Asset Inequality?

                                          

Fairfield Marina

Recent articles in the Wall Street Journal have argued that the income inequality bemoaned by progressives in this country is a myth. Statistical studies that demonstrate an increasing amount of income inequality apparently leave out over a trillion dollars of government income transfers to those in lower income brackets. These studies also do not take into consideration the substantial impact of an effective progressive income tax code on the highest earners.  

In an August 7 WSJ op-ed Bruce D. Meyer, a professor of public policy at the University of Chicago, and James X. Sullivan, a professor of economics at Notre Dame, claimed that “there is much less material deprivation than there was decades ago.” They cited a number of studies including the American Housing Survey that demonstrated the significant strides made in this country. They wrote,

The poorest 20% of Americans live as the middle class did a generation ago as measured by the square footage of their homes, the number of rooms per person, and the presence of air conditioning, dishwashers, and other amenities.

Unfortunately, studies that claim that America has reached an unprecedented level of income equality are questioned by politicians and advocates on both extremes of the political spectrum. Right wingers claim that the enormous sums spent by government social programs or income transfers have largely been wasteful and ineffective. Left wingers claim that they have not gone far enough and call for massive spending to finance free college education, health care, minimum wage increases and a host of other benefits. 

Left wing progressives also claim that studies that indicate income inequality are a politically biased attempt to roll back or eliminate the social service safety net. As a last resort, even if they grudgingly admit some measure of income equality, progressives will then raise the issue of “asset” inequality. Even if the incomes of the poor are improving, the gap in asset ownership is greater than ever before in history and getting wider and wider.

I know that there are incredibly wealthy people in the country today. Jeff Bezos of Amazon is reputed to be the wealthiest person in the world with a fortune of $157 Billion. But my own experience leads me to believe that the gap between the very rich in this country and the rest of us is no wider than it has ever been, and that more Americans share in the American economy than ever before.

When I started my career in the financial services industry as a mutual fund salesman in 1972, it quickly became clear to me that most Americans did not own a share in the American economy. The mutual fund business was in its infancy, and only a small percentage of the population owned shares of common stock. Moreover, there were no IRA or 401k plans with tax favored treatment of retirement savings. Many leading companies had pension plans but there was little in the way of profit sharing plans or employee stock ownership plans. There were, however, two tax-favored retirement accounts but they were only available to small businesses (Keogh plans), and school teachers (403b plans). The 403b plan was the granddaddy of these plans and it is still used to fund the retirement of most college and university professors today. 

In the past 45 years the growth of all of these plans has been phenomenal. More Americans now own tax favored retirement plans than ever before and most of them are invested in a broad cross section of the American economy. In addition to the tax advantages, most people could participate in these plans through payroll deduction, the best way to save. Incredibly, the huge amount that Americans put into these tax favored retirement plans does not count in official government statistics as savings.

When I started in 1972 the Dow Jones Industrial Average (DJIA) was about 1000. Today it is around 25000. The baby boomers who began saving in the 1970s have become the richest generation in history. On a recent visit to Alameda California, across from San Francisco Bay, I discovered that the modest homes there could not be had for less than $1 Million largely due to its proximity to trendy San Francisco. Although San Francisco is the bluest city in the bluest state in the country, most ordinary people cannot afford to live there.

Closer to home, my wife and I enjoy sitting at the marina near Fairfield beach and watching the boats, both large and small, go in and out. It is a constant parade. Fairfield is a middle class town but a good number of its people enjoy messing around in boats, and can afford to do so. 

But what about the lower classes? Although people living on welfare have very little in the way of assets, their guaranteed welfare income and benefits makes them virtual millionaires. For example, if someone receives a monthly welfare check, subsidized medical care under Medicaid, and housing and food assistance, they could easily have the equivalent of an income of $2500 per month or $30000 per year. At 3% interest it takes a million dollars of assets to provide an income of $30000 per year. 

Despite protests from both the left and the right, it would appear that the social safety net has been working in America. 

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