For Some in the Middle Class, Net Worth Slumps a Staggering 43%

It’s not only income inequality that’s on the rise, it’s also wealth inequality

A new study shows a disturbing increase in wealth inequality in America.

Written by Hudson Institute scholar John Weicher, a former assistant secretary for housing at the Department of Housing and Urban Development, the study compares the distribution of wealth from 1983 to 2013, using data from the Federal Reserve’s Survey of Consumer Finances. The survey, which collects information about assets ranging from homes to equity to stamp and coin collections, are published every three years.

Weicher is one of the nation’s foremost authorities on the distribution of wealth, and this study is the latest in a series analyzing the Federal Reserve’s data.

Wealth is easily confused with income, but the two are by no means the same. Income is what people earn — it is a flow of incoming value. Wealth is a stock of value. The arguments about widening income inequality have, up to now, not applied to wealth. But the newest Federal Reserve survey shows dramatically widening wealth inequality.

From 1983 to 2007, wealth in the United States tripled from $24 trillion to $73 trillion, adjusted for inflation, and the level of inequality stayed about the same. But the Great Recession brought a decline in wealth and an increase in inequality.

Between 2007 and 2010, wealth declined from $73 trillion to $62 trillion, and then rose slightly to $65 trillion in 2013. While all income classes saw lower levels of wealth, middle-income Americans were hit the hardest, mostly because of declines in home ownership and the value of their homes.

The rate of homeownership for the middle 10th of the income distribution declined from 85% to 77% between 2007 and 2013, and the value of those individuals’ home equity declined by 48%. Their net worth declined by 43%.

Potential solutions

What can be done to repair the housing sector, the main cause for the increase in wealth inequality?

One key problem with housing is the government’s push to subsidize mortgage risk. As Columbia University professor Charles Calomiris showed in a briefing in Washington last week, the subsidization of housing finance risk has always been, and continues to be, a major threat to financial system stability.

Powerful political interests lobby for real-estate lending to be sponsored by the government and allow them to operate on small capital margins. In addition, they encourage mortgage lending mandates, such as those in the Community Reinvestment Act, that require Fannie and Freddie to target low-income borrowers.

Calomiris proposes phasing out Fannie Mae and Freddie Mac and going from a required down payment of 3% to a larger amount of 20%.

Rather than subsidizing lending, he suggests helping low-income individuals to lock in longer-term interest rates, so they are not at risk of being affected by increases in the cost of debt.

In addition, Calomiris proposes promoting homeownership through a means-tested matching down payment rather than through subsidized rates. This is done in Australia, where everyone can receive a $7,000 first-time homebuyer subsidy. This makes their home more affordable, stabilizes leverage ratios, and gives people a stake in their homes and communities.

On a means-tested basis, we could help first-time buyers make their down payment. That would be rewarding thrift. We could also give special tax deductions for people who put money aside for their house. These measures would subsidize housing without subsidizing leverage.

Lower taxes, fewer regulations

It goes without saying that the most important way to reduce wealth inequality is to increase economic growth so that middle-class individuals can get better-paying jobs and move up the income ladder. This allows them to buy homes and build home equity; pay off student loans; and purchase vehicles, all of which are important elements of the Fed’s Survey of Consumer Finances.

This means that President Trump and Congress should accelerate tax and regulatory reform to get the economy toward a higher growth rate, rather than the sub-par 1.9% rate in 2016. More income will lead to more wealth, reducing the inequality. Then perhaps the distribution of wealth will return to historical norms.

This piece originally appeared in WSJ's MarketWatch

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Diana Furchtgott-Roth is a senior fellow and director of Economics21. She had previously served on the transition team for President Trump. Follow her on Twitter here.

This piece originally appeared in WSJ's MarketWatch