Thursday, January 12, 2017

HOW THE RICH GET RICH: New Data: Inheritance

A third of Americans think they’ll be rich someday. More than half of 18–29 year olds think they will be.
Less than 5% actually make it.* And many of those do it the old-fashioned way: they inherit it. About 60% of U.S. household wealth is inheritedBetween a quarter and a third of Forbes 400 billionaires got rich that way. It may not be the most common way to get there, but it’s widespread, and it’s surely the easiest way.
That aspiration to wealth is deeply understandable. Getting high income from a good job is all well and good, but because wealth begets more wealth — people are compensated simply for owning things — wealth is, potentially, forever. It persists, and spreads through families and dynasties. Wealth can, and often does, endure for generations.
So it’s worth asking: how do Americans accumulate wealth? And how does that vary across income and wealth classes? How do the bottom 50% accumulate wealth, for instance, compared to the top 1%?
The Distributional National Accounts
A huge aid to answering that question arrived last month. Gabriel Zucman, Emmanuel Saez, and Thomas Piketty (PSZ) released one of the most important pieces of economic research in the last century. Their Distributional National Accounts (DINAs) reveal the distribution of national income to different income classes, wealth classes, age groups, and genders (and potentially different races, etc. etc.). This has been unavailable in the national accounts, and as a result it’s absent in most macroeconomic empirical work.
Here’s one poster exhibit:
Collect the whole set.
Zucman and company explicitly hope this distributional data “will be adopted by government agencies down the road” (see Conclusion slide). Here’s to it. The DINAs are a magisterial achievement, a treasure trove for empirical economists that merits easy access and prominent, front-and-center presentation in each release of the national accounts.
Income versus Wealth Accrual
But impressive as they are, the DINAs don’t fully answer the question of how Americans accumulate wealth. Because the DINAs only tally income, and income doesn’t include households’ holding (or “capital”) gains on stock portfolios, real estate, etc. Income does include much “property income” — dividends, interest, etc. That’s income from owning things. But it’s not everything that households receive from ownership. Holding gains figure large in that picture.
Any investor will tell you: cap gains are a big part of their wealth accumulation. Total return — dividends plus capital gains — is the measure that most savvy stock-market investors care about, long-term (and that fund managers like to tout, loudly). And much of Americans’ retirement saving — especially middle-class Americans — is accrued through capital gains on their homes.
The DINAs’ central goal is to match income as presented in the national accounts, and to reveal a multidimensional pyramid of distributional data underneath that income measure. A deeply worthy goal. But as a result, the DINAs can’t and don’t reveal the whole picture of household wealth accumulation (change in assets and net worth), or its distribution.
Here’s a rough picture of that disparity, showing a wealth-accrual measure compared to the PSZ income share, for the top one percent:**
Clearly, holding gains are much more volatile than income. But this kind of graph can still tell a long-term, secular story — and even give important insights into shorter-term trends and business cycles.
To get a feel for this: Of $22 trillion in contributions to household wealth in 2013 (income plus holding gains), the top 1% captured $8 trillion, or 35%, compared to 21% of income. That measure has exceeded 30% in eight of the last seventeen years; in the three and a half decades before 1997, it never went above 26%. (2008 is an arithmetic anomaly here, by the way. Household wealth accrual was negative that year, but one-percenters’ wealth accrual, the numerator, was even more negative.)
Concentration of total wealth accrual is almost always far higher, and has been rising faster, than concentration of income alone. The rich are getting richer, faster. It’s an inequality picture more dire even than that depicted in the DINAs. And because wealth begets more wealth, it’s a self-perpetuating picture.
We pay people for doing things, and we pay people for owning things. Increasingly, the latter.

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