Another death knell for the middle class
It may be time to play a dirge for the American middle class.
While many American families enjoyed rising prosperity in the decades following World War II, those wealth gains have eroded, leaving the middle-class poorer than anytime since the 1940s, according to new research from economists Emmanuel Saez of University of California, Berkeley and Gabriel Zucman of the London School of Economics.
At the same time, the richest Americans have become richer, putting their share of wealth at the dizzying heights only seen during the era of "The Great Gatsby" and the Gilded Age of the robber barons, the researchers note.
While economists have focused on income inequality in the United States, Saez and Zucman sought to explore the issue of wealth. The question, they write, is to investigate whether American household wealth -- homes, retirement and investment assets, minus debts -- has been hit by a similar growing disparity.
"Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years," Saez and Zucman wrote in a brief for the Washington Center for Equitable Growth.
Following the Great Depression, the country saw a "substantial democratization of wealth," they note. The decades following World War II are often viewed as a golden time for the American middle-class, when families were buoyed by a growing economy and workforce opportunities.
Starting in the 1980s, that trend inverted, leaving the middle class progressively poorer and the richest even richer, the study found. By 2012, the top 0.1 percent of American households owned 22 percent of the country's wealth, compared with only 7 percent in the late 1970s. The top 0.1 percent of American households consist of 160,000 families whose total net assets amounted to more than $20 million in 2012.
Interestingly, it's only the richest of the rich who have benefited from the trend. For those households in the next 0.9 percent of the top 1 percent of the richest U.S. families, total share of wealth actually decreased slightly during the past 40 years, the study found.
"In other words, family fortunes of $20 million or more grew much faster than those of only a few millions," the economists note.
But what about that backbone of the American economy, the middle-class household? That's been a story of wealth erosion since the mid-1980s, when the bottom 90 percent of U.S. families saw their share of wealth peak at 36 percent. Since then, that share of wealth has declined to 23 percent, or on equal footing to the asset share held by the American middle-class in 1940.
The "American Dream" may be somewhat to blame for the decline in middle-class debt, with many households taking on larger mortgages and more debt for student loans, which is eroding many families' wealth. During the stock market bubble in the late 1990s and the housing boom of the early 2000s, rising asset values helped pump up the wealth of many American families. The Great Recession brought a collapse of the average wealth for the middle class, the study found.
Income disparity is also to blame, the economists added. Without real wage gains for the middle-class, most American consumers are unable to boost their savings rates. While the top 1 percent of U.S. families save about 35 percent of their income, the savings rate for the bottom 90 percent of American households is "about zero," they note.
Their findings mirror the research into the growing income inequality between the richest Americans and the rest of the country. The top 1 percent of Americans now take home 20 percent of all pre-tax income in the country, or double their share in 1980, according to a study earlier this year from the Paris-based Organisation for Economic Co-operation and Development.
While some might view the rising wealth of the rich as a positive, hoping that "job creators" will spread the wealth to the less fortunate, some economists and analysts are sounding alarm bells about the trend.
Ratings agency Standard & Poor's warned that the growing income gap in the U.S. is approaching an "extreme" threshold that threatens to dampen long-term economic growth. The agency cut its 10-year U.S. growth forecast to 2.5 percent, from 2.8 percent five years ago, citing the wealth gap as hurting social mobility and creating a less educated workforce.
A "dystopian future" might be in store for America, with middle-class families ending up with debts as high as their assets, Saez and Zucman write.
To avoid that outcome, the U.S. needs "policies that reduce the concentration of wealth, prevent the transformation of self-made wealth into inherited fortunes, and encourage savings among the middle class," the report added. They noted, "Progressive estate and income taxation were the key tools that reduced the concentration of wealth after the Great Depression. The same proven tools are needed again today."