Rising Executive Pay and Breakaway Wealth

The Washington Post ran a lengthy piece this weekend written by Peter Whoriskey on the rise of executive pay as a driver of “breakaway wealth.” From the data and stories he presents, it’s certainly another indication that inequality is making a comeback.

Like other recent exposes, such as Tim Noah’s series in Slate, Whoriskey focuses his inquiry on income. But it turns out this is just one dimension of the inequality picture. A fuller portrait of inequality would also include wealth. When income and assets are concentrated into the hands of the few, it not only makes the economic mobility climb more arduous but it poses a direct challenge to a functioning democracy by undercutting the foundations of meritocracy.

As we look closer at the impact of the Great Recession and the bursting of the housing bubble, it seems likely that the distribution of resources in the years ahead will be skewed even further towards those at the top.

By many standards inequality in America now exceeds the days of the Robber Barons. That was when the richest 1 percent of earners scooped up 18 percent of the nation’s collective income. Today, those at the very top account for 24 percent, while it was below 9 percent back in 1976. The Great Divergence (a Krugmanian phrase) corresponds to recent years when more than 80 percent of the total increase in income went to the top 1 percent, and when productivity rose around 20 percent, wages were stagnant for the majority of workers. That hardly seems fair.

In 2007, the latest year when data from the Federal Reserve was available, the richest 1 percent of households owned almost 34 percent of the nation’s wealth. This surpassed the concentration of income by over 40 percent. Further, this amassed wealth is greater than that held by the bottom 90 percent. Perhaps most revealing is the fact that the bottom half of the population controls such a paltry share, owning a collective 2.5 percent of the country’s total wealth. Gains in wealth which occurred during the mid-naughts (the 2000s) largely flowed upward. Those in the top ten percent saw their assets rise 24 percent between 2001 and 2007, far outpacing gains of those farther down the ladder. The result is a concentration of wealth at unprecedented levels. Families in the top 1 percent own over 50 percent of all stocks, bonds, and other securities. At the tippy top, the levels of wealth concentration have been even more extreme. The total net worth of the Forbes 400 (the crème de la crème) rose from $502 billion in 1995 to $1.6 trillion in 2007.

To be sure, the recession has had an impact. Initially, the bursting of the housing bubble and the stock market tumble momentarily stemmed the wealth inequality tide. Economists with Fed estimated that the decline in assets prices associated with the recession have reduced the net worth of the typical family by almost 18 percent from its 2007 peak. The assets of the Forbes 400 dropped to $1.3 trillion in 2009. Hardly a calamity, and most likely it has been a short-lived decline, since security prices have increased in the past year and a half so many of the losses have been recouped.

The same can’t be said for most households, where home equity was the largest item on the family balance sheet. Declining home values and the spreading wave of foreclosures will depress housing prices for the foreseeable future. This in turn will make it difficult for families to rebuild their portfolios. The current divergence between housing values and security prices will be one of the mains drivers separating the middle and upper-middle from those at the very top. This means inequality is going to take a different form than it did in previous periods. Without dramatic changes to these markets, these trends will only compound the extent of wealth inequality for years to come.

Previous recessions have disproportionally impacted minority families. For instance, during the 1999-2001 economic slowdown, median wealth dropped 27 percent for minority households but grew by 2 percent for white families. That history does not bode well for the future, especially as minority families had larger shares of their assets held as housing equity and are more likely to live in communities hard hit by foreclosures and housing price drops.

To lower runaway inequality, wages and incomes will undoubtedly need to rise, but we also will have to focus on the overall distributions of wealth and assets. Not only does the excessive concentration of wealth and power make collective action more difficult but it drains resources from other segments of society. Perhaps more significantly, there are real and tangible upsides for families that are able to accumulate small pools of wealth. These assets can serve as a stock of resources to mitigate risks during times of economic volatility and can be invested and deployed productively to produce returns down the line. Unfortunately, it seems as though the breakaway wealth at the top makes it more difficult for families art the bottom to jumpstart their own wealth building process.