How Did America's Wealth Inequality Reach This Level of Toxic?

The following is an adapted excerpt from the new book Toxic Inequality: How America's Wealth Gap Destroys Mobility, Deepens the Racial Divide, and Threatens Our Future by Thomas M. Shapiro. Copyright © 2017. Available from Basic Books, an imprint of Perseus Books, LLC, a subsidiary of Hachette Book Group, Inc.:

In recent years, as living standards for many families have declined and productivity, income, and wealth gains have flowed to the very top, a new conversation about inequality has emerged in the United States. The Occupy Wall Street movement, which began in the fall of 2011, splashed inequality across the front pages and provided space for discussions about historically high income and wealth disparities and their causes. The movement pitted the wealthiest and most powerful 1 percent against 99 percent of Americans. Thomas Piketty’s best-selling 2014 book, Capital in the Twenty-First Century, brought attention to a different kind of inequality with a focus on capital. Yet many popular and academic accounts of inequality, spurred by media coverage and the emerging national discourse, continued to focus on income disparities, economic class, and the mega-rich. A pre-occupation with income led to an insufficient understanding of the new inequality that left wealth out of the picture. President Barack Obama provided perhaps the crowning moment in this new public attention to economic inequality when he proclaimed in a December 2014 speech that inequality “is the defining challenge of our time.” But the president’s speech referenced income inequality eleven times and wealth inequality once. Leaving wealth out of the conversation is a crucial mistake, giving fodder to those who would make personal poverty the result of personal failings.

Wealth inequality in the United States is uncommonly high. The wealthiest 1 percent owned 42 percent of all wealth in 2012 and took in 18 percent of all income. Each year the Allianz Group, the world’s largest financial service company, calculates each country’s Gini coefficient—a measure of inequality in which zero indicates perfect equality and one hundred perfect inequality, or one person owning all the wealth. In 2015, the United States had the highest wealth inequality among industrialized nations, with a score of 80.56. Allianz dubbed the USA the “Unequal States of America.”

Wealth concentration has followed a U-shaped pattern over the last hundred years. It was high in the beginning of the twentieth century, with wealth inequality reaching its previous peak during the Depression, in 1929. It fell from 1929 to 1978 and has continuously increased since then. By 2012, the share of wealth owned by the top 0.1 percent was three times higher than in the late 1970s, growing from 7 percent in 1979 to 22 percent in 2012. The bottom 90 percent’s wealth share has steadily declined since the mid-1980s.

The rise of wealth inequality is almost entirely due to the increase in the top 0.1 percent’s wealth share. The steady decline in the bottom 90 percent’s wealth share has struck middle-class families in particular. Half the population has less than $500 in savings.

Wealth is not just a matter of money. Wealth is also about power, status, opportunity, identity, and self-image. Wealth confers transformative advantages, while lack of it brings tremendous disadvantages. A family’s income reflects educational and occupational achievements, but wealth is needed to solidify these achievements to build a solid foundation of economic security. Wealth is a fundamental pillar of economic security, and without it, hard-won gains are easily lost.

The explanations for economic inequality are many. One prominent line holds that individual values and characteristics either promote or hinder achievement and prosperity. Inequality, in this view, results from poor people’s laziness and lack of work ethic, the decline of traditional marriage, an influx of unskilled, uneducated immigrants, and dependence on welfare. Our interviews contradict such arguments—the people we spoke with, rich and poor, had broadly similar values and aspirations—and reveal instead the importance of policy and institutional factors. Other theories focus on such factors as market forces in a globalizing economy, technological change, policies, and politics.

To take a different tack, we must understand wealth and income inequality together with racial inequality. Despite recent attention to racial disparities in policing, mass deportation, persistent residential segregation, attacks on voting rights, and other manifestations of racial injustice, the conversation about widening economic inequality largely leaves out race, as if that gap’s causes, its harshest consequences, and its potential solutions are race neutral. Whether they focus on the widening gulf between the very top and various segments further down the distribution ladder, on the fortunes of the bottom 40 percent, on the dwindling of the middle class, or simply on the growing share garnered by the best-off, traditional accounts emphasize class and economics as the central (and sometimes only) explanation. As a result, much of our national discourse about inequality sees disparities as universals that impact all groups in the same ways, and many of the policy ideas proposed to address it fail to recognize the racially disparate distributional impact of universal-sounding solutions. Recent movements such as the Color of Change, the Dreamers, and Black Lives Matter are vigorously trying to recenter the inequality conversation to include race, ethnicity, and immigration. I have been inspired and heartened by the new public conversation about inequality. At the same time, I am frustrated that once again it looks like attention to class is trumping a reckoning with race.

For it is crucial to understand that the trends toward greater income and wealth inequality are converging with a widening racial wealth gap. The typical African American family today has less than a dime of wealth for every dollar of wealth owned by a typical white family. The civil rights movement and the landmark legislation of the 1960s helped to open educational and professional opportunities and to produce an African American middle class. But despite these hard-won advances, as a study following the same set of families for twenty-nine years shows, the gap between white and black family wealth has widened at an alarming pace, increasing nearly threefold over the past generation (see Figure 1.1). Looking at a representative sample of Americans in 2013, the median net wealth of white families was $142,000, compared to $11,000 for African American families and $13,700 for Hispanic families. This racial wealth gap means that even black families with incomes comparable to those of white families have much less wealth to use to cushion unemployment or a personal crisis, to apply as a down payment on a home, to secure a place for their families in a strong, resource-rich neighborhood, to send their children to private schools, to start a business, or to plan for retirement.

In short, the basic pillars of economic security—wealth and income—are today distributed vastly inequitably along racial and ethnic lines. African Americans’ historical disadvantage has become baked into the American economy. African Americans are effectively stymied from generating and retaining wealth of their own not simply by continuing racial discrimination but also by senseless policies that protect existing wealth—wealth that often originated at times of even more intense racial discrimination, if not specifically from racial plunder. Race and wealth have intertwined throughout our nation’s history. Too often missing in today’s dialogue about inequality is this binding race and wealth linkage. Failure to tackle the nexus of race and wealth will lead, at best, to only small ameliorations at the worst edges of inequality.

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Figure 1.1  Median Net Wealth by Race, 1984–2013

The phrase “toxic inequality” describes a powerful and unprecedented convergence: historic and rising levels of wealth and income inequality in an era of stalled mobility, intersecting with a widening racial wealth gap, all against the backdrop of changing racial and ethnic demographics.

I call this kind of inequality toxic because, over time and generations, it builds upon itself. Wealth and race map together to consolidate historic injustices, which now weave through neighborhoods and housing markets, educational institutions, and labor markets, creating an increasingly divided opportunity structure. So long as we have entrenched wealth inequality intertwined with racial inequality, we cannot even begin to bend the arc toward equity.

Toxic inequality is also noxious in that it makes these challenges harder to tackle. High levels of material inequality are inherently destabilizing, heightening social tensions. Janet Yellen, chair of the board of governors of the Federal Reserve System, has warned that economic inequality “can shape [and] determine the ability of different groups to participate equally in a democracy and have grave effects on social stability over time.” Thomas Piketty argues that extremely high levels of wealth inequality are “incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies” and warns that a drift toward oligarchy is a real danger. The new inequality is especially politically poisonous because most people of all races feel stuck in place, finding it harder to believe that hard work, sacrifice, and innovation are going to pay off and lead to a better life. People are apt to look for someone to blame, and America’s changing demographics encourage racial division, resentment of other groups, and prejudice. These forces have complicated economic policymaking throughout our history, but they are especially dangerous today, given the urgent need to address the particular economic disadvantages facing people of color.

We are just beginning to understand one further dimension of toxic inequality: a phenomenon we might call “toxic inequality syndrome.” Are there emotional and even physiological consequences for families and individuals exposed to repeated, persistent economic trauma, frustrated ambitions, and cumulative downward spirals? We know that there is a strong relationship between adversity and social outcomes throughout the life course, with greater frequency of adverse events leading to worse outcomes. One adverse event increases the likelihood of a cascade of other stressful and traumatic events. Research has documented the negative impact of a wide variety of stress-inducing events, including community violence, accidents, life-threatening illnesses, loss of economic status, and incidences of racism. We also know that financial resources shield families from economic and social trauma, lessen the impact of some trauma, enable more rapid recovery, and reduce the risk of subsequent adverse events. Yet many of the families we spoke to experienced multiple forms of adversity—foreclosure, violence, unsafe neighborhoods, incarceration, disability, sudden or chronic family illness, family breakup, unemployment or loss of wages, declining living standards—without adequate wealth resources and without the sorts of family, institutional, community, or policy support that can also foster family resiliency.

America’s response to toxic inequality will set our future course for generations. The current magnitude of inequality robs the nation of human potential and promise, sapping aspirations and distorting futures. Earned achievements have become uncoupled from financial rewards and personal well-being. Frustrated ambitions and stalled social mobility foment racial anxieties. Without bold changes, we will keep heading toward greater inequality and become even more polarized along class and racial lines. The tiny segments of the population that are doing well will continue to do so, and the vast majority will try even harder just to stay in place. The rich and powerful will continue to write rules that protect and expand their vast advantages at the expense of those struggling to keep pace, especially younger adults and families and communities of color. As differences magnify, those groups facing the brunt of inequality, stalled mobility, and lost status will more critically interrogate the legitimacy of governmental and economic systems. Such an interrogation of deep structures is necessary and productive as long as it uncovers drivers of inequality. However, an explanation that does nothing more than pander to racial, ethnic, and class fears will short-circuit solutions. To avoid this bleak future and bend current trends in the direction of shared prosperity, we must transform the deep structures that foster inequality. Policy solutions must be bold, transformative, and at a scale sufficient to reach the families and communities most affected by toxic inequality.

Adapted excerpt from TOXIC INEQUALITY: How America’s Wealth Gap Destroys Mobility, Deepens the Racial Divide, and Threatens Our Future by Thomas M. Shapiro. Copyright © 2017. Available from Basic Books, an imprint of Perseus Books, LLC, a subsidiary of Hachette Book Group, Inc.