True wealth distribution in the US

[PeshakJang]

I thought this deserved a separate thread, but this is based on the other thread about wealth distribution.

We constantly have these threads arguing who controls how much of American wealth, and every time, we see figures saying, "The top X% control y% of the wealth in America!", but we rarely see any sources or studies to back claims up, and when we do, we rarely see any critical analysis of how the figures were determined, or what it really means.

So let's have a critical look at all the studies and data and make our own conclusions... maybe it will change the debate slightly. I'm not saying that the figures are right or wrong or different, but from what I have seen briefly looking at some of the studies, they at least deserve a closer look.

I'll start it off based on what I found from the other thread's studies and the sources, as well as the sources cited on the commonly-used Wiki entry on wealth in the US.

I'll cite everything I use, and cut/paste everything with as much context as possible.

**

From the other thread:

http://www.slate.com/id/2268872/

The richest 1 percent account for 35 percent of the nation's net worth; subtract housing, and their share rises to 43 percent. The richest 20 percent (or "top quintile") account for 85 percent; subtract housing and their share rises to 93 percent.

From the study cited:

http://www.levyinstitute.org/pubs/wp_589.pdf

The principal wealth concept used here is marketable wealth (or net worth), which is defined as the current value of all marketable or fungible assets less the current value of debts.

Net worth is thus the difference in value between total assets and total liabilities or debt.

Total assets are defined as the sum of:
(1) the gross value of owner-occupied housing;
(2) other realestate owned by the household;
(3) cash and demand deposits;
(4) time and savings deposits, certificates of deposit, and money market accounts;
(5) government bonds, corporate bonds, foreign bonds, and other financial securities;
(6) the cash surrender value of life insurance plans;
(7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans;
(8) corporate stock and mutual funds;
(9) net equity in unincorporated businesses; and
(10) equity in trust funds.

Total liabilities are the sum of:
(1) mortgage debt;
(2) consumer debt, including auto
loans; and
(3) other debt.

So from this, first of all, we can define what we are talking about when we say wealth distribution. Real wealth is determined by taking all of your marketable assets, minus all of your liabilities.

From this, I'd make the suggestion that the distribution of wealth among the lower quintiles is highly influenced by the fact that a large majority of those in the middle class have large debts (mainly mortgages, auto loans), which subtracted from their other assets, results in very low, if not negative, net-worth. These loans, by proxy, would necessarily increase the net-worth of upper quintile individuals, through holdings or ownership of the loan institutions.

EDIT: See posts below for correction

My point about this, is that accounting for this, we might see a little less drastic curve in the net-worth of quintiles, which may at least make it appear a little less dire. For example, if you and I both have equal net worth, and I take out a loan from you to buy a house, my net worth decreases by the amount of the loan, and yours increases by the same amount. This would create a very drastic curve between the two of us, although our real situation hasn't changed drastically.

Another way of thinking about this is that the middle/lower classes have nescessarily shifted their future wealth to the right, especially with the increase in the push for universal housing, as well as the inflation of the housing market. With the crash, unfortunately, a lot of that future shift has been lost, or will at least take a lot longer to return.

Moving on:

http://www.wider.unu.edu/stc/repec/pdfs/rp2008/dp2008-03.pdf

This study shows a picture of world wealth distribution by country.

One interesting figure you can see is that Denmark (page 6) has a somewhat greater inequality curve between the upper and lower classes, with the bottom 70% all having negative net worth. Sweden is in a similar situation, with the bottom 60% having negative net worth.

Note that the data for the different countries is compiled from various sources, thus has different sample years.

Also from that chart, we see that among the top brackets, the US and Sweden are relatively equal, while Denmark has a much higher share within the top 10%, and a much lower share among the lower 90%.

Most developed countries hover around 40-60% in the top 10%.


This is the study cited on Wikipedia relating to wealth distribution:

http://www.jchs.harvard.edu/publications/markets/w07-1.pdf

The SCF data have a major limitation in terms of sample size, since each survey interviewed fewer than 5,000 households. This makes it impossible to investigate small subgroups. In this paper, the two race/ethnic groups compared are non-Hispanic whites and all minorities. Quartiles are used to examine wealth and income distribution overtime, and sometimes the top two deciles are used to highlight the imbalance in the distribution. In some
cases, the top one percent is compared with the bottom half of all households. The sample size for the top one percent is admittedly small, less than 50 cases, but both Wolff (1998) and Keister and Moller (2000) have used it in their reports, as well. All dollar figures in this paper are in 2004 constant dollars adjusting for inflation using the factors provided by SCF, and data sources are the 1995 and 2004 SCF data for public use unless otherwise stated. Descriptive statistics are
used with weights to adjust to the level of the total number of households in the nation. The SCF data do not benchmark with either the Current Population Survey or Housing Vacancy Survey of
the Census Bureau and readers should be aware of a potential discrepancy in reported statistics regarding the number of households due to this difference.

So from this, I'd make the observation that a lot of these statistics, at least the popular ones, are based on extremely small sample sizes in all cases. Some other studies use some complicated weighted modifiers to supposedly compensate for this, but it still seems to me, from a non-professional point of view, that it is still going to allow for a large margin of error.

On page 12 we get a good summary of mean/median net wealth growth between 1995 and 2004.

So at least for Mean net worth growth rate, it doesn't appear as bad as some would make you think, IMO. The top growth rate average of 79% compared to lower rates of about 30% doesn't seem too unbalanced considering all factors involved.

On pages 16,17, and 18, they show us that seniors and near-seniors dominate the groups that saw their wealth increase the most, not surprisingly.

Note: This study seems to only study the period between 1995 and 2004, so while it may account for the stock market crash of 2001, it doesn't go as far as the housing/stock crash of 2008.

**

Ok, I've thrown out some stuff to discuss, let's see where it goes.

 

[GuitarDaddy]

My point about this, is that accounting for this, we might see a little less drastic curve in the net-worth of quintiles, which may at least make it appear a little less dire. For example, if you and I both have equal net worth, and I take out a loan from you to buy a house, my net worth decreases by the amount of the loan, and yours increases by the same amount. This would create a very drastic curve between the two of us, although our real situation hasn't changed drastically

Your understanding of net worth is incorrect.

Using your example, If you borrow money from me to buy a house it has a zero net effect on both our net worths, in other words neither of our net worths will change.

For you, your liabilities go up by the amount of the loan but you assets also go up by the same amount becuase you own the house that you bought with the loan.

In my case I would just be trading a short term asset (cash) for a long term asset (note recievable), so neither my total assets or total liabilities change

 

[PeshakJang]

Your understanding of net worth is incorrect.

Using your example, If you borrow money from me to buy a house it has a zero net effect on both our net worths, in other words neither of our net worths will change.

For you, your liabilities go up by the amount of the loan but you assets also go up by the same amount becuase you own the house that you bought with the loan.

In my case I would just be trading a short term asset (cash) for a long term asset (note recievable), so neither my total assets or total liabilities change

Ok, I see what you are saying.. bear with me, I was never good at accounting.

I would change my assertion to only include the difference in true value, to include finance charges. So in the same example, while the principal net worths wouldn't change, you'd owe me the finance charges for providing the service, increasing my net worth, and decreasing yours through the added liability.

So I lend you $100,000 cash, my net receivable would be maybe $120,000, your liability would be $120,000. There would still be a transfer of wealth, just not as drastic.

Also, I think my original observation would remain the same... in that if somebody with say $100,000 in net worth borrows $100,000 to buy a house, he'd have $100,000 assets - $100,000 liability = 0 net worth. Right?

Edit: I understand from an accounting perspective you'd have the $100,000 loan as an asset, leaving your net worth unchanged, but I guess it depends on how the study characterizes home ownership as an asset... since you wouldn't really "own" the home.

 

[CycloWizard]

Thanks for posting this - very interesting stuff. I noticed that those reports didn't normalize growth and simply display everything in terms of raw dollars or percents, but if you look at the normalized rate of growth, it appears to be about the same across all quartiles according to the Harvard study (Chart 4). They also show data supporting the shocking conclusion that the rate of wealth accumulation is proportional to income. It looks like economists need to start studying differential equations so they can arrive at these conclusions without writing 30 pages of fluff to support an obvious result.

 

[PeshakJang]

They also show data supporting the shocking conclusion that the rate of wealth accumulation is proportional to income.

Yeah, I don't think anybody on either side of the argument will deny this... pretty common sense.

I would say the biggest question to look at is, what is the "cut-off", or coefficient of static wealth, that one has to reach to be able to actually accumulate wealth at a reasonable rate? Somebody who has an income that is just enough to sustain their current net worth with inflation is obviously going to stagnate, and realistically fall into the lower statistics. This doesn't mean that their standard of living will not increase... it just means that they don't accumulate things of wealth as considered in any study.

 

[xj0hnx]

Your understanding of net worth is incorrect.

Using your example, If you borrow money from me to buy a house it has a zero net effect on both our net worths, in other words neither of our net worths will change.

For you, your liabilities go up by the amount of the loan but you assets also go up by the same amount becuase you own the house that you bought with the loan.

In my case I would just be trading a short term asset (cash) for a long term asset (note recievable), so neither my total assets or total liabilities change

But he doesn't "own" the home until the loan is paid off.

 

[PeshakJang]

But he doesn't "own" the home until the loan is paid off.

He's still correct, from an accounting perspective. If I take out a loan, the value of that loan is added to my assets, while it is also added to my liabilities, for no net change (minus finance charges). Like I said though, I am not sure of the exact methodology used by any of the studies in determining how much of a home you "own" versus your liabilities.

 

[zephyrprime]

Also, I think my original observation would remain the same... in that if somebody with say $100,000 in net worth borrows $100,000 to buy a house, he'd have $100,000 assets - $100,000 liability = 0 net worth. Right?

No, in that situation, his net worth is still unchanged. Before, he had 100K in cash and nothing else. After, he had 100K in house equity and nothing else.

Before: $100000 cash + $0 House - $0 liabilities = $100000
After: $0 cash + $100000 House - $0 liabilities = $100000

Also, GuitarDaddy is correct in what he posted before.

 

[PeshakJang]

No, in that situation, his net worth is still unchanged. Before, he had 100K in cash and nothing else. After, he had 100K in house equity and nothing else.

Before: $100000 cash + $0 House - $0 liabilities = $100000
After: $0 cash + $100000 House - $0 liabilities = $100000

Also, GuitarDaddy is correct in what he posted before.

Ok, you're right. I'd restrict my claim to the amount of finance charges in that case.

Accounting != me good at.

 

[ElFenix]

the fact of the matter is that people who hold a higher % of their wealth in assets that appreciate at a higher rate than houses will continue to garner a larger and larger share of total wealth than people who hold a higher % of their assets in their houses. it's a simple, inevitable fact.

 

[xj0hnx]

He's still correct, from an accounting perspective. If I take out a loan, the value of that loan is added to my assets, while it is also added to my liabilities, for no net change (minus finance charges). Like I said though, I am not sure of the exact methodology used by any of the studies in determining how much of a home you "own" versus your liabilities.

That's kind of retarded though, seems just recently a lot of people had their homes devalued, and defaulted on loans and watched their "worth" spiral down the drain. I don't see how anyone that's really trying to determine actual wealth is not going to take into account money owed.

 

[ElFenix]

That's kind of retarded though, seems just recently a lot of people had their homes devalued, and defaulted on loans and watched their "worth" spiral down the drain. I don't see how anyone that's really trying to determine actual wealth is not going to take into account money owed.

double entry accounting. learn it, love it.

(and yes, he does own the home while there is a mortgage on it)


i buy a house, it's worth 100,000. i took out a loan of $90,000 to cover it, and had $10,000 in cash that i put down.

assets before buying the house: $10,000 in cash
liabilities before buying the house: $0
total net worth: $10,000

assets after buying the house: $100,000 in house
liabilities after buying the house: $90,000 in mortgage
total net worth: $10,000


after a few years i've paid down $10,000. the value of my house declined 20% so now:

assets after decline: $80,000 in house
liabilites after delcine: $80,000 in mortgage
total net worth: $0

if the value of the house continues to decline faster than i pay off principal, then my net wealth would go negative.




heck, we could do this with just cash. i have $10,000 and then take out a loan for $90,000. i sit on the cash. what does my net worth look like.

assets before loan: $10,000 cash
liabilities before loan: $0
total net worth: $10,000


assets after loan: $100,000
liabilities after loan: $90,000
total net worth: $10,000

 

[Phokus]

Ok, I see what you are saying.. bear with me, I was never good at accounting.

I would change my assertion to only include the difference in true value, to include finance charges. So in the same example, while the principal net worths wouldn't change, you'd owe me the finance charges for providing the service, increasing my net worth, and decreasing yours through the added liability.

So I lend you $100,000 cash, my net receivable would be maybe $120,000, your liability would be $120,000. There would still be a transfer of wealth, just not as drastic.

Also, I think my original observation would remain the same... in that if somebody with say $100,000 in net worth borrows $100,000 to buy a house, he'd have $100,000 assets - $100,000 liability = 0 net worth. Right?

Edit: I understand from an accounting perspective you'd have the $100,000 loan as an asset, leaving your net worth unchanged, but I guess it depends on how the study characterizes home ownership as an asset... since you wouldn't really "own" the home.

I'd like to know which bank is smart enough to fool the home owner into tacking on additional 20K on a 100K loan as 'finance charges' so i can invest all my money into it.

 

[umbrella39]

PJ Wall Of Text account #2 activated.

 

[piasabird]

These people also live in larger houses and drive bigger cars and consume a lot more energy than other people. In other words they are also resource hogs.

 

[CPA]

the fact of the matter is that people who hold a higher % of their wealth in assets that appreciate at a higher rate than houses will continue to garner a larger and larger share of total wealth than people who hold a higher % of their assets in their houses. it's a simple, inevitable fact.

which in the grand scheme of things means nothing to each individual. Someone else's wealth or lack of has no bearing on my opportunity to grow wealth.

Calls for wealth redistribution is the lazy man's approach to better his/her life, if wealth is the factor used for such betterment.

 

[GuitarDaddy]

the fact of the matter is that people who hold a higher % of their wealth in assets that appreciate at a higher rate than houses will continue to garner a larger and larger share of total wealth than people who hold a higher % of their assets in their houses. it's a simple, inevitable fact.

Home devaluation is a realatively new phenomenon for Americans brought on by the burst of the housing bubble in 2008-2009. For many decades leading up to this time homes values were continously rising and homes were considered as investments and in many many years home appreciation outpaced many traditional forms of investments like stocks and securities.

My own parents made most of the money they used for retirement through buying and selling houses throught the years. I remember one stretch of about 15yrs when they more than doubled their money on two different homes. Bought one in the early sixties for $15k sold it 6yrs later for almost $40k, bought our next home for $50k and sold it 9yrs later for $132k

 

[PeshakJang]

PJ Wall Of Text account #2 activated.

Shh... adults are talking.

 

[PeshakJang]

I'd like to know which bank is smart enough to fool the home owner into tacking on additional 20K on a 100K loan as 'finance charges' so i can invest all my money into it.

When you take out a 30 year, $100,000 mortgage... how much interest do you think you wind up paying? I eagerly await your answer.

 

[First]

the fact of the matter is that people who hold a higher % of their wealth in assets that appreciate at a higher rate than houses will continue to garner a larger and larger share of total wealth than people who hold a higher % of their assets in their houses. it's a simple, inevitable fact.

Pretty much. Homes historically yield like 1/5th of what you'd get in the average mutual fund. It's still better than putting all your money in a low yield CD, but not much better from what I remember.

 

[First]

PJ Wall Of Text account #2 activated.

Actually, his OP was pretty damn good despite some pretty understandable errors that I had forgotten myself. PJ rambles on incessantly with no coherence and cites nothing but extreme righty blogs.

 

[PeshakJang]

Actually, his OP was pretty damn good despite some pretty understandable errors that I had forgotten myself. PJ rambles on incessantly with no coherence and cites nothing but extreme righty blogs.

Thanks for the props. PeshakJang = PJ is purely coincidence... it actually means "Cat fight" in dari.

 

[First]

Yeah, I meant PJabber. Actually, that applies to ProfJohn too. Lots of PJ's here apparently, lol.

 

[Phokus]

When you take out a 30 year, $100,000 mortgage... how much interest do you think you wind up paying? I eagerly await your answer.

Not only do you not know accounting, you don't know time value of money either.

1) The only way the bank could have a 20K receivable on their books, in addition to your 100K mortgage, is if you were delinquent on paying your mortgage for a couple of years

2) On a 30 year mortgage, you would be paying a LOT more than just 20K in interest. But that's over the FULL LIFE OF THE MORTGAGE. I bought a house with around a 250K mortgage last year. The bank has the exact same 250K mortgage on their books. . They don't just tack on 40 or 50K on their receivable 'just because'. Again, look up 'time value of money'

This thread is full of unbelievable fail and now i completely understand why conservatives exist.

 

[Phokus]

Actually, his OP was pretty damn good despite some pretty understandable errors that I had forgotten myself. PJ rambles on incessantly with no coherence and cites nothing but extreme righty blogs.

"Understandable errors"? Are you shitting me? The OP claimed that when you get a mortgage, you go into debt without getting anything in return and claims that he made the mistake because he didn't understand 'accounting'. No, it's not just accounting, it's basic logic. The whole premise was built on retardation.