One way to reduce wealth inequality
Posted November 29, 2016
Wealth is the value of the assets you own minus the debt you owe. For example, your house, your car and any stocks you might own are assets. In America, wealth increased by $4.6 trillion from mid-2014 to mid-2015 and reached $85.9 trillion. This increase is large enough that it was more than double the size of the next-biggest international asset increase, that of China, which saw its assets grow by $1.49 trillion, according to Credit Suisse’s Global Wealth Report. This is good news, right?
What these numbers don’t say is that wealth distribution is very uneven. Globally, Credit Suisse states that the top 1 percent of the richest own as much as half of all household wealth. Furthermore, it is expected that by the end of 2016, the top international 1 percent will own as much as the rest of people worldwide, according to Oxfam.
Here is another way to look at wealth distribution in the United States: The top 10 percent of households own as much as 76 percent of total family wealth; those between the 51st percentile and the 90th percentile own 23 percent of total wealth and those in the bottom half held only 1 percent, as of 2013, according to the Congressional Budget Office. Wealth inequality is remarkably high.
Furthermore, it is difficult to address a number of racial inequality issues when economic inequality is very high between races. White families had average wealth of $677,658 in 2013, while African-American families had $95,351 and Hispanic families $122,227, respectively, according to the Urban Institute.
C. Eugene Steuerle, at the Urban Institute, believes low- and moderate-income people have to build wealth by saving and investing in stock and then reinvesting. By repeating this process over a long period, stock investors will see their money grow eight times over 36 years, as compared with the two times appreciation they have investing in bonds, if past patterns hold. Furthermore, Steuerle suggests that making long-term investments makes sense since, as time goes by, stock investments are less risky than bond investments. Yes, I know this seems counterintuitive, but the evidence is clear.
What would be needed to have the poor own shares? Part of the answer is to further encourage Employee Stock Ownership Plans (ESOPs). In part, this is because many people no longer own stock in their portfolios. As of April 2016, only 52 percent of Americans owned stock in their personal accounts, down from 65 percent in 2007. Additionally, lower- and middle-income Americans are the most likely groups to have left the market, given their bad experience during the 2008 crisis, according to Gallup.
Any wealth-building portfolio should be diversified and include other assets, such as real estate. Yet there is real value when people own shares in their own companies — either as entrepreneurs or through ESOPs. ESOPs have many other advantages, such as fostering employee participation in a company’s decision-making. Additionally, a seller of ESOP shares can defer or eliminate capital-gains taxation. While it is true that ESOPs can cause some diversification problems, the laws are structured to alleviate this problem for older workers. The evidence shows that ESOPs increase income, save jobs and have backup retirement systems in place to protect employees.
If a more even wealth distribution is in the best interest of society, then we have two basic choices: raise taxes on the rich (which many are opposed to) or create mechanisms to put shares in the accounts of low- and moderate-income people. ESOPs are a good place to start.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Mario Alejandro Mercado Mendoza, Hoffmire’s colleague at Progress Through Business, did the research for this article.
John Hoffmire teaches at SaÏd Business School at the University of Oxford.