The Privileges of Wealth

Rising inequality and the growing racial divide

Robert Williams, Robert B. Williams

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781315395562
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The American Dream is under assault. This threat results not from a lack of means, but from an unwillingness to share. Total household wealth increased by half in the past generation, but barely one fifth of American households captured this new wealth. For the rest, the dream of owning a home, gaining a secure retirement, and ensuring a college education for their kids is disappearing. Worse still, the widening wealth divide largely tracks our racial fault lines.

The Privileges of Wealth investigates the impact of the rising concentration of wealth. It describes how households accumulate wealth along three pathways: household saving, appreciation of assets, and family gifts and inheritances. In addition, federal wealth policies, in the form of assorted tax deductions and credits, act as a fourth pathway that favors wealthy households. For those with means, each pathway operates as a virtuous cycle enabling families to build wealth with increasing ease. For those without, these same pathways are experienced as vicious cycles.

The issue of wealth privilege is even more pronounced when examining the racial wealth gap. Typically, White households own ten times the wealth of Black or Latino families. This chasm results from the durability and transferability of wealth across generations and serves as a persistent legacy of our history of racial enslavement, expropriation, and exclusion. Current policies favoring the wealthy are simply cementing these wealth disparities.

This book explains how these sources of wealth privilege are systemic features of our economy and the basis of rising disparities. The arguments and evidence presented here offer a compelling case for how our current policies are undermining the American Dream for most Americans while fortifying a White plutocracy, with dire consequences for us all.

1

Cracks in the American Dream

That truly American dream

Deep within our national psyche lies the compelling allure of what we call the American Dream. It was manifest even at our country’s founding. As the signers of the Declaration of Independence announced to the world: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain inalienable rights, that among these are Life, Liberty, and the pursuit of Happiness.” From this and other pronouncements, the United States gained the reputation as the land of opportunity, serving as a magnet to millions of immigrants searching for a better life. While some among these voluntary immigrants¹ were fleeing religious or political oppression, most came with the desire for a fresh start and a fair chance to get ahead. Although many of us are separated by generations from our ancestors who first came to this land, the American Dream still frames our perceptions as we consider our future.

Our individual aspirations are unique to our personal circumstances and experiences. Yet, our dreams share common themes that comprise the larger American Dream. Given credit for coining the term, James Truslow Adams (1941) described it as “that dream of a land in which life should be better and richer and fuller for everyone with opportunity for each according to ability or achievement … regardless of fortuitous circumstances of birth or position” (p. 214–15). As suggested by Adams, the American Dream comprises two key points. Primarily, it is about the opportunity for upward mobility. If I work hard and play by the rules, my efforts will bear measurable fruit. For some, this might mean completing high school or college to gain a steady, well-paying job. For others, it entails owning a home or running a business. For most, it means achieving sufficient financial security to retire comfortably and to offer their children a better start to their lives. In addition, Adams said the American Dream is not available to a few, but afforded to all Americans. As each generation comes of age, all Americans should have the opportunity to attain measurable upward mobility.

The reality of general improvement from one generation to the next has sustained the American Dream to the present. The U.S. economy has served as a powerful engine for improving the material conditions of most Americans and affirming the prospect of upward mobility. Even among those who experienced little gain in their own lifetime, they watched their children grasp increased opportunities and claim greater rewards. Most of us can see material improvements in subsequent generations as we trace back our ancestry. Even among those excluded from this history, the Dream’s pervasive appeal offers hope they can change their family’s fortunes. To be sure, our laws and social norms have systematically excluded certain groups from living the dream. European immigrants removed or exterminated the native populations they encountered, enslaved Africans, and excluded Asians and Latinos from opportunity and property. For much of our history, the American Dream effectively had a “Whites Only” sign. In recent decades, the overtly racist laws and structures have been overturned, giving some hope we might finally realize the promise offered over two centuries ago.

Today, there is a new threat to the future of the American Dream. Numerous reports have documented rising income inequality as growing numbers of households have slipped from middle-class status. According to the U.S. Census Bureau (2015), real median family income fell from 2000 to 2010, the first decade to experience such a decline. Other reports cite the rising costs of health insurance, homeownership, and college tuition making it harder for households to attain or keep these symbols of Middle America. In a recent poll, respondents felt by a two to one margin that attaining the American Dream is harder than in past generations; by an even larger margin, they felt it would be harder still for the next generation (Bedard, 2011). In 2012, that bellwether of American culture, Time magazine, questioned its relevance as it ran a cover story titled “The history of the American Dream: Is it still real?”

Given the trauma of the Great Recession, it is unsurprising that many Americans are questioning whether the dream still exists. Numerous trends suggest the U.S. economy is experiencing rising inequality thereby jeopardizing its reality for many Americans. In any event, realizing the dream entails the acquisition of household wealth. Buying a home requires cash for a down payment. Gaining financial security demands ample savings to draw upon during times of duress. Building a retirement nest egg entails regular deposits into funds that yield rising asset values. Raising kids and offering them a head start in their lives requires more funds to access good schools, support extracurricular activities, and finance a college education. As Jim Cullen stated in his book The American Dream: A Short History of an Idea that Shaped a Nation (2004) attaining the dream requires that individuals have the means to direct their lives. He argued that “all notions of freedom rest on a sense of agency, the idea that individuals have control over the course of their lives. Agency, in turn, lies at the very core of the American Dream, the bedrock premise upon which all else depends” (p. 10). Clearly, achieving the American Dream requires the possession of sufficient wealth.

Historically, we have had limited opportunity to investigate the level and role of wealth in American society, despite its obvious importance. Though many forms of household wealth are visible, it is rarely the topic in public, or even private, conversation. Public policy has reflected these norms. The federal government knows much about our employment, salaries, and other forms of personal income; yet it has remained amazingly disinterested in understanding the wealth of American households. Despite this veil, economic historians have tried to understand the level and distribution of household wealth across society (Shammas, 1993). In most cases, they chose to examine the one instance where one’s wealth becomes more public: at death. From their time-consuming investigations of probate court records, we have gained glimpses of the type, level, and spread of household wealth at different points in our history. However, these efforts have provided, at best, a dim and partial understanding of the accumulation and distribution of wealth.

Fifty years ago, researchers began to pierce this veil. In 1962, the Federal Reserve authorized the Survey of Financial Characteristics of Consumers in which they surveyed 3,600 American households about their net worth (Worth, 1964). It produced the first comprehensive snapshot of the allocation and distribution of wealth across households. After two more surveys in the mid-1980s, the Federal Reserve implemented an expanded survey in 1989 that became the basis of their regular triennial surveys. Other national surveys followed suit.² For the first time, we have the means to understand in detail the composition, extent, and distribution of household wealth across American society.

A picture of wealth

Even with the evidence in hand, conceptualizing the distribution of wealth is not easy. Most Americans recognize that the typical household has some wealth while a fortunate few have acquired a lot. Still, the disparities are striking and larger than most Americans believe (Norton and Ariely, 2011). As an illustration, I use the metaphor of a skyscraper in which each floor represents an increase in net worth.

Even the tallest building in the world, the Burj Khalifa with its 163 stories, cannot accommodate all American households without some mathematical sleight of hand.

Over the first 20 floors, each story signifies an increment of $50,000 in household net worth. For most households, this increment represents a significant improvement in their balance sheet, usually requiring years of discipline and patience to move up one floor. At this rate, occupants of the 20th floor have attained the celebrated status of becoming a millionaire. Yet, simply extending our metaphorical skyscraper up at this rate would require over 6,000 Burj Khalifas to accommodate the wealthiest Americans! Starting at the 20th floor, ascending to each additional story requires an additional $1 million. Continuing at this rate over the next 100 floors, residents must have at least $100 million to rise to the 119th floor. Even still, we need another change to include all Americans in our skyscraper. From this point up, it takes another $100 million to ascend each additional floor. One can find billionaires starting at the 128th floor. Yet again, we must increase the rate to accommodate virtually all Americans in our skyscraper. From this point to the top, ascending each floor requires an additional half billion. To gain access to the penthouse, one’s net worth must be at least $36 billion. In 2015, only eight Americans were worth more than this amount as listed in the Forbes 400.

Entering this top floor, we would likely recognize many of its occupants, including Bill Gates, Warren Buffet, the Koch brothers, and Michael Bloomberg. As we descend through the floors below, we would notice several patterns. Many floors near the top would have no occupants while the remainder would have a handful, at best. Despite the amount of wealth needed to move from one floor to the next, the top of our skyscraper is sparsely populated. In surveying the occupants, one would certainly notice how many individuals are beyond middle age, how few women reside there in their own right, and how almost everyone is White. Our continued descent would yield only slight changes in the age, gender, and racial makeup of the residents, even as their numbers slowly increased.

Not until we arrive back at the 20th floor would we reach the confines where the bottom 90 percent of households reside. Even at this point, we are mingling with millionaires. To reach the “typical” American household, the one which has just as many wealthier as poorer neighbors, we need to descend to the seventh floor, 156 floors below the penthouse. Here, our residents form a much larger and more diverse crowd. Even still, we would notice relatively few Black and Latino households, particularly given their numbers in the population at large. As we resume our descent, the floors are more crowded while the occupants are noticeably younger, female, and less likely to be White.

Even as we reach the ground floor, we would not have seen every household. In 2013, nearly 12 percent of American households would reside below ground.³ As these households experience debts that exceed their assets, they reside in the basement floors. Although they live in the same building as those observed in the penthouse, their view of the world could not be more different.

As we consider this skyscraper we may call American Wealth, several questions come to mind. As we consider the residents at each floor, how did they get there? Were they born on the floor they currently reside? Or are they temporary residents simply captured in the moment as they ascend or descend through the building over their lifetime? How is it that the vast majority of households headed by persons of color remain in the lower reaches of the building? Is this simply a legacy of our past or does it reflect current factors? Why is it that the top floors are so sparsely populated as compared with the lower floors? Fully half of the U.S. households reside in the bottom seven stories and basement while the remaining 156 stories are devoted to the affluent half.

Each of these questions considers the issue of wealth mobility, or the ability of households to rise or fall from one floor to the next. Indeed, they all suggest a further question: are the opportunities for the wealth mobility the same from top to bottom? Our hypothetical skyscraper suggests not. Rising one floor in the middle and upper reaches of this building requires a 20-fold, 2,000-fold, and even 20,000-fold increase in net worth over what it means near the bottom. Do these differences reflect different circumstances and opportunities? Quite likely, since the occupants of these floors hold wealth at 20, 2,000, and even 20,000 times the rate of the lower-level occupants. Consider a household whose net worth is $50 million. Earning the additional $1 million required to ascend to the next floor (a 2 percent increase) is easier than for a household with $500,000 who needs an additional $50,000 to rise one floor (a 10 percent increase). As our skyscraper suggests, the incremental rewards get larger as one ascends the building.

The opportunities for upward mobility vary in other ways as well. Like most modern buildings, our skyscraper has different means for moving between floors, including stairways, escalators, elevators, and express elevators. As I will show later in the book, only some building occupants have access to each of these conveniences. Most households in the bottom floors have only one means for upward wealth mobility: household saving. Only by not spending all of their current income can these households slowly increase their wealth. In most cases, this form of wealth acquisition feels like climbing long stairways, requiring continual exertion and self-discipline. As households accumulate wealth, they find that many forms of wealth can grow in value without much exertion. Interest-bearing accounts, stocks, and bonds are a few examples. These assets offer their owners the opportunity to simply stand in place, like on an escalator, and slowly rise to the next floor. Other assets, usually carrying more risk, can seem like an elevator as their sudden appreciation can lift their holders to new heights quite rapidly. Further, some fortunate individuals receive inheritances that can function like express elevators as the gifts boost them many floors higher overnight. Lastly, there are government wealth policies that assist the building occupants in their efforts to ascend to higher floors. As I will show, these policies work best in the upper reaches of the building, thereby supplementing the ample regular and express elevators already available. Though one might find these elevators in the building’s bottom floors, their limited service restricts their availability to only the most talented or lucky occupants.

Not all movement within the skyscraper need be upward; misfortune and self-indulgence can generate a fall in wealth as well. Divorce, illness, and unemployment can strike virtually any household; throughout the American Wealth building, they pose hazardous holes through which unfortunate residents may fall to floors below. Yet, wealth offers help here. Arguably, the oldest motivation for wealth accumulation is its value as a safety net during times of distress. Today, wealth offers its owner the opportunity to purchase ample insurance to protect oneself from ruin. Through asset diversification, the wealthy can protect their nest egg from specific financial threats. As I will show in Chapter 7, wealthy householders experience much greater financial resilience in the face of financial collapse; they can suffer steeper declines in their wealth before they must ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Acknowledgments
• 1. Cracks in the American Dream
• 2. A primer on household wealth
• 3. Pathways to wealth accumulation
• 4. Recognizing our past
• 5. Evidence of wealth privilege
• 6. Three views of the American Dream
• 7. Resilience and wealth privilege
• 8. The spiral of privilege and policy
• 9. The White plutocracy system
• Appendix A: the Gini coefficient
• Appendix B: discussion of Asian or other household experience as suggested by the SCF evidence
• Appendix C: logit regression: which households increased net worth between 2007 and 2009?
• Appendix D: methodology for estimating distributional shares of tax expenditures
• Index