Solving the Mystery of the Richest Americans' Missing Wealth
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The United States has been regularly counting people, via the Census, since 1790. But the federal government didn’t start counting the dollars in people’s pockets, with any regularity, until 1983 when the Federal Reserve began conducting a “Survey of Consumer Finances.”
This Fed survey, now conducted every three years, tallies just how much family wealth sits in the United States and who holds it. The Fed delivers all this info in a neat little summary report that makes comparing the wealth of America’s poor, average, and affluent families a relatively easy undertaking.
But this Fed report doesn’t tell us much about America’s truly rich. These rich remain fairly invisible, lost in a broad “top 10 percent” category that includes plenty of families few Americans would consider exceptionally wealthy. In the Fed’s most recent Survey of Consumer Finances wrap-up, released in February, this top 10 percent extends down to families that make $140,000 a year.
To the rescue comes Arthur Kennickell, the chief of the Fed’s survey unit. Over recent years, Kennickell has been producing an analysis of the Survey of Consumer Finances data that isolates out the wealth of the top 1 percent, a group most all Americans would define as rich. His latest analysis has just become available online.
In 2007, the year the new Survey of Consumer Finances data cover, a family needed to sport a net worth of at least $8.3 million to enter the nation’s richest 1 percent. Together, these top 1 percent families held a collective net worth of $21.9 trillion, $3.5 trillion more than the net worth of all the families in the nation’s bottom 90 percent combined.
These numbers actually understate the wealth of America’s top 1 percenters. Each Fed Survey of Consumer Finances, as Kennickell notes, “specifically excludes” from the survey sample any of the people wealthy enough to make the most recent Forbes 400 list of America’s richest. In 2007, the Forbes 400 held a collective net worth of $1.5 trillion.
But in 2007, even without the fortunes of the Forbes 400, the top 1 percent still held a whopping 33.8 percent of America's total family wealth. Families in the bottom 90, all together, only held 28.5 percent.
Robert Frank, the Wall Street Journal reporter who covers the paper’s wealth beat, finds these numbers deeply troubling — and not just for the obvious reason that they reveal a staggeringly unequal America. For Frank, the Fed numbers on the top 1 percent’s wealth just don’t make sense statistically.Here’s why. According to the Fed, the nation’s top 1 percent in 2007 held roughly the same share of the nation’s family wealth as the top 1 percent held in 1995. Indeed, the 2007 share for top 1 percent — 33.8 percent — runs a bit under the 34.6 percent top 1 percent share in 1995.
The Fed’s numbers on income, curiously, show a quite different dynamic. Since the mid 1990s, the share of the nation’s family income going to America’s top 1 percent of wealth-holders has risen substantially, from 11.5 percent of total family income in 1994 to 16.4 percent in 2006.
How can this be? How can the nation’s wealthiest be grabbing an ever greater share of America’s income and not show an ever greater share of America’s wealth?
The answer could be a statistical quirk. Maybe the Federal Reserve Survey of Consumer Finances just isn’t uncovering all the wealth the wealthy hold.
That's possible. The IRS, after all, can send people to jail if they don’t honestly report all the income they’re making. Fed researchers, to collect wealth data, have no such power. These Fed researchers have to rely on the families they survey to respond to questionnaires, and, as Kennickell points out, “nonresponse in surveys often appears to be higher among wealthy families.”
But Fed researchers do take eminently reasonable statistical steps to minimize this nonresponse factor. So what other explanation could account for Robert Frank’s “wealth-and-income puzzle”?
The Fed could be overestimating the wealth of average American families. Any overestimating of average household wealth would, of course, reduce the percentage share of America’s total wealth that the rich hold.
New York University economist Edward Wolff suspects this may indeed be happening. The Fed may be overestimating the wealth of average Americans, he notes, by not taking into account Corporate America’s massive switch from defined-benefit to defined-contribution pension plans.
The Wall Street Journal’s Robert Frank has still another explanation for the top 1 percent statistical puzzle, an explanation that no one, he concedes, can yet prove.
Those huge incomes that go into rich people’s pockets aren’t translating into a greater share of the nation’s wealth, Frank postulates, because the rich have been busy spending massively on “McMansions, yachts, planes, Gucci bags, bottles of Mouton Rothschild, and $300,000 watches.”
The rich, in other words, have been consuming, not investing, a huge chunk of their incomes. Now some of this consumption may add to a rich person’s net worth on paper. A yacht, for instance, can appreciate in value over time. But much of this consumption — a $2,632 ticket to a ballgame at the new Yankee Stadium, for instance — simply subtracts from a rich person’s net worth.Could America’s rich actually be consuming, on personal pleasures, enough to put a statistically significant dent on their share of U.S. family net worth? Maybe. We have no reliable national data on rich people's personal consumption. But every so often we do get a glimpse at the immense fortunes America’s rich are regularly spending to be all they can be.
One such moment came last month in the Connecticut divorce trial of former United Technologies CEO George David — the nation's top-paid CEO in 2004 — and his 36-year-old former investment banking spouse, Marie Douglas-David.
Douglas-David is suing for $57 million more than her ex is offering. She needs that extra, her lawyers contend, to cover her basic expenses. These expenses, to be precise, run $53,000 a week, a sum that covers, among other outlays, “$4,500 a week for clothes, $8,000 for travel, and $1,500 for eating out.”
How typical might Douglas-David be? We can't know for sure. The puzzle of our top 1 percent's static net worth share, for now at least, must remain unsolved. Should that bother us? Does this puzzle, in the final analysis, really matter?
Sure does. The puzzle that the Wall Street Journal's Robert Frank has identified carries much more than just statistical significance. The entire rationale for cutting taxes on the rich rests, after all, on the notion that the wealthy will “invest” the extra dollars tax cuts deliver unto them. These investments, the argument goes, will strengthen the core economy and leave all of us better off.
But if the rich are frittering away their fortunes, they’re not creating wealth, they’re burning through it. And that, advises the Journal’s Frank, ought to be “a worrying sign for those who hope that the rich are sitting on the sidelines with loads of accumulated wealth, ready to lead us into recovery.”