As the old saying goes, do the rich really get richer while the poor get poorer? Recent data from the Federal Reserve shows that at least half of that statement is true for U.S. households.
The latest Survey of Consumer Finances (SCF) conducted by the Federal Reserve shows another significant increase in the already historically high gaps in income and wealth between rich households and poor ones. According to a speech given by Federal Reserve Governor Lael Brainard, the recently released SCF showed that the top 1% of households held a 24% share of all U.S. household income as of 2015 and a 39% share of all U.S. household wealth. That's a seven- and nine-percentage-point increase respectively from the values 27 years prior.
The rich may get richer, but are the poor getting poorer? Not necessarily. The SCF survey found that families at all levels of income distribution saw an increase in average real incomes between 2013 and 2016. That's a contrast from the previous 3-year period, when the recession caused stagnant or lower average incomes for all income groups except one – the very top of income distribution.
In other words, the financial gaps are widening because, while the finances of poor Americans are improving slightly, very wealthy Americans are making very large financial gains.
The Federal Reserve is concerned about wealth and income gaps, and rightly so. Given that approximately two-thirds of the economy is consumer-driven, it's important that lower-income households have more discretionary money to spend.
Intuitively, you might think that higher-income households would spend more money since they can afford to do so – but Gov. Brainard cited research suggesting, "The wealthiest households are likely to save a much larger portion of any additional income they earn relative to households in lower-income groups." In addition, higher-income households are more likely to invest their extra funds into equities and other vehicles that build their wealth even faster, further widening the wealth gap.
Lower-income families do not have that luxury. They spend because they must, and they can't afford to invest in higher-return ventures like stocks because they may need access to their funds at any time to handle unexpected expenses. Lower-income families will be more likely to use traditional bank accounts with negligible interest rates.
The SCF also noted racial and ethnic disparities with respect to income and wealth. The average income for white households in 2015 was approximately $123,000 annually, while Hispanic and African-American families came in below half of that mark at $57,000 and $54,000, respectively.
With respect to wealth, white families hold a more than fivefold advantage. The average wealth for a white household in 2016 was nearly $933,000, while Hispanic households averaged $191,000 and African-American families averaged $138,000 in average wealth holdings.
What can close the income and wealth gap? Recessions generally do a great job of leveling the playing field – but a healthier way to close the income gap is through targeted policy. More jobs at a higher wage will bring the lower-income classes up at a higher rate, especially if jobs and stimulus programs are targeted toward minorities. Meanwhile, changes in tax policy can minimize the wealth gap. However, there are no signs that the current government is willing or able to apply this approach.
Regardless of your wealth status, you can make the most of what you have through sound financial decisions. Budgeting applies whether your household income is $10,000 or $10 million. Keep spending under relative control and invest wisely – and if you're struggling to make ends meet, focus on your own situation. Let the top 1% drive the economy with their spending for a while. They can afford some extra spending within their budgets.
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