratification- in Sociological Perspective’’, page 637. Westview Press, 2001] Moreover, “wealth provides for both short- and long-term financial security, bestows social prestige, and contributes to political power, and can be used to produce more wealth” [Keister, page 64] . Hence, wealth possesses a psychological element that awards people the feeling of agency, or the ability to act. The accumulation of wealth grants more options and eliminates restrictions about how one can live life.

Wealth and Income

There is an important distinction between income and wealth. Income refers to a flow of money over time in the form of a rate (per hour, per week, or per year); wealth is a collection of assets owned. In essence, income is specifically what people receive through work, retirement, or social welfare whereas wealth is what people own [Grusky, page 637] . While the two are seemingly related, income alone is insufficient for two reasons:
# It does not accurately reflect an individual’s economic position
# Income does not portray the severity of financial inequality in the United States.

The Bureau of the Census formally defines income as “received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc.” [U.S. Census Bureau, Housing and Household Economic Statistics Division (December 20, 2005). ‘’Income Overview’’. Retrieved December 2, 2007, from http://www.census.gov/hhes/www/income/overview.html] . By this official measure, the wealthiest families have low income but the value of their assets earns enough money to support their lifestyle. Dividends from trusts or gains in the stock market do not fall under the definition of income but are the primary money flows for the wealthy. Retired people also have little income but usually have a higher net worth because of money saved over time [Keister, page 65] .

Additionally, income does not capture the extent of wealth inequality. Wealth is derived over time from the collection of income earnings and growth of assets. The income of one year cannot encompass the accumulation over a lifetime. Income statistics view too narrow a time span for it to be an adequate indicator of financial inequality. For example, the Gini coefficient for wealth inequality increased from 0.80 in 1983 to 0.84 in 1989. In the same year, 1989, the Gini coefficient for income was only 0.52 [Keister, page 65] . The Gini coefficient is an economic tool on a scale from 0 to 1 that measures the level of inequality. 0 signifies perfect equality and 1 represents perfect inequality. From this data, it is evident that in 1989 there was a discrepancy about the level of economic disparity with the extent of wealth inequality significantly higher than income inequality.

Causes of Wealth Inequality

Two primary causes contribute to the creation and persistence of wealth inequality:
#Financial Resources
#Money Allocation

Essentially, the wealthy possess greater financial opportunities that allow their money to make more money. Earnings from the stock market or mutual funds are reinvested to produce a larger return. Over time, the sum that is invested becomes progressively more substantial. Those that are not wealthy, however, do not have the resources to enhance their opportunities and improve their economic position. Rather, “after debt payments, poor families are constrained to spend the remaining income on items that will not produce wealth and will depreciate over time [Hurst, page 36] . Scholar David B. Grusky notes that “62 percent of households headed by single parents are without savings or other financial assets” [Grusky, page 640] . The lack of savings removes the poor any opportunity to accumulate wealth and better their conditions. Notably, for both the wealthy and not-wealthy, the process of accumulation or debt is cyclical. The rich use their money to earn larger returns and the poor have no savings in which to produce returns and eliminate debt. Unlike income, both facets are generational. Wealthy families pass down their assets allowing future generations to develop even more wealth. The poor, on the other hand, “are less able to leave inheritances to their children leaving the latter with little or no wealth on which to build…This is another reason why wealth inequality is so important- its accumulation has direct implications for economic inequality among the children of today’s families” [Hurst, page 36] .

Corresponding to financial resources, the wealthy strategically organize their money so that it will produce profit. Affluent people are more likely to allocate their money in financial services such as stocks, bonds, and other investments. Yet those who are not wealthy are likely to have their money in savings accounts and home ownership [Hurst, page 34-35] . This difference comprises the largest reason for the continuation of wealth inequality in America; the rich are accumulating more assets while the middle and working classes are just getting by. Currently, the richest 1% hold about one-third of all privately held wealth in the United States [Hurst, page 34] while the bottom 90% held 73% of all debt [Hurst, page 36] . These staggering statistics suggest that wealth inequality is deeply rooted in today's society and supports a class system in the United States.

A review in The New York Times of the book The Millionaire Next Door states, "Who is the prototypical American millionaire? What would he tell you about himself? ... We are welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, and paving contractors... Most of us have never felt at a disadvantage because we did not receive any inheritance. About 80 percent of us are first-generation affluent..." [ [http://www.nytimes.com/books/first/s/stanley-millionaire.html The Millionaire Next Door: The Surprising Secrets of American's Wealthy] The New York Times, 1996]

Racial Disparities

When it comes to identifying issues that create and contribute to ongoing wealth inequality in the United States, it is also important to observe issues that surround the disparity in wealth between different racial groups. Upon observation of wealth inequality in the United States it is obvious that there remains to this day a large wealth gap between whites and African Americans. This gap could be from a variety of things however the most important when evaluating this topic is inheritance. Inheritance refers to the amount of unused material possessions and assets that can be transferred from previous generations to future generations. Inheritance therefore takes on a special meaning when considering the wealth gap between blacks and whites in today’s world because it can directly link the disadvantaged economic position and prospects of today's blacks to the disadvantaged positions of their parents' and grandparents' generations. According to a report done by Robert B. Avery and Michael S. Rendall, one in three white households will receive a substantial inheritance during their lifetime compared to only one in ten black households [Citation | last1=Avery | first1=Robert B. | last2=Rendall | first2=Michael S. | title=Lifetime Inheritances of Three Generations of Whites and Blacks | publisher=The University of Chicago Press | year=2002 | volume=107] . This lack of inheritance that has been observed among African Americans could be caused by a number of reasons. Racial differences in family background could be a potentially important cause in disparities of inheritance. It has been observed that there are clear differences in the family structure between whites and minorities. Specifically it has been found that there is increased fertility and family size among African Americans compared to whites [Citation | last1=Keister | first1=Lisa A. | title=Race, Family Structure, and Wealth: The Effect of Childhood Family on Adult Asset Ownership | publisher=University of California Press | year=2004 | volume=47] . This could possibly explain the disparity in inheritance because an increase in family size would statistically result in a greater strain on the family’s resources. Since more resources are required to meet the family’s needs in the present there would be fewer resources allocated to each family member in future periods. Furthermore since minorities typically have larger families any left over resources would be divided between a larger group of people and would result in a diminished inheritance [Citation | last1=Keister | first1=Lisa A. | title=Race, Family Structure, and Wealth: The Effect of Childhood Family on Adult Asset Ownership | publisher=University of California Press | year=2004 | volume=47] .

The overall trend of diminishing inheritances between whites and African Americans is important in explaining the increasing wealth gap. Inheritances provide a starting point for families and also allow them to purchase certain assets that greatly improve their financial standing, or transformative assets. Any direct transfer of resources from the parent to the child will provide a base for starting wealth accumulation. Children who receive fewer assets from their parents will have a different starting point in terms of debts as well as assets. The use of inherited wealth could be used for the down payment on a home or to erase debts incurred by college. Those who receive an inheritance are much more likely to own a home and this allows them to accumulate wealth much more quickly [Citation | last1=Keister | first1=Lisa A. | title=Race, Family Structure, and Wealth: The Effect of Childhood Family on Adult Asset Ownership | publisher=University of California Press | year=2004 | volume=47] . Since it has been observed that there is a continual disparity in inheritances between white and African American families and it is important for establishing wealth, this could possibly explain why the wealth inequality between whites and blacks is on the rise.

ee also

*Income inequality in the United States
*Affluence in the United States
*Wealth in the United States
*Race and inequality in the United States

References


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