Wealth inequality is even worse than income inequality

You probably know the numbers on income inequality by now: The share of all income going to the top 1 percent of Americans now stands at around 20 percent, which is a big and disturbing number.

But what about wealth inequality?

Income is a relatively straightforward matter of wages and compensation. Wealth is more mercurial: It can be a physical asset like a car, house, or land. But it can also be a stock or bond or other financial asset.

The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

Join more than 350,000 subscribers and keep yourself informed with a selection of The Week’s most interesting, enlightening and entertaining stories - plus daily puzzles.

Join more than 350,000 subscribers and keep yourself informed with a selection of The Week’s most interesting, enlightening and entertaining stories - plus daily puzzles.

Sign up

The effects of wealth also go much deeper: If you own a piece of land, you can decide what uses that land gets put to. Same thing if you own a building. If you own someone else's debt, you have tremendous legal power over their livelihood. If you own shares in a company, you have input into its governance: Where does it invest? Who does it hire? What does it pay? Income decides your standard of living, but wealth gives you control over the shape and future course of the economy.

And if you think income inequality is bad, well, you ain't seen nothing yet.

As of 2015, the top 1 percent of American households in terms of wealth ownership enjoy 35 percent of the pie all by themselves. The top 10 percent own a staggering 76 percent of all wealth.

Furthermore, from 1963 to 2013, families in the bottom 10 percent of wealth ownership went from having no wealth at all on average to being $2,000 in debt. Over the same time period, the average wealth of the top 10 percent grew four times over. For the top 1 percent, it grew six times over. These shifts are far larger than the changes in the distribution of income over the same time frame.

But these two inequalities also feed into one another. Capital gains and other returns are a form of income, for example, and they've arguably been the biggest driver of rising income inequality since at least the 1990s. On the flip side, the more income you have, the more wealth-generating assets you can buy, leading to even more income. The top 1 percent's share of all income generated from wealth holdings has been rising for decades. And by 2014, 58.9 percent of all income going to the top 1 percent was income from wealth.

The equivalent number for the bottom half of all Americans was just 5.1 percent.

So the best way to enrich yourself is to already be wealthy. Which is kind of perverse, since income from wealth is income you don't have to lift a finger to earn. (You have to wonder if this bothers all the commentators and politicians who regularly worry that government aid to poor people discourages work.)

As a result of all this, wealth has a tendency to just transfer endlessly from one generation to the next in the same family. A big part is obviously outright inheritance. But there are subtler ways as well: "Wealthier families are better positioned to afford elite education, access capital to start a business, finance expensive medical procedures, reside in higher-amenity neighborhoods, exert political influence through campaign contributions, purchase better legal representation, leave a bequest, and withstand financial hardship resulting from an emergency," wrote Darrick Hamilton, an economist at the New School. All of which vastly improves the chances that the next generation can build up a wealth stock of their own.

So, not surprisingly, socioeconomic mobility in America is incredibly sclerotic. If you're born into the bottom fifth of the income ladder, the chances you'll stay there are 43 percent. Your chances of breaking into the top fifth are 4 percent. For people born into the top fifth, the numbers are effectively reversed. "In a capitalist system, if you lack capital, it just locks in inequality," Hamilton said.

Then there's the racial wealth gap: As of 2013, the median white household had $141,900 in wealth, while the median black household had a paltry $11,000. The median Hispanic household had $13,700. And the gaps have actually increased since the mid-2000s, mostly because household wealth for blacks and Hispanics nosedived. These disparities are much larger than the racial gap in income, and their consequences are profound. It is arguably the clearest and most concise evidence we have that the historic damage done to black Americans by slavery, segregation, and Jim Crow is far from repaired.

So what's there to be done about wealth inequality?

Well, first off, education or "skills" or whatever won't help. If we equalized education levels between black and white Americans, we'd barely dent the racial wealth gap. Rather, wealth inequality is about how our society distributes the power and property rights that ultimately make up wealth ownership, and how easily that ownership perpetuates across generations.

That's also the challenge, because this implicates huge swaths of society. You could try a number of different, interlocking policies: Massively hike the highest tax rates on income from capital gains and labor. Strengthen the inheritance tax or just tax wealth specifically. Close tax giveaways like the mortgage interest deduction, which spend hundreds of billions every year helping already-wealthy households build up even more wealth. Reform copyright and patent laws, which let powerful companies extract endless money out of everything from software ideas to media images. Or create some sort of public option for banking, to help the tens of millions of Americans who have little-to-no access to basic banking services. I could go on.

But Hamilton himself is pushing a particularly elegant idea: "baby bonds." Every American would be given a savings account at birth, directly funded out of the U.S. Treasury Department. How much money the account is stocked with would be scaled up or down depending on the wealth circumstances the child is born into — with the least wealthy children receiving as much as $50,000 or $60,000. Once the child is a legal adult, they can spend the money on certain "clearly defined asset enhancing activities," such as getting an education, buying a house, starting a business, etc. Think of baby bonds as the third piece of a triumvirate of "big idea" reforms that would reshape the economy, alongside a universal basic income and a federal job guarantee.

The point here is this: As important as income is, who owns wealth ultimately determines who rules. And that kind of inequality is arguably the most destructive inequality of all.