The nuances of the '1 percent'
Last week, we did a story about how likely it is that anyone in the United States will spend even a little part of their lives in the 1 percent. We got a lot of feedback — comments, questions and discussion about income inequality vs. wealth inequality, about the 1 percent vs. the 0.1 percent and about economic mobility. There's so much interesting stuff to talk about, we decided to dive back in to the issue and answer some of the questions you raised.
Q. The story looked at some new research by Mark Rank and Thomas Hirschl that suggests one in eight americans will make it in to the "1 percent" of earners for at least a year of their lives, to which Andrew Tong responded on Facebook: "Perhaps in income. But most certainly not based on net worth!"
So what’s the difference between income and net worth?
Andrew brings up a good point. Rank and Hirschl's research looks at the 1 percent in terms of income. In this case “income” means the money a household makes in the course of a year, mainly through working a job and getting a paycheck. (The data did also count money a family might have inherited in a given year. It did not include capital gains.)
In dollar terms, a household would be in the 1 percent of earners today if it makes more than about $360,000 in a year.
But as Andrew and others pointed out--- income is just part of the story. If you’re interested in the way economic resources in the U.S. are distributed, you have to look at income but also about wealth or net worth. That is, the total money you have in the bank, plus the value of your home(s), car(s), investments; minus all your debts.
To be in the top 1 percent in terms of wealth there is a much higher bar. You'd have to be worth more than roughly $8.4 million.
Q. What do we know about wealth inequality versus income inequality?
@Marketplace So income inequality isn't so much the problem. It's WEALTH inequality.
— Sammy Saber (@SammySaber) May 5, 2014
The short story is that wealth inequality is growing right along with income inequality, especially at the very top. The Economic Policy Institute estimates that in the early 1960s, the wealthiest 1 percent in the U.S. had 125 times the wealth of a median household. In 2010, that ratio had doubled, reaching 288 to 1.
It’s worth noting that data on wealth and wealth inequality is harder to come by than data on incomes. The census measures income, not wealth. Tax returns don’t paint a full picture of a person’s net holdings. Surveys like the Federal Reserve’s Survey of Consumer Finances have trouble capturing the super-rich.
Part of what makes the work of Thomas Piketty and his colleagues Emmanuel Saez and Gabriel Zucman so ground-breaking is that they have developed new ways to measure private wealth and wealth inequality over time. Their method involves taking tax returns, which record the income generated from assets (in dividends, interest payments or rental income), and teasing out the underlying value of those assets.
Q. Does the 1 percent even matter? Or, as Kevin Tyler put it on Facebook, “The 1 percent people are complaining about are probably only about the .01 percent!”
Yes, “We are the 99.99%" might have been a less catchy but more accurate chant for Occupy Wall Street. (Shout out to Carl Swanson for making this point on Facebook).
That’s because the most intense rise in incomes the U.S. has seen in the last forty years isn’t among the top 1 percent, but the top 0.1 and 0.01 percent. Check out this graph, that the Atlantic’s Derek Thompson built out of data from Thomas Piketty and friends’ World Top Incomes Database:
It’s also important to note that the kind of income the tippy top of the 1 percent is earning is mostly not the wage or salary kind that most Americans earn. It’s capital gains-- money made from investments in real estate or in the stock market. And that money is taxed at a lower rate than the plain old “income” you get from a pay check at a job.
There are also growing disparities within the 1 percent of households as measured by wealth (as opposed to income). The rise over the last few decades in the share of total wealth these households own has been almost completely driven by a rise in the wealth of the top 0.1 percent (households with a net worth of more than $20 million today). Those at the “bottom” of the 1 percent have seen their wealth relatively stagnant.
And yet, as critical as the 0.1 and 0.01 percent are to our understanding of wealth and income inequality, we shouldn’t entirely ignore the plain old 1 percent. Even if people at the bottom of this percentile don’t always “feel” rich, it’s worth remembering that if your household makes more than $360,000 in a year—even just a single year—you’ve got things pretty darn good compared to 99 percent of the rest of America.
Q. What about economic mobility? How does the fact that one in eight Americans might join the 1 percent of earners for a year at some point in their lives fit in to the larger question of how possible it is to move up the economic ladder over the course of your life?
This is a really important question. We love our rags to riches stories, but it's a mixed bag here in America. Rank and Hirschl’s research suggests that more Americans than you might expect jump in to the 1 percent of income distribution at some point in their lives, but very few stay there for very long. And it’s more than seven times more likely for a white person to reach the 1 percent than for a person of color.
Then there’s the fact that Americans have a greater chance of living in poverty for a year than living for a year in the 1 percent. In earlier research, Rank found that 40 percent of American adults will spend at least a year below the official poverty line.
When it comes to overall rates of economic mobility, new research from Harvard economist Raj Chetty shows that it’s about as hard to climb the economic ladder in the U.S. as it was 20 years ago. The good news is that today most Americans will live in households with higher incomes than their parents (even after adjusting for inflation). But that’s largely due to the rise in two-earner homes.
And when you look at economic mobility in the U.S. compared to other industrialized democracies, we don’t fare so well. It’s harder for Americans to climb in to a different part of the income distribution than the one their parents were in— say, from the bottom 20 percent to the top 20 percent. If you were born in to poverty in America, the chances of escaping it are half as good as they are in a country like Denmark.