The other day, in response to my article about average net worth values, a reader named ‘g‘ left a fascinating comment. As I pointed out in “Lessons Learned From Average Net Worth Values, ” there is currently a huge disparity between the median and mean net worth values in the United States.
For those that need a statistics refresher, the median is the value separating the higher half of the sample from the lower half, whereas the mean is the plain old arithmetic average. So what this disparity indicates is that some fraction of those individual in the upper half of the sample are way, way, way above the median, thereby dramatically inflating the mean. In other words, the distribution of wealth in this country is highly skewed.
While this might not come as a surprise, it’s interesting to look at these same values over time. This is where the aforementioned comment comes in… According to ‘g‘, this is what the numbers look like based on historical data from the Federal Reserve:
1960: Median = $8, 690; Mean = $10, 420 (Median is 83% of mean.)
1976: Median = $13, 549; Mean = $16, 893 (Median is 80% of mean.)
1982: Median = $19, 446; Mean = $26, 259 (Median is 74% mean.)
2004: Median = $93, 100; Mean = $448, 200 (Median is 21% mean.)
As you can see, the numbers have become increasingly skewed over the years. In fact, since 1960, the median household net worth in the United States has increased 10.7-fold, whereas the mean has increased 43-fold.
Any thoughts as to why this is the case?
The rich are getting richer while the poor get poor because they’ve stacked the deck for themselves and against the rest of us. And every time someone tries to excuse their greed with the “I never got a job from a poor man” line, I’m just reminded that it’s these same rich business owners that refuse to pay a living wage, force one worker to do the job of two (or more), slash their benefits… all so they can get even richer off the sweat of our labor.
Fortunately, life is relatively short but heaven is eternal and I won’t have to deal with them there: “Tis easier for a camel to go thru the eye of a needle than for a rich man to get into Heaven.” And we all understand why — even if we won’t admit it.
Ralph,
After reading your post, all I can say is, that “edcation” that your parents paid for, was probably a waste of money!
I hope God can help you, Ralph! I hope you never have to feel the pain and experience the troubles of millions of Americans. Have a heart.
do you work……do you earn a pay check…….if you do…..then you can thank a rich person for creating that bussiness for you to be oble to work……but i do no that jobs come from rich people that create jobs……or if you lucky enuogh to work for the goverment…which everyone nose…thats a hard position to get…and only a majority of people…are able to qualify….I have edcation that I my parnts paid for it for…toopay for welfare to much… pay me more… Ihave no money after taxes…I need more…to much taxes means not working…no more jobs…get degreed..Iwork hard to get degreed, so pay more…everone wants be por ciz it is to easy to be por…son all will be por and cary sign to stkre…al have to do iss no work…to socialist tax…COEs will be broke without bailedouted…Obma have to suprt them…49% not faur to me…por gets to money…to many money to por..six figrus is to litle to have pade house…after deth taxes no money from parnets
The reason for the disparity is found in the progressive tax system. It forces people on the margin to not invest in the education and other investments needed to get into to the top earner bracket… this creates a shortage of such people able to perform these jobs leading to higher real compensation after taxes not less…
From the Tax Foundation website:
“In 2005, the top 1 percent of tax returns paid 39.4 percent of all federal individual income taxesâ€*
Comment:
“So the top 1% already pay nearly 40% of the taxes in this country. Does that sound “reasonableâ€? Does it sound fair?”
————————————————-
Reply:
The Tax Foundation statement is truly meaningless. The important question is, at what rate were the rich taxed? If their effective tax rate was like 1% (due to deductions and whatever other schnanigans their accountants came up with), and even if that resulted in 39.4% of all federal individual income taxes collected, then I think they are not paying their fair share. If the guy changing your car oil is paying 10% income taxes, how is the rich guy paying 1% income taxes reasonable?
This is simple. The issue here is that earned income has a progressive tax while other incomes tend to be much less. For example Capitol gains and interest is tax at a much lower tax rate. This makes it very difficult for “new money” to be built because you have to work so hard to break through that most settle for middle class because they get proportionally less the harder they work! This is then mixed with the level of risk… these papers are always misleading because the top few percent take exponentially greater risks than the rest of us… While in 2004 they where way up today they would be way down! Do the math now that the DJIA is half what it was in 2004 and housing values have plummeted and see who took the hit… Us in the middle or lower class didn’t feel it very much but the upper 10% lost a considerable chunk of their net worth… people don’t account for the level of risk that these high net worth people take… they win big but they lose big too and depending on the years you want to pull out of the data you can write any story you want… I could write the opposite story by selecting different years to site or by defining the values a little different… the real issue is progressive income tax! They must go! Progressive tax is fine in some areas but not on earned income… If i work 80 hours a week I shouldn’t pay a higher percentage in taxes than my lazy neighbor who works 25… thats just stupid… and if I spend 8 years in college when I come out I shouldn’t be in a higher bracket than the guy who has been working for 8 years making money while I was taking loans to better myself… its all stupid… but its not rich versus poor but instead its designing a system where the poor can become rich if they are willing to do the work and progressive income taxes prevents that… almost precludes it all together!
G-
Personal responsibility and Public irresponsibility sound the same yet are very different animals. Unfortunately US stud behind the second one. Well, you get what you deserve. I hope that politicians and few smart CEO’s (Bloomberg was a pleasant surprise) will change the nature of the beast and soon (in my life time) I would be proud to call myself American in the name of my son.
Why politician one may ask, well… bank set the rules and has the cards. Not the players. It’s time bank to start acting like one.
Money is the ability, the fuel, if you wish to live your life meaningfully without remorse. Their volume not always brings expected value. Greed is not good. Unrest is present.
Kitty,
Having to experience “democratic changes†after the Iron curtain fall, being in college and studding both system the one before and the one to come, seeing what the “democracy in transition†did first hand. Thinking of the second amendment and the depression you mentioned. I just suggested my view. “God forbid†as you said. Yet in front my eye is hurricane Katrina and the government reaction. Now think of it in mass scale, for unforeseen amount of time, and all those people armed.
Many politicians talked about disappearing of the middle class, which is the column that holds American economy. Being consumer oriented, that brings us to the thought. “No consumers, no economyâ€, that is how the “credit crunch†problem appeared, (slap it on the card). Lately someone suggested that is the reason of the stimulus package we getting. Yet it is more of a patch then a solution.
I don’t make correlations between education and wealth or income; it is personal for each and every one of us. As well as the policies that government implements change all that in time. That is how the baby boomers have more then we would when we are at the same stage. Paradox is that we are more now then they were; we produce more using less then they did, with much better technologies…yet we have less then them. This led me to my thoughts on the situations.
I’ll give simple example. If a policemen is underpaid what would be his/her interest to protect the law, and how would that affect you? That is why I’m deeply concerned. I saw first hand what happened in Central and East Europe in the last 19 years. And if that would to happen here in US with all arms readily available… I bare very little optimism what it would bring, for neither of us reach or poor. I have little and have little to lose…, you can complete the sentence.
Now what I see in statistic is how much I ought to be paid and worth compare to where I am at the moment. This brings more thoughts that are not pleasant. I wish American students studied the siege of Leningrad, which would give them leverage, and hopefully teach them a lesson of humanity and kindness.
I have been away for a while and came back surprised that my comments have provoked discussion. I stand by my original point – the rich are getting richer on the back of the working class. Call me a Socialist; it doesn’t offend me. The pro-capitalist always fall for the arguments of the rich deserve the wealth and income they acquire justly and they provide value to society. I don’t disagree; those who provide greater value deserve greater reward and assuming it is justly acquired, but at some point the house is too big, the garage of cars is too full, and the conspicuous consumption is too much.
Here are some issues to think about (don’t go check the Limbaugh or Coulter archives for canned responses so quickly).
-France and the rest of ‘Socialist’ Europe is doing just fine with respect to innovation and value production: Airbus, Nokia, Ericcson, etc. etc. People strive for reasons other than money (or at least obscene amounts of money). Clearly as children, we all strived in school and in athletics without direct financial reward. My point is that some people (“A-types”) want to succeed regardless of financial reward. We as a race will always be productive and innovative without the promise of excessive financial prosperity.
-A more progressive tax code, like in the 50s and 60s (vide supra), would be better for the entire country, albeit at the expense of a few. But isn’t that what the Constitution and government is all about? Heard of the, “Social Contract” by Rosseau? The ‘rich’ would still be the richest. We have numerous laws that are counter to what would be considered pro-business or pro-production. For example slavery, would you want to return to slavery, it would good for business? Nonetheless, all of our laws should reflect the moral character of an enlightened society. Which includes paying people, even those ‘flipping burgers’, a living wage. It doesn’t matter if you are more clever, more intelligent, or have more ‘production value’ than someone else; you cannot morally live a life of excess at the expense of another human being.
-If we reverted back to a more progressive tax system a reasonable scenario would include this: instead of corporation boards taking excess profits and paying themselves bonus, they would instead REINVEST into their company or into their workforce – is that so bad? The money wouldn’t vanish, it would be redistributed. If, somehow, the blue-collar worker made more, he/she would spend it (or invest like the ‘rich’). Isn’t spending money good for the economy too, like the ‘rich’ investing? Someone has to buy what the company has made…
-A clear example of another FAILURE of the less progressive of recent past is the loss of US production, outsourcing, and even illegal immigration. All of the above are a direct result in order to maximize profits, and of course maximize senior management income/bonuses, by corporations. I don’t think I need to clarify this…
Nonetheless, the social unrest is coming; or is already here. Workingmen (and women) unite!
PS. The last sentence was thrown in to piss off you Limbaugh/Savage/Beck/Coulter/GW/Romney -loving idiots!
Hey all, sorry to skip out on the convo after making a half-supported statement. 🙂 I made a spreadsheet Friday with some example numbers that just made me blurt out what was on my mind.
What I intended to say wasn’t that say the bottom 5% of people would just go from a positive net worth to a negative one (that obviously wouldn’t change the median) but that rather than the bottom 5% being negative…the bottom 30-40% are negative.
With a somewhat evenly distributed scale from one end of the spectrum to the other (i.e. a bell curve of net worth values) the “hump” was much sharper in the 2004 example I made. It was also further away from the mean.
I’ll try to get my spreadsheet/table posted later to show what I was trying to say. Kinda hard in a comment block. (and I have to run to work now)
Also, looking at this in hindsight, I think maybe this is a POSSIBLE scenario, or maybe just another effect…but it may not be THE reason for the change/difference in numbers. In my scenario, there were definitely some rich people getting much richer!
Hope that helps clear up my statement.
@nick. My point was that poor in America aren’t anywhere near the level that has a potential for social unrest, so it is not an issue. Additionally, net worth is not necessarily correlated with income. Sure, there are more millionaires right now among those with net worth above the median and some new billionairs that weren’t there in the 80s; there is also a lot more of those who are in debt. But are really poor – those on welfare or earning low salaries are really worse off than in the 80s? Is the majority of people with net worth below the median are poor or are they simply those who choose to live beyond their means? Not everyone with low net worth comes from poor families or is uneducated. Some people with low net worth have fairly high salaries and some of those with high net worth have low salaries.
BTW – I got my college education in the US, and while my parents experienced hunger as children during the second world war and my aunt survived the siege of Leningrad as a teenager, I was fortunate enough not to. I simply wanted to point out that examples from French revolution aren’t exactly relevant. Maybe if there is another Great Depression (heaven forbid, though I did hear a guy on TV today predicting it).
Incidentally, we saw the numbers for 1982 then 2004. It’d be interesting to see numbers for say 1990 and 1998 just to see how internet boom and the current housing bubble affected the net worth numbers.
As a student:
In my opionion, it’s all about the intrest rates. Once they go up, the only people who can afford taking a loan are the people who have high-income. At that point the stock market begins to crash, which influences some to invest into stock [if they can afford it] and pray for it to go back up, whereas people who had low-income or lesser income from the start can’t afford a loan, let alone stock. Large companies mature and flourish, and smaller companies, well.. don’t, and it can even result in many of them filing bankruptcy. This results in the huge gap between high-income and low-income. It appears that the more a company can make, the more other companies surrounding try to accumulate as well. If you’re taking large numbers and averaging them out with smaller numbers, of course the equation is going to come out as a higher number. That’s just logic. Correct me if I’m wrong? I could be completely unaware of the bigger picture. I’d like the input.
Rearrange the data all you want, it still doesn’t change what’s happening. Using your version (flipping the ratio) the mean is 120% of the median in 1960 and 480% of the median in 2004. So what do you mean when you talk about wondering about the mean drifting lower?
Growth in the mean has dramatically outstripped growth in the median. And Mr. Debt Beater’s argument about extreme low values pulling down the median doesn’t hold water in a statistical sense. The median is robust to extreme outliers — it’s the mean that would be affected (pulled disproportionatley lower) in his scenario. This would narrow the difference, and then ultimately reverse the pattern, not inflate it.
@nickel:
Having come here to make the same comment as Mr. Debt Beater, I wonder what doesn’t make sense to you about his response. If you rearrange the data to say:
1960: Mean is 120% of Median
etc.
then of course you shift the focus, and you wonder why the mean keeps drifting lower, NOT why the median drifts higher. And then it’s a viable answer that the low end can get much much lower in 2004.
Is there some baseline data you’re using and not presenting here? Like maybe the CPI is up 1000% sine 1960, so you think the median is reacting appropriately but the mean is not? (I doubt that would hold up in a complex economy, but it’s just an example.)
Dear Kitty, or shall I say “Dorogaia tovarish†Kitty…
Yes Americans may not know what hunger in its real meaning is, after all, the last war in US was the Civil one long time ago, They definitely have no Idea of what have had happened in St Petersburg – Russia during the German siege of the city… Apparently you do. That is very good. And yes an American will never understand the meaning of the word “Beriozkaâ€, or what it is to enter store with empty shelves and the only thing for sale to be packets of salt, for everything else having to go to the black market paying with your grandma’s antiquities. American is a lucky man. With that said, it doesn’t make change impossible.
Position in society today is close to back then. Except the immigrants as they are minority and as such casting is put aside in the name of survival, preserving unity of that minor group, such as the one you belong. In 70-80 people who run away fro then “CCCP†were educated and intelligent, there is no surprise that you are now in top 10%. Average American don’t know what “grade book†is or he had to take exams for a seat in Moscow University. Those are two different worlds. “New poor†what do you mean? I’m “new†by your classification, yet I don’t consider myself poor I’m happy with what I have and it is enough for me. Even if I am to fall to by above classification as poor.
Baby boomers will star spending and that would be minus (not necessarily) for economy as the money will go from Soc. Sec. and 401K’s in their pockets, which are theirs to begin with. They were lucky to have more value in their dollars. Compare to today where the value of the dollar is much less then it use to be. Or with other words Poor are poorer now a day, and rich are not much richer as they have to spend more to maintain that status quo. Value has to come from somewhere and that would put pressure on society. You would agree with me that social pressure lead to unwanted and extreme events and obscure situations. You are prime example yourself; would you leave your country if everything was so beautiful and dandy? Change is inevitable. The options are two, let the vent open and realize the pressure or look at the explosion as it occurs.
“And if we not take care of them, soon enough you will be in the same position that was Mary-Antoinette’s head, in the basket. ”
I don’t think you can exactly compare today the time of French revolution. People were actually hungry back then, and one’s position in society was completely determined by one’s birth. How many of the poor Americans actually have any idea what real hunger feels like? Or what a father is ready to do if his son or daughter is crying from hunger?
Additionallly, the numbers don’t tell anything about mobility; the numbers don’t show how many of those who were poor in 1982 are still poor and how many of the poor are actually new poor including recent immigrants from poor countries or young people. Or how many of the currently rich are those who used to be poor in 1982. BTW – I was poor in 1982, I am in top 10% nowadays, much as many of the Russian immigrants who came to the US with me in late 70s early 80s.
I also think that what minimum wage said about baby boomers affects the mean at the same time as those with negative net worth (as Brian said) bring the median down, so I think both have affect on the numbers.
@Minimum Wage
Providing value to society IS what generates wealth, but tucked away in there is the law of supply and demand as well.
What you stereotypically call “thugs” in pro sports are in very short supply. How many people can play as well as Tom Brady, Peyton or Eli Maning, Shaq, or many others? There aren’t many, but there are tens of thousands of teachers.
When a teacher can fill a stadium with 90,000 people willing to pay $100 each to hear a lecture on quadratic equations, they will make the same salary as those “thugs.”
BTW, making a sweeping generalization about those in pro sports is the same as making a sweeping statement about those who don’t make more than minimum wage.
A lot of good points have been made, but there is an interesting number that corresponds with this large increase in average net worth: the ever-increasing number of millionaires in America. As more and more people achieve this milestone, their wealth is going to grow much faster even if they don’t change anything about the way they build it (ties back to the comment about baby boomers), thus causing the mean to rise.
I think the comment about negative net worth can, and does, have an effect on the median net worth. Anyone with any kind of debt is going to have that subtracted off of their net worth, since debt is a negative. For example, if a middle-class household has $300,000 in assets but owes $150,000 on their house, their worth is only going to appear as $150,000. Kind of a “duh” statement, but one that is key to seeing how debt can skew the median downward. Since so many people in the US carry debt, their corresponding net worth values are also going to be skewed downward, thus lowering the median. I don’t have any info on hand to back this up, but I think it’s safe to say that most millionaires or people of very high net worth do not carry debt (as stated in Thomas Stanley’s “The Millionaire Next Door”), so their worth is not dragged down in any way, shape, or form.
In chemistry there is a law, that states that nothing is lost in nature… just change its form. The answer on your question… Are the rich get richer is, YES. Where that wealth comes from is the question to ask.
Fair or not…, hum… There is no fairness in nature. You either learn and survive, or die. Some one gave the example how rich deserve their wealth creating jobs, right? Well I have a question for that guy. After you create a company, can you be all the personal at the same time and make 1 trillion dollars in revenue? Here is the problem in US economy. The big shots forgot that someone has to run the machines in factories, flip the burgers, teach our children, and protects us from crime…. Those are all little guys working hard and earn fair. And if we not take care of them, soon enough you will be in the same position that was Mary-Antoinette’s head, in the basket. History if not learned tend to repeat itself. Soo… for all those who believe in the concrete foundation of the system. I have news for you, you are not alone, so did many other prior to you. They lost, change happens whether you like it or not. That is the nature of life. And the boy who flips the burger deserves respect for doing it.
Greed is not good. Generosity and Humbleness are good. I’m afraid I don’t see much of the second anymore. And that is why the statistics are the way they are.
MW: While the baby boomers are a real phenomenon, that explains the overall uptick in wealth (both median and mean) but I’m not sure that it really addresses the divergence between those values.
Increasing wealth is largely driven by demographics. The baby boomers are moving into their high-wealth years.
We live in a capitalist economy which rewards those that provide value to society.
Thugs in professional sports uniforms provide value to society and teachers don’t?
OK, and now I have to go back to work – lest I find myself a low-income wage earner… Cheers.
Chris…. You almost had me… But then you had to toss in the “They still are getting a bargain out of the deal too.”
American Heritage Dictionary defines ‘bargain’ as: “Something offered or acquired at a price advantageous to the buyer.”
Now, you don’t say what’s being bought for this “bargain” price. But, in my opinion, the government should be providing, in no particular order: national parks, public education, and national security among other things.
Regardless of which of those three we refer to I’d argue the rich not only are NOT getting a bargain, but in fact are getting screwed.
Why? Does a rich individual get any more benefit from national parks, public education, or national security than a poor individual? No. In fact, one could make the argument that the rich make less use of public education than the poor.
So the rich are paying MORE for a service they use LESS. That’s not a bargain in my book… 🙂
Why always the reflexive socialist comments? To be clear – we are talking about raising the capital gains tax from 15% to 25% on the top 1% of America. So get a grip. It was 20% in the 1990s!
I do think that having the top 1% fund 40% of government is fair, since they hold about 35% of the net worth in America. They still are getting a bargain out of the deal too, since they have seen their share of the wealth increases steadily over the past 30 years.
It does get complicated doesn’t it Brion? Yikes!
Chris – your logic that increasing taxes on capital gains won’t lead to the rich moving their money elsewhere doesn’t make sense to me.
We do agree on one thing, just sitting on your money doesn’t make any sense. And the rich won’t – they’ll simply move their money into offshore investments. They’ll still get their rate of return and they’ll do it in such a way to reduce their effective tax rate even further!
The other point you’re failing to make is that in order for the rich to get these capital gains they have to INVEST the money. In other words, they are loaning capital to companies. Capital those companies then use to grow. Growth that then leads to jobs.
You tax their investments too much, they invest elsewhere. They invest elsewhere the cost of capital for companies goes up. The cost of capital for companies goes up and companies produce less (or prices rise). Lower production leads to less jobs. And where do those job losses come from? The lower income jobs. So, one can come full circle (and, yes, i know there’s a million other factors at play in a macroeconomic sense) and argue that increasing taxes on capital gains leads to loss of jobs for the lower income workers for whom your arguing the taxes aren’t fair.
touche 😉
@ Chris:
From the Tax Foundation website:
“In 2005, the top 1 percent of tax returns paid 39.4 percent of all federal individual income taxes”*
So the top 1% already pay nearly 40% of the taxes in this country. Does that sound “reasonable”? Does it sound fair?
Why should the top 1% pay more than the rest of us for the same gains? Just because they made their money work for them? Just because they can live off their capital gains and you (and most of the rest of America) can’t? IN addition, there are plenty of people below the top 1% that live off of capital gains. Should they be penalized too?
And your claim that the rich will just bend over and take it is hilarious! The rich didn’t get that way by bending over, they got that way by being smart and savvy. Sure they won’t pull there money all out on a whim, but you can bet they will look elsewhere to set up companies and create jobs.
If you want to live in a socialist society move to France. Godspeed. I’d rather live someplace that will reward me for creating value for others and if that leads to me getting rich, so be it. In the meantime, I’m not going to pick on the rich just because there is more of us…that’s just unsportsmanlike.
*http://www.taxfoundation.org/news/show/250.html
Please do not jump what is a wonkish conversation into talk about Marx and Communism. We are talking about what is a reasonable share for people to pay to support a government that is responsible for “setting the stage” for generating the wealth.
A stable powerful government = wealth generation.
An unstable government = collapse.
An overly intrusive government = stagnation.
Thus we are looking for what is a “reasonable” share to pay.
I wrote before that the odd numbers comes directly from the top 1% (and even more the top .01%) and the fantastic power of wealth to make wealth. For these people, their money is working for them, yet their taxes at a very low rate compared to work another person might do themselves (CEO to Doctor to welder). I think it would be reasonable to increase the capital gains tax for those in the top 1% whos primary income (and it is massive) comes from just that, the gains their capital provides.
The argument against, is that it would cause people to pull investment from the market but I think that is just not true because as I said before money works harder than anything else. And sitting on your money is the dumbest thing a person can do. So the income from the year might drop say 10%, but you still made more money, with relatively little risk, than any other way possible.
None of this would affect investors 99% and down.
Mr. Debt Beater: Perhaps I’m missing the point that you’re trying to make, but no matter how low the net worth of those on the low end of the spectrum gets (even if it goes into negative territory), it won’t move the median, just the mean. This is just the reverse of the pattern that we’re seeing right now. The mean is highly sensitive to skewed data, the median is not.
Brian, I so agree with you. I grew up in the Soviet Union, so I know from personal experience what “working men unite” leads to: everyone living on welfare: “we pretend that we are working and the government pretend that they are paying us” and constant shortages. I’d imagine poor in America are a whole lot richer than a doctor or an engineer was in the Soviet Union.
Even if you look at Western Europe, you’ll see a lot of problems – higher unemployment, for example.
Hear! Hear! Excellent point Mr. Debt Beater.
I have to admit before I write this post I get quite irritated when people start railing about the rich not paying their fair share.
The ‘working men unite’ phrase you mention was coined by Karl Marx in The Communist Manifesto.
So G, when you say “pre-Reagan days” are you arguing that we should go back to the days of a 90% top tax rate (1951-1963)? Or perhaps a more modest (surely the rich can afford this much) 70% top tax rate we had in the boom-time economy of the 1970’s? Would that be fair?
Perhaps the country should just give socialism a go? That hasn’t worked so well for most countries that have tried it. I’m certainly not in the top tax bracket but I have no desire to give communism a go.
In the end I tend to agree with poster Toby – if you raise the top tax rates too high the rich will just find methods (some legal, some not) to avoid their taxes – that makes us all worse off.
I’ll probably kick-off a whole new discussion with this last point – if you want to make sure everyone pays their fair share then you need to move to a consumption-based model along the lines of the UK’s VAT tax. Everyone pays (with necessities perhaps exempt) for what they consume.
Perhaps the fact that there are millions of people with a NEGATIVE net worth are skewing the median downward with respect to the average.
Back in the 60s it was a lot more difficult for someone to go $100K in debt, so the overall net-worth spectrum was mostly from say -5000 to the millions. Whereas now, the overall spectrum probably ranges from -200000 to the billions.
This shift below the 0 in net worth for millions of people will drag that median downward very far away from the mean pretty quickly.
We live in a capitalist economy which rewards those that provide value to society. The more value you provide, the more you are rewarded. If you start a company that employs thousands you get rewarded a lot. If you flip burgers at McD’s you get rewarded a little. Is that so hard to understand? Why is that a bad thing?
Most people don’t realize that if the “rich” didn’t invest in companies or start their own, the poor/middle-class wouldn’t have jobs. There are plenty of reasons for our government to encourage the rich to continually invest in our economy. If they didn’t, the rest of us would be much worse off then we are. Shouldn’t those risks they are taking be rewarded?
If government policies suddenly turned “anti-rich”, do you think they would shrug and pay their taxes? No! They would move their investments and companies away from the US and that would hurt our economy in a big way.
I believe the theory of Abundance. There is plenty to go around, but you have to provide the value to get your cut. If all you do all day is run a drill press, you are not adding much value. 30 years later your net worth will reflect that…
In our society, capital will always work harder for you than any work you can do yourself. So is it any wonder that the top 1%, and to a greater extent the top .01%, have been growing their net worth at a fantastic pace?
Afferent Input has the best graphing of the data I have seen to date, check it out: link
I think several factors are in play – some of which I mentioned in another thread and some are mentioned by other posters.
1. As above – compound interest. And it was a much bigger factor in late 70s early 80s than today. Early 80s was a period of two-digit inflation. The interest rates were high too, even those you could get on a CD. One could get a 30-year non-callable government bond in late 70s or early 80s for 18%; I remember how I opened my very first CD in 1984 soon after I started working and got 13%. Being young in stupid I only locked it for 6 months; the rate dropped to 11% thereafter, than to 9%. But opening a 10 year CD for 13% would result in really nice gains.
2. 401K and great stock market performace after 1987 crash.
3. Inflated house values. Your equity is part of your net worth. But since the prices went up so much so fast, someone who bought in mid-90s is likely to have a lot less debt and a lot more equity than someone who bought in early 2000s. Additionally, someone who bought in a cheaper area will have a lot less of a gain. Even if you aren’t very rich and bought something small like a one bedroom condo in Northern suburbs of NYC for $90K in mid-90s, your property would be worth 300K today, over 300K in 2004. This is 210K+your downpayment in net worth. Compare it to someone of the same age buying a one bedroom condo in Iowa. Your equity will probably be a lot less. Sure you may have more money outside of your home, but no investment would produce quite as much growth.
4. Growth in college cost that outpaced inflation. Young people now have a lot more debt than before.
There probably more reasons.
An interesting correlation is that the DJIA has increased by 1413% since 1970. People with a higher net worth can afford to invest more, and as such get more $$$.
@Curtis:
I don’t think it’s that simple. Compound interest was just as strong a factor in 1960 as it is today. The difference here is that there’s more principle, either because of greater savings and/or lower taxes.
There was a great series from the NY Times (either 2006 or 2007) about the growing gap between the poor or working class and the rich. The take away from the series was that there were a lot of different reasons: tax cuts for the rich, investment income being taxed at a much lower rate than earned income, the increase in cost of college, reduction in good paying blue collar jobs as manufacturing is moved over seas, reduction in gov. benefits, etc., etc., etc.
I would say the answer is pretty simple… “Compound Interest”.
I’m sure there are MANY factors involved in this, but I would say that a big one that jumps to mind is: 401(k) plans.
These plans have only existed for a relatively short period of American history. Prior to that everyone worked for the same company for 30 years and then took a pension. The divergence between the median and the mean is illustrative of the fact that many people “get it” when it comes to saving for retirement, but the vast majority are underfunded.
There may also be some influence from the tax breaks that occurred in the early 80s which mainly served only to allow those with lots of money to keep more of it.