Today's Headlines: Economic Inequality Rising, Says CBO

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Today's Headlines: Economic Inequality Rising, Says CBO
August 23, 2016

New CBO Report Highlights Growing Economic Inequality

In a nutshell, "The wealthy have nearly healed from recession. The poor haven't even started." That headline is one of the primary inferences based on a recent report from the Congressional Budget Office (CBO). The study recalculated the wealth of US families and studied the distribution of that wealth, identifying changes from 1989 through 2013.

According to the CBO, the total wealth of US families reached $67 trillion in 2013, or about four times America's GDP. The percentage of that wealth held by the upper classes has increased significantly, with the top 10% in family wealth holding 76% of America's total wealth as compared to 67% in 1989. The lower 50% in family wealth watched their share of total wealth decrease by a factor of three — from 3% in 1989 to 1% in 2013.

If you are fortunate enough to be at the 90th percentile in wealth, the average inflation-adjusted wealth in your group increased by 54% over 1989 values. At the 50th percentile, the increase in wealth dropped to 4%. Down at the 25th percentile, fortunes literally reversed — wealth declined by 6% over 1989, with debt burdens as a primary factor in the decrease. Those in the bottom 25% of family incomes averaged a disturbing $13,000 in debt.

Looming Issues with Debt

People may tend to associate rising wealth inequality with the rise in incomes among the wealthy, and certainly that plays a major role — but the increase in debt among the less wealthy is becoming a major factor.

In the baseline year of 1989, 7% of America's families were in a net debt situation (having more debts than assets) and the average indebtedness was $9,000 in inflation-adjusted 2013 dollars. Moving forward to 2007, prior to the Great Recession, the number of households in debt raised slightly to 8% but the average debt level reached $20,000. Six years later, 12% of households found themselves in debt with an average debt of $32,000.

Families were hit with two major debt-increasing blows during the recession — the collapse in home equity and sharp increases in student loan debts.

Prior to the housing crisis in 2007, only 3% of families were "underwater," meaning that they owed more on their home than it was worth at current market prices. The average underwater amount was $16,000. After the collapse in prices and slow recovery, 19% of families were underwater in 2013 with a stunning average deficit of $45,000. We are still well below 2007 underwater rates according to Zillow, with 12.1% of homeowners remaining underwater. Zillow also found that urban areas retained a higher underwater rate, at 13.7%, compared to 11.2% in suburban areas.

To add further burden, student loan debt increased from 56% of families with an average debt of $29,000 in 2007 to 64% of families with an average of $41,000 in 2013. Home prices may be correcting, but student loan debt is still increasing — and both drivers disproportionately squeeze poorer Americans.

The Great Recession and Unequal Recovery

Senator Bernie Sanders emphasized the rising inequality during his presidential campaign, striking a nerve with a large number of Americans who feel the economic recovery has passed them by. The CBO report goes a long way toward making Sanders' argument.

Sanders has frequently charged that "since the 1980s there has been an enormous transfer of wealth from the middle class and the poor to the wealthiest people in this country." Certainly, the gap is wider, but how is wealth being transferred? It may be more accurate to say that changes in incomes, asset values, and debt loads are all working against middle and lower-income Americans.

Changes in income and wealth, when expressed as percentages, are always going to favor the wealthy — a specific percentage change in a $500,000 annual salary obviously affects wealth more than the same percentage change in a $50,000 salary — but there is more to the story. Falling home equity takes a huge toll because homes are, for many Americans, the largest marketable asset they own. Those with greater wealth are likely to have other assets to help them recover — for example, a stock market that is currently at record levels.

On the other side, debt has a multiplier effect on dragging down wealth, especially with a net debt. You cannot use debt to your advantage; instead, you pile up interest charges that delay your recovery and potentially send you into an unrecoverable debt spiral.

During the recovery from 2007 to 2013, non-mortgage debt stayed flat for families in the 51st to 90th percentile of wealth and actually decreased by 10% for those in the 26th to 50th percentile. Unfortunately for those in the 25th percentile or below, non-mortgage debt increased by 40%, accelerating the debt trend from 1989-2007. Home equity plunged and turned a net asset into an effective debt for this group, greatly increasing their overall debt burden.

In short, the recovery is unequal because those with less wealth are disproportionately affected by most of the recession's effects, and by definition, they have fewer resources to apply toward recovery without the outside assistance that Sen. Sanders proposes.

Valid Assessment or Complete Piffle?

As with any report, the CBO report has some detractors. Forbes contributor Tim Worstall refers to the "larger statement" of wealth distribution in the CBO report as "complete piffle." Worstall does not question the results, just the methods used to achieve them. Primarily, he says the focus is on financial wealth and does not include "human capital," or the value of a person's qualities such as age, qualifications, skills, and health.

True, but human capital is difficult to quantify and arguably skewed toward those with greater wealth. Human capital does not buy much at the grocery store, unless they offer you a job there based on your superior stock of it.

However, Worstall is on more solid footing with the CBOs exclusion of other assets such as Social Security benefits — future assets that have already been earned via contributions. Retirement programs such as 401(k)s are included in the CBO study; defined benefit pensions and Social Security benefits are not.

The CBO refers to inclusion of such benefits as "beyond the scope of this report," but the report does acknowledge the likely understatement of wealth at the bottom and middle of the distribution and decrease of that at the top. Such benefits are distributed more evenly across all incomes, and clearly are a greater percentage of income for lower income classes.

There's nothing inherently wrong with this approach — but if the report is being touted as proof of growing inequality, it should at least attempt to estimate data-skewing streams.

The Takeaway

While one can reasonably argue that the CBO report is skewed toward the conclusion of greater economic inequality, few people would argue that economic inequality is absent in the US, or that by most standards, is not rising. It's also likely that few people would disagree with the goal of helping those in the lower and middle economic levels attain greater wealth.

The real question is — as it has always been — is it right to redistribute wealth from the highest incomes toward the lowest, and if so, by how much and through what mechanisms? Is redistribution necessary to provide opportunity, or is it economic engineering run amok?

Economists and politicians will be debating this forever, regardless of where the wealth balance lies at any point in time. Meanwhile, as we will do in November, we periodically settle the argument as a nation with our votes.

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irene | 08.23.16 @ 16:28
Don't the rich always get richer and the poor get poorer? That's how I feel.
Brittany | 08.23.16 @ 16:29
The gap between rich and poor is truly ridiculous.
Steffanie | 08.23.16 @ 16:29
To redistribute wealth goes against the American way. Why would people want to go and earn if they know they will get a handout. Makes no sense.
Erin | 08.23.16 @ 16:30
I think the rich will always recover faster than the poor. They're never hurt as much as the poor to begin with since they have funds to fall back on. I don't know what the answer is, but the inequality is getting out of control.
Kyle | 08.23.16 @ 16:31
I think the idea of redistributing wealth is ridiculous. I get that the gap between rich and poor sucks, but at the end of the day, socialist views don't belong here.
Kailie | 08.23.16 @ 16:33
I don't really know how I feel about this. Economic inequality can such, sure. But how even do we fix it without turning against the american way? I think all we really can do is attempt to work harder on a more individual basis.
Nancy | 08.23.16 @ 16:36
This truly does not surprise me. It will never be equal and as long as we have this system it will be unfair. That's life.
Carla | 08.23.16 @ 16:39
I think it is only right that we work hard for our money if able. I don't think this idea would work out well in the long run.
$commenter.renderDisplayableName() | 12.03.20 @ 17:06