Total household wealth equals the value of assets, including financial assets and housing, minus the value of debts. The The Congressional Budget Office has just published “Trends in the Distribution of Family Wealth, 1989 to 2019(September 2022). Here are some of the themes that caught my attention.
In 2019, the total family wealth in the United States, that is, the sum of all families’ assets minus their total debt, was $115 trillion. This amount represents three times the total real family wealth in 1989. Measured as a percentage of the country’s gross domestic product, the total family wealth increased from around 380% to around 540% over the 30-year period from 1989 to 2019, says the CBO. … From 1989 to 2019, the total wealth held by families in the top 10% of the wealth distribution increased from $24.3 trillion to $82.4 trillion (or 240%), the wealth held by families from the 51st to the 90th percentiles
increased from $12.7 trillion to $30.2 trillion (or 137%), and the
the wealth held by families in the bottom half of the distribution rose from
$1.4 trillion to $2.3 trillion (or 65%).
There are several points worth stopping here. First, the wealth/GDP share fluctuated but remained in the long run around 360% of GDP from the 1950s through the early 1990s. Indeed, I remember being taught in the 1980s that, for quick and dirty calculations, wealth/GDP could be taken as a constant. But since then, the wealth-to-GDP ratio has taken off, not just in the United States but around the world. Part of the reason is soaring stock prices; part is the rise in real estate prices. One of the major questions for financial markets is whether this higher wealth-to-GDP ratio will persist: iIn particular, to what extent is it the result of the gradual decline in interest rates since the 1990s that has contributed to raising asset prices, and a return to interest rates more in line with the levels historical events cause asset prices to collapse permanently?
Second, wealth growth has not been equal: households at the top of the wealth distribution now hold a larger share of the wealth than in the past. The CBO points out that differences in wealth are correlated with many factors, such as age, marriage and education. But while these factors can help explain differences in wealth at any given time, it’s not clear to me that changes in these factors can explain growing wealth inequality. Instead, my own feeling is that growing wealth inequality is a version of a “Matthew effect,” as economists sometimes call it. In the New Testament, Matthew 13:12 reads (in the New King James Version): “For he who has, more will be given to him, and he will have abundance; but whoever does not have, even what he has will be taken from him. In the context of wealth, those who were already somewhat invested in the stock market and housing, say, in the mid-1990s, benefited from the asset boom in those areas; those not already invested in these areas were less likely to grow their pre-existing wealth.
Third, it should be remembered that for many people, especially young and middle-aged adults, their main wealth lies in their own skills and training – their “human capital“…which allows them to earn higher salaries. As an example, imagine a newly appointed lawyer or doctor, who may have significant student debt and has not yet had the chance to accumulate much financial wealth, but their skills and qualifications mean that the broader personal wealth including human capital that will generate decades of future income is already quite high.
Finally, the pattern of wealth accumulation over the life cycle seems to be changing. In this graph, note that people born in the 1940s have significantly more wealth when they reach their 60s than the previous generation of people born in the 1930s. However, the generation born in the 1950s is on a lower trajectory : that is, their median wealth in their late 50s is less than what was accumulated by the generation born in the 1940s. As you work up to more recent generations, each line is lower than that of the previous generation: that is, each generation accumulates less wealth than the previous generation at the same age.
The CBO writes: However, for cohorts born since the 1950s, median wealth as a percentage of median income was lower than that of the previous cohort at the same age, and median debt as a percentage of median assets was higher.
The CBO report also offers updates during the first quarter of 2022, when total wealth and the stock market held up fairly well during the pandemic recession. But since April, US equity markets are down about 20%, and the above totals and distributions should be adjusted accordingly.