Magazine article The American Prospect

The Wealth Problem

Magazine article The American Prospect

The Wealth Problem

Article excerpt

The postwar boom was a time of broadly shared prosperity, when working- and middle-class people not only enjoyed steadily increasing incomes but were also able to accumulate lifetime wealth. The measures that made possible this wealth-broadening included expansion of homeownership under a reliable, well-governed system of mortgage finance; the development of a retirement system, with Social Security complemented by private pensions; debt-free higher education; and rising real wages. Each of these instruments interacted with the others.

Today, these mechanisms have all gone into reverse. Meanwhile, the capacity of the already-rich, the parentally endowed, and the well-situated to accumulate financial wealth has only intensified. Wealth inequality gets less attention than income inequality, but it is every bit as important. And the two are related. Wealth helps generate income and the capacity to earn income. Decent income increases the capacity to save and to amass wealth. As public systems for wealth-broadening collapse, private wealth within families provides asset endowments to the young and positions the next generation to become upper-income earners like their parents.

Economist Thomas Piketty called overdue attention to wealth extremes in his celebrated book, Capital in the Twenty-First Century. Assembling more than two centuries of data from several countries, Piketty demonstrated something close to an iron law of capitalism: The return on capital tends to exceed the rate of GDP growth. Thus, as a matter of simple arithmetic, wealth becomes ever more concentrated. But the most interesting and least developed part of Piketty's book was his discussion of the mid-20th century--an anomalous period when wealth and income became more equal.

Piketty--more of a virtuoso historical statistician than a political economist--attributed this temporary reversal primarily to accidental and mechanical factors, most importantly the fact that a lot of wealth (largely owned by the wealthy) got wiped out in two world wars and the Great Depression. Thus, wealth distribution became more equal. But that weakening of concentrated capital had political implications. It opened the door to a different constellation of power and to more egalitarian social contracts in the major democracies.

In the United States, policies were put in place that promoted wealth building for the middle and working classes. Now, 70 years later, those policies are eroded and the capital-owning class once again enjoys concentrated wealth and the power that goes with it. What policies might restore balance?

Interestingly, in the early postwar era there was no explicit policy goal or field of inquiry called wealth building. Rather, egalitarian policies in different realms broadened wealth in several mutually reinforcing respects.

A pension provided secure retirement in old age. Financial assets in pension funds were not under the direct control of the pensioner but were held on his (and occasionally her) behalf, and spun off income that was contractually guaranteed. Many pensions also extended to widows. Some critics contended that pensions made it too easy for people to neglect individual savings, but research suggests that the institutionalization of retirement via public and private pension systems has the opposite effect. If you expect to retire, you are more likely to plan for retirement. You become aware that a pension may not be sufficient to maintain your standard of living. By focusing attention on retirement as a social institution, the pension system actually encourages complementary personal savings. In line with that evidence, personal savings rates rose during the postwar boom; they declined only when incomes, job security, and free higher education began collapsing.

Rising real wages made supplemental savings possible. Working- and middle-class families were not spending every nickel of income making ends meet. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.