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Thursday, June 20, 2013

U.S. Median Wealth Falls by 1/4 in One Year (Maybe)

Les Leopold's report on Alternet that the United States is only 27th in median wealth per adult (h/t @papicek) is getting lots of well-deserved notice. But his article, based on the October 2012 Credit Suisse Global Wealth Databook, missed a big point. (I missed it, too, when the 2012 edition came out.)

As I reported last July, the 2011 Global Wealth Databook estimated that U.S. median wealth per adult was $52,752. But by 2012, the figure had fallen to $38,786, a decline of 26.5%. This is, obviously, a huge number. Moreover, mean wealth per adult had grown by 1.0%, from $259,796 in 2011 (revised upward from $248,395) to $262,351 in 2012. This represents a substantial increase in wealth inequality in the United States.

What could have caused such a sharp decline in median net worth? It's hard to tell. The 2012 Databook does not give information for median debt per adult, only mean debt. Moreover, it does not publish updated information for median wealth for 2011, only for mean wealth. Thus, it is impossible how much, if any, of the change is due to data revisions. On the other hand, if the 2012 measurement was taken relatively early in 2012, it may have reflected the dip in home prices, a major component of middle-class wealth, as reflected in the Case-Shiller national home price index. Moreover, declining median wealth is not an isolated phenomenon, though it is less severe in other countries, as the table below shows.

Country          2011 Median Wealth     2012 Median Wealth     Change

Australia       $221,704                        $193,653                        -  12.7%
Belgium        $133,572                        $119,937                        -  10.2%
Canada         $89,014                          $81,610                         -    8.3%
France          $90,271                          $81,274                         -  10.0%

At the same time, there's at least one example of an even sharper swing, Denmark, which Leopold appears to have missed. According to the 2011 Databook, median wealth was $25,692; in the 2012 Databook, it was $87,121, an increase of 239.1%! And this came at a time when mean wealth per adult fell 14.1%.

Do I believe this? Probably not. So it seems possible that the U.S. decline might be measurement error. Even if that's the case, the main point both I and Leopold made remains true: the wealth of the U.S. middle class is surpassed in a substantial number of countries around the world.

For an update, see here.

Wednesday, June 19, 2013

"Technology Causes Inequality" Refuted

I'm getting to this a little late due to extensive travel (in South Africa now), but David Cay Johnston has a nice writeup of a recent paper on inequality based on the World Top Incomes Database. The paper, by Facundo Alvaredo et al., is important because it largely refutes the idea that technological change is the big reason for diverging incomes between skilled and unskilled workers. As Johnston writes:
That [sharply different levels of increased inequality] is significant because it means that new technologies and the ability of top talent to work on a global scale cannot explain the diverging fortunes of the top 1 percent and those below, since the Japanese have access to the same technologies and global markets as Americans. The answer must lie elsewhere. The authors point to government policy.
As the paper shows, the income share of the top 1% in the U.S. declined from a high of around 24% just before the Great Depression to a low of about 9% in the late 1970s. Since then, it has soared all the way back to about 23% just before the Great Recession, but falling back to 20% in 2010. Other English-speaking countries have had similar "U shaped" patterns, as the authors describe them (i.e., reaching Great Depression levels again), but the share of the 1% is much less in other countries. For example, in Australia, even though the 1% share is close to what it was in the 1920s, it is still only 10% of total income, compared to 20% in the U.S. This difference is part of the reason that median wealth is so much higher in Australia.

The paper gives examples of other countries where the 1% share is permanently below its 1920s level, such as Germany, Japan, France, and Sweden. In all four cases, that share is only about 10%. As Johnston emphasizes, these countries are all essentially equal to the U.S. technologically (remember back in the 1980s when so many people thought Japan was poised to eclipse the U.S. in technology?), so their substantially lower levels of inequality stand in direct contradiction to frequent economists' claims that technology is the problem (Richard Freeman has a balanced analysis).

It is also important to point out, as Johnston does, that lower tax rates on the 1% have an impact on this. One suggestion the paper makes is that lower tax rates give CEOs and other top managers more incentive to bargain for higher income, so the effect even shows up in pre-tax income. Obviously, lower tax rates make post-tax income even more unequally distributed.