Reversal of fortunes as rich become poorer
The rich, as a group, are no longer getting richer. During the past two years, they have become poorer. And many may not return to their old levels of wealth anytime soon.
By DAVID LEONHARDT and GERALDINE FABRIKANT
The New York Times
The rich have been getting richer for so long that the trend has come to seem almost permanent.
They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. The recent news about resurgent Wall Street pay has seemed to suggest that not even the Great Recession could reverse the rise in income inequality.
But economists say — and data are beginning to show — that a significant change may be under way. The rich, as a group, are no longer getting richer. During the past two years, they have become poorer. And many may not return to their old levels of wealth anytime soon.
For every investment banker whose pay has recovered to pre-recession levels, there are several who have lost their jobs and many wealthy investors who have lost millions. As a result, economists and other analysts say, a 30-year period in which the superrich became wealthier and more numerous may be ending.
Just how much poorer the rich will become remains unclear. It will be determined by, among other things, whether the stock market continues its recent rally and what new laws Congress passes amid the financial crisis. At the very least, though, the rich seem unlikely to return to the trajectory they were on.
Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.
Bill Gates, Warren Buffett, the heirs to the Wal-Mart Stores fortune and the founders of Google each lost billions last year, according to Forbes magazine.
In one example, John McAfee, an entrepreneur who founded the anti-virus software company that bears his name, is worth about $4 million, from a peak of more than $100 million.
He will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the crash in real estate and stocks.
"I had no clue, that there would be this tandem collapse," he said.
Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the past six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price. In one ZIP code in Vail, Colo., only five houses sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick.
"We had a period of roughly 50 years, from 1929 to 1979, when the income distribution tended to flatten," said Neal Soss, chief economist at Credit Suisse. "Since the early '80s, incomes have tended to get less equal. And I think we've entered a phase now where society will move to a more equal distribution."
Few economists expect the country to return to the relatively flat income distribution of the 1950s and 1960s. They say inequality is likely to remain significantly greater than it was for most of the 20th century. The Obama administration has not proposed completely rewriting the rules for Wall Street or raising the top income-tax rate to anywhere near 70 percent, its level as recently as 1980. Market forces that have increased inequality, such as globalization, are also not going away.
But economists say the rich will probably not recover their losses immediately, as they did after the dot-com crash earlier this decade. That quick recovery came courtesy of a new bubble in stocks, which in 2007 were more expensive by some measures than they had been at any other point save the bull markets of the 1920s or 1990s.
This time, analysts say, Wall Street seems unlikely to return soon to the extreme levels of borrowing that made such a bubble possible.
Any major shift in the financial status of the rich could have big implications. A drop in their income and wealth would complicate life for elite universities, museums and other institutions that received lavish donations in recent decades. Governments — federal and state — could struggle, too, because they rely heavily on the taxes paid by the affluent.
The best-known data on the rich comes from an analysis of Internal Revenue Service (IRS) returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning 1/10,000th of households was roughly $2 million, in inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5 million.
Big gains
The gains for the merely affluent were also big, if not huge. The cutoff to be in the top 1 percent doubled since the late 1970s, to roughly $400,000.
By contrast, pay at the median — about $50,000 in 2007 — rose less than 20 percent, census data show. Near the bottom of the income distribution, the increase was about 12 percent.
Some economists think the contrasting trends are unrelated. If anything, these economists say, any problems the wealthy have will trickle down, in the form of less charitable giving and less consumer spending.
Other economists say the recent explosion of incomes at the top did hurt everyone else, by concentrating economic and political power among a relatively small group.
"I think incredibly high incomes can have a pernicious effect on the polity and the economy," said Lawrence Katz, a Harvard economist. Much of the growth of high-end incomes stemmed from market forces, such as technological innovation, Katz said. But a significant amount also stemmed from the wealthy's newfound ability to win favorable government contracts, low tax rates and weak financial regulation, he added.
The IRS has not released its data for 2008 or 2009. But Saez, a professor at the University of California, Berkeley, said he believed the rich had become poorer. Asked to speculate where the cutoff for the top 1/10,000th of households was now, he said from $6 million to $8 million.
For the number to return to $11 million quickly, he said, would probably require a large financial bubble. The U.S. economy experienced two such bubbles in recent years — one in stocks, the other in real estate — and both helped the rich become richer.
Stark pattern
One of the starkest patterns in the data on inequality is the extent to which the incomes of the very rich are tied to the stock market. They have risen most rapidly during the biggest bull markets: in the 1920s and the 20 years starting in 1987.
"We are coming from an abnormal period where a tremendous amount of wealth was created largely by selling assets back and forth," said Mohamed A. El-Erian, CEO of Pimco, one of the country's largest bond traders, and the former manager of Harvard's endowment.
Some of this wealth was based on real economic gains, such as those from the computer revolution. But much of it was not, El-Erian said. "You had wealth creation that could not be tied to the underlying economy," he added, "and the benefits were very skewed: They went to the assets of the rich. It was financial engineering."
But if the rich have done well in bubbles, they have taken enormous hits to their wealth during busts. A recent study by two Northwestern University economists found that the incomes of the affluent tend to fall more, in percentage terms, in recessions than the incomes of the middle class. The incomes of the very affluent — the top 1/10,000th — fall the most.
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