Is Wealth Inequality Increasing?

In his update to the income inequality debate yesterday, Greg Mankiw wrote:

Another piece of this puzzle is a paper by Kopczuk and Saez on wealth inequality. They find (see figures 2 and 5) that wealth concentration has not changed much over the past half century (although their data end in 2000), and it is nowhere near the levels experienced in the 1920s.

Since I have been referring referring to this paper as evidence of widening wealth inequality (see their figure 8 which simulates their model’s implied Gini index for wealth inequality), I was sort of surprised by this so I checked out what Wojciech Kopczuk and Emmanuel Saez

This paper presents new homogeneous series on top wealth shares from 1916 to 2000 in the United States using estate tax return data. Top wealth shares were very high at the beginning of the period but have been hit sharply by the Great Depression, the New Deal, and World War II shocks. Those shocks have had permanent effects. Following a decline in the 1970s, top wealth shares recovered in the early 1980s, but they are still much lower in 2000 than in the early decades of the century.

The authors were not only comparing 2000 to 1916, while other research look at periods from say the 1960’s to 2000 (or later), the authors were not trying to capture all percentiles – just the ones towards the upper end.

So I was wondering what other research on wealth inequality might be available. Sylvia Allegretto of the Economic Policy Institute offers:

The figure is one such measure of inequality – the ratio of the wealth of the richest 1% to that of a household with typical wealth in the middle. As the figure indicates, wealth inequality has not only persisted, but also grown much larger over time. The richest 1% of wealth holders had 125 times the wealth of the typical household in 1962; by 2004 they had 190 times as much or $14.8 million in wealth for the upper 1% compared to just $82,000 for the household in the middle fifth of wealth.

OK, our friends on the left have one narrow statistic that says wealth inequality is soaring, but to be fair – this does not capture the distribution either. So check out Marco Cagetti and Mariacristina De Nardi from the Chicago Federal Reserve. They examine the entire distribution from 1989 to 2001 noting how uneven the distribution of wealth is. But is inequality rising? Their table 1 shows “Percent of net worth held by various groups defined in terms of percentiles of the wealth distribution” with the top 5% seeing an increase from 54.4% to 57.7%. The bottom had seen an increase in their small share from 1989 to 1995, but this has reversed itself. The share of wealth from the median to the 95th percentile eroded over this period. The authors also note the difficulty of measuring wealth inequality in the past but point to the findings of other literature:

There is evidence that U.S. wealth inequality decreased significantly between the 1920 and the 1970s … Inequality increased again in the 1980s. Wolfe argues that while wealth inequality fell during the 1970s, it rose sharply after 1979, with a dramatic increase over the 1980s, to the level of in the 1990s. The trend in the 1990s is much less clear.

Perhaps my favorite paper on this topic comes from James P. Smith who not only documents the rise in wealth inequality but also asks Why is Wealth Inequality Rising?

This paper summarizes the principal facts about wealth inequality and how it has been changing during the last fifteen years. A very sharp rise in the inequality in household wealth has taken place at least since the mid-1980s. I first examine the relation between wealth and income by illustrating how wealth is distributed within and across income groups and then attempt to uncover some reasons why wealth inequality has been expanding so rapidly. The reasons examined include the receipt of inheritances, rising income inequality, and capital gains, particularly those due to appreciation in equity markets. The subsequent impact of these capital gains on financial savings in other forms is also investigated. Two of the possible explanations–the receipt of inheritances and the uneven savings generated by the simultaneous rise in income inequality–were rejected as likely to be quantitatively unimportant. The principal culprit lies instead in the third reason: the uneven receipt both within and across income classes of capital gains, particularly those due to sharp price appreciation in equity markets. Capital gains in stocks then induced households to reduce their financial savings in other assets and therefore may have contributed to the recent secular decline in household savings. Throughout, this research relies on two longitudinal surveys that have pioneered the incorporation of household wealth modules into multipurpose social science surveys: the Panel Study of Income Dynamics (PSID) and the Health and Retirement Survey (HRS).