Can the Government Help End Outrageous Wealth Inequality In the U.S.?
The United States is drowning in wealth. According to the Bureau of Economic Analysis, U.S. gross domestic product (the value of goods and services produced in the country) clocked in at $16.77 trillion in 2013, up 2.2 percent annually. Compare this against GDP of $9.24 trillion for China, our closest competitor in terms of sheer size, and Japan in third at $4.9 trillion. It wasn’t until recently that the combined GDP of the European Union exceeded that of the U.S.
Here’s another way to frame it: The amount of money we spend on healthcare alone is greater than the GDP of Russia (granted, the U.S. healthcare system is a whale).
But despite the fact that it’s got the biggest economic pie in the world, the U.S. has managed to slice it up into outrageously unequal parts. A study conducted by Thomas Piketty, of Capital in the 21st Century fame, and Gabriel Zucman shows that wealth inequity in the U.S. is as severe now as it was during the “Roaring ’20s” — the post Gilded Age boom that preceded the Great Depression. Just 1 percent of the U.S. population controls 40 percent of the wealth. Imagine one guy in a room of 100 carving out 40 percent of a pie all for themselves. No one needs that much pie, and it’s hard to imagine anyone who deserves it.
To be clear, we are not advocating for the unholy wealth distribution of socialism. Evidence for the efficacy of capitalism is abundant, and capitalism doesn’t work without incentives. But when S&P Capital IQ reduces its ten-year economic growth forecast for the U.S. because of extreme income and wealth inequality, then something is clearly broken.
So how did we get here? The institutionalization of wealth across generations has played a huge role, and more recently gross inequality in income gains has has tipped public ire against the nation’s top earners. The basic problem, as Piketty put it in his book, is that there is a fundamental divergent force within capitalism that, if left unchecked, will produce greater and greater wealth inequality. This inequality can be summed up as r > g, where “r” is the rate of return on capital and “g” is the rate of economic growth. If the rate of return on capital is greater than economic growth, then those who have already accumulated capital will be able to grow their wealth at a rate faster than the economy at large, claiming an increasingly large share while leaving less and less to those without capital.
With this in mind, one straightforward way to address the wealth gap, and maybe narrow it to a point where it’s not a drag on the overall economy, is to design wealth-building programs for those at the bottom of the distribution.
In a report published this July, the Urban Institute laid out some ideas to do just this.
1. Universal Children’s Savings Account
Unless you are exceptionally savvy or were born into it, accumulating wealth takes time. According to the U.S. Census Bureau, college graduates earn an average of $2.1 million during their lifetime — this number drops to $1.2 million for those without a college degree and jumps to $4.4 million for those with a professional degree. Most of this income will be spent to meet the cost of living or saved for retirement (cost of living deferred), leaving the majority of estates looking like pocket change compared to the magnificent intergenerational transfers of wealth that happen at the top of the distribution.
But while it’s easy to get caught up in the massive inheritances of the lucky few, it’s important to keep in mind that it is essential that people have the opportunity to accumulate wealth and leave it to their children. This is especially so for those at the lower end of the distribution, where assets like property are often out of reach and obtaining financial assets like stocks is a pipe dream. According to the Economic Policy Institute, the top 20 percent of the wealth distribution owns 90 percent of stocks.
One way to buck the trend — or, at least, give those at the bottom of the distribution a financial platform to stand on — is through a specialized children’s saving account. The Urban Institute argues that “To help low- and moderate-income families save,” policymakers should “create a ‘savable moment’ at tax time by allowing families to deposit a portion of their child tax credit or earned income tax credit, perhaps sweetening the pot with an additional match.”
2. Homeownership Incentives
For most Americans, a home is the largest single purchase that they will ever make, and historically it has been a foundational wealth-generating asset for the middle class. “With each mortgage payment, families build equity, which later can be tapped for additional income in retirement or to finance a child’s college education,” states the Urban Institute. This idea hasn’t escaped the government, which has tried to incentivize homeownership through a variety of means, but primarily through the mortgage interest deduction.
However, the Urban Institute argues that “the mortgage interest deduction, which cost roughly $70 billion in 2013, has proven ineffective at putting low- and moderate-income families into homes. Repealing or limiting the mortgage interest deduction and replacing it with a credit for purchasing a home for the first time could provide greater assistance and incentive for those shut out from today’s homeownership subsidies. The credit could be designed to be deficit-neutral compared with current homeownership tax incentives.”
3. Automatic Retirement Savings
It’s no secret that Americans are terrible at saving. At an individual level this is evident in average savings rates well below the level that economists would like to see — currently about 5.3 percent, compared to about 10 percent suggested. Institutionally we’re not much better. According to Boston College’s Center for Retirement Research, about 66 percent of people work for employers who don’t offer retirement plans. And even when given generous incentives in the form of tax deductions or tax-deferred growth and employer matching for retirement accounts, Americans often fail to take advantage of them.
However, one way to begin to address the problem is to automatically sign employees up for savings plans when they begin work, forcing them to opt out instead of opt in to the programs. “Recent scholarship on behavioral economics has shown that defaults—something as simple as having to opt out of a retirement plan instead of opt in—can have powerful effects on plan participation and contributions,” states the Urban Institute.
Even a modestly fed retirement account can give people enormous financial stability relative to not having a retirement account at all, and this stability can go a long way toward helping people secure and grow additional wealth.
If you really want to get worked up about the income and wealth distribution in the U.S., check out the video below. It’s a little dramatic, but the data suggest that the situation is severe enough to call for a little drama. In particular, check out the video if you want an illustration of how perceived wealth distribution matches up against reality in the U.S., and to get a look at what the same distribution would look like spread over just 100 people.