Chart of the Month – June 2019

Will the US Election revolve around Wealth Inequality?

Some Democratic candidates in the USA are trying to make wealth inequality an election campaign issue. The wealthiest 20% of the population owns 88% of the nation’s wealth while the bottom 60% owns 2%. The bottom 40% of the population is effectively penniless or in debt. This situation has continually deteriorated since 1975. In 2018, the richest 10% held 70% of total household wealth, up from 60% in 1989. The share funneled to the top 1% jumped to 32% last year from 23% in 1989.

It is interesting to note that recessions hurt the net worth of the less wealthy more in percentage terms than the rich. This is not what one would intuitively expect, given that the super wealthy’s net worth is often heavily skewed towards equity prices or to the corporations they own. While equity drops do hurt the wealthy, it is real estate losses that hurt the average person

This situation is important from an economic growth perspective, as spending by the mass middle class is key to growing the economy, not spending by the top 10%. The trickle-down effect from policies that help the elite have not provided lasting improvements to the economy in any of the last three times these policies have been enacted. What has worked is to put more money in the hands of people who will spend it – i.e. the middle and lower classes. It is not coincidental that the U.S. economy was most dominant in the seventies when the wealth gap was at its lowest level.

When one looks at how the middle class has been hollowed out in most developed countries, and perhaps to the most extreme in the U.S., putting more wealth in the hands of the super wealthy, this may help the Democrats as we head into the next election. After all, everybody from the top ten percent down have lost ground relative to the top 10%.

This disparity is likely one of the key reasons that politics has become so polarized in the USA.