“Wealth Inequality in the United States”
Simply because you are gifted upstairs does not mean that you can handle a checkbook appropriately or tackle any of the jobs that might make you wealthy. A thorough study conducted by Alvaredo, Facundo, et al. (405), involving 7,000 plus Americans followed from their teen years in the late 1970s, shows that high intelligence guarantees more earning power, but not necessarily more accumulated wealth. Although, the smarter you are, the more income you have, but sadly, for wealth, there is weak or no correlation at all (Wolff 27). This paper will focus on wealth inequality in the United States, highlighting key facts and figures about it and even focus on wealth distribution based on education- why having a smart brain does not automate being wealthy.
To put this into perspective, what is wealth? Its definition and aggregate measures? Well, wealth is put as the difference between assets and liabilities of a person and a current market value of accumulative assets owned by any household net of all their debts (Robertson, Susan 824). According to the International Standards documented in the System of National Accounts- United Nations, 2009, the components of assets include both financial and non-financial assets that are under the custody of the owner and which bring economic benefits to the owner (Robertson, Susan 827).
This definition encompasses all pension wealth, regardless of whether held on individual retirement accounts, pension funds or life insurance companies, except for social security and unfunded defined benefit pensions. Both social security and government transfers are essential for saving decisions, therefore, including social security in wealth is like counting presently value of future Medicare benefits, and even the future government education spending for one’s children. So including such comes with some inherent computational blunders because they don’t have adequately defined market value for these assets (Domanski, et al. 8). However, the concept of wealth does not cover human capital, which is not like non-human capital that can be sold on markets. Their distributions are majorly influenced by various economic forces, which are education and technology for human capital and savings, inheritance, and rates of returns for non-human capital.
Ongoing, it is now clear what wealth entails from the discussions. Nonetheless, the United States has experienced a sharp increase in income inequality since the 1970s, even though the present evidence indicates that wealth concentration has not grown that much. One possible reason behind that is because the bulging variation is a phenomenon of labor income. Literally, this contradicts the swelling top wages and entrepreneurial earnings, so the working category might not have had enough time yet to consolidate a lot of wealth- suggestively because of poor or low saving levels, high taxation from the government or low returns investment returns on assets if they care to have some (Zagorsky, Jay 14). Don't use plagiarised sources.Get your custom essay just from $11/page
Currently, wealth distribution has taken the shape of a “pyramid”- whereby the most affluent families occupy the top by a paltry 0.1%, a decrease from 7% in 1978 (Saez, Emmanuel, & Gabriel 520). Even though 0.1% is quite a small category, it includes approximately 160,000 families having net assets above $20 million in 2012, careful quantification of wealth is essential because of two reasons. First, the citizens view the distribution of economic resources with a toothcomb, because wealth is a little bit complicated since it factors in income from labor and other changing processes that govern its consolidation. The top 0.1% also are essential because they own a considerable share of accumulative wealth and account for a massive percentage of its growth. Between the periods of 1986- 2012, the average American family has experienced an increase in wealth at a rate of 1.9% with a right heterogeneity level (Saez, Emmanuel, & Gabriel 531).
For the bottom of the pyramid, which makes up 90%, there has not been any growth at all, whereas the top 0.1% has enjoyed an increase of 5.3% annually. A clear indication that almost half of the aggregate wealth accumulation has been occasioned by the top of the pyramid (0.1%) (Saez, Emmanuel, & Gabriel 538). Second, within the confines of any asset class, richer households might have different rates of returns compared to the remaining population, specifically to cab tax evasion. Unsurprisingly, the majority of the “small” families at the top of the pyramid have one thing in common- they either dropped out of college or did not attend at all. They are successful, and they are the employers in America. Typically, it is presumed that good education equals to the good life and a great extent, a reasonable wealth. Why is this not the case? Does wealth have a particular affinity for little knowledge? Or is education the ultimate measure of human intelligent quotient (IQ) or ability?
Luckily, several pieces of research have been done that could possibly answer some of the aforethought questions. Zagorsky conducted outstanding research. He collected approximately 7,403 baby boomers in the year 2004 and asked them questions regarding their financial status, including whether they have been declared bankrupt, defaulted bill payments, or wasted any of their credit cards. The responses were thrilling, 18 percent reported to have missed at least a single bill payment, 9 percent reported to have exhausted their credit cards to the limit, and 13 percent said to have filed a bankruptcy form (Zagorsky, Jay 17).
Also, the same group took part in an IQ test in 1980 to cover for their enrollment in the National Longitudinal Survey of Youth. Usually, the Armed Services Vocational Aptitude Battery comprises of ten trials, four of which are: arithmetic reasoning, paragraph comprehension, word, and math knowledge- these are critical intelligence assessment criteria of recruits in the United States Department of Defense. These intelligence scores were compared with the financial data collected in 2004. Every IQ point attracted an increment in income between $202 and $616 every year. This translates to a person of, for example, 130 IQ points earning between $6,000 and $18,500 more per annum than a peer of lesser intelligence. Nevertheless, this annual increment in income did not translate into higher wealth. Instead, people with slightly above average intelligence (105 IQ score) had an accumulative net worth higher than those just a bit smarter (110 IQ) (Zagorsky, Jay 23).
The revelation is that there are possibly many smart people who get into financial whirlwinds, and thus possible financial deadlocks. Alas! Even smart people hardly save. When the same experiment was controlled by inputting variables like race, education, the status of jobs, and even habits like smoking- the gap between IQ and wealth remained the same (Saez, Emmanuel, and Gabriel 530). So, why don’t smart guys perform better financially? Is there any existing relationship between intelligence and rates of saving that has never been explored? Anyhow, the likelihood of missing any payment improves with the IQ score (Saez, Emmanuel, and Gabriel 542).
From the findings, making a lot of money does not require any rocket science. Individuals with below-average income have the same capability of getting wealthy just like their peers with the higher IQ test scores (Saez, Emmanuel, and Gabriel 573). By the mere fact that someone is smart, it does not guarantee to be rich, and it is not surprising that the level of IQ has no relationship with the wealth. Again, being very smart does not provide immunity to running into financial head-on. Although individuals with higher IQ scores are paid handsomely in terms of incomes, there is no scientific relationship between wealth and intelligence and even financial hurdles, not all at the moment! Walking into financial freedom and success requires more than a good income that higher IQ provides, it needs a substantial wealth that can cushion daily turbulences and jabs that life throws at an individual more so after retirement. In any case, income limits an individual’s financial capabilities.
How can high-IQ persons earn higher incomes on average but still afford to have the same or even little wealth than others? The wealth inequality lies in the saving attitude and culture, which is, the less intelligent people have a resilient character in terms of saving the “peanut” they earn, and that gives them equal or higher accumulated wealth than smart fellows. As Domanski, et al. (3) puts it; higher salary income attracts expenditure of the same magnitude to match the financial status.
According to Robertson et al., as of 2016, a college graduate with a bachelor’s degree earned about $30,000 more every year than a high school graduate on average or approximately $500,000 moreover a lifetime (828). Albeit many billionaires appearing on the Forbes magazines have earned one or two graduate degrees that have further increased their incomes. Interestingly, it is after they have acquired their wealth fortunes. It is often said that academic qualifications are more vital for an individual with good working experience.
Furthermore, to bolster this issue of wealth inequality, it is prudent to dissect critical figures and facts inside America’s wealth inequality. First, income inequality has grown- this is a handy pointer in matters of financial well-being. The data of pre-tax income distribution in the United States have shown immersive shrinking of household earnings between 1989 and 2016 (Zagorsky 35). In 2016, the bottom 50 percent of households in the 0-50th percentiles earned incomes of $0 to $53,000, the middle class lying in between 50 percent to 90 percent had revenues falling between $53,000 and $176,000, while the top 10% of the household in the 90th percentile had an income of $176,000 or even above per year (Alvaredo 410). These are the U.S total figures before tax and include wages, interest, food stamps, social security, and any other source of income. The country has grown from $7.12 trillion in 1989 to $12.88 trillion in 2016. However, how this growth is shared has changed over the last thirty years. The top 10% have a considerable share of the pie, whereas the bottom 50% and the middle 50%-90% have a tiny percentage of the cake.
Second, the wealth gap amongst people of color hardly changes. Although there have been some changes, the racial and ethnic wealth gap is unchanging, whether white/ Hispanic or white/black families. According to the data conducted by Robertson and Susan (56), the 50th percentile of the white families was $134,000 in 1989 and $163,000 in 2016, while black families in the same percentile earned $8,000 in 1989 and $16,000 in 2016. Unsurprisingly, the upper quartile wealth of black families did not even reach the 50th percentile of white families.
In the same manner, when comparing white/Hispanic families’ wealth gaps, the median wealth of Hispanic families was $10,000 in 1989 and $22,000 in 2016, which was still lower than the wealth of white families. Worse yet, the upper quartile did not even reach half the 50th wealth percentile of white families (Wolff 12). It is common knowledge that the wealth gap has a date with history, and that can never be downplayed. Family wealth stood at $86.87 trillion in 2016- 89% was owned by the whites, whereas white blacks and Hispanic families collectively owned 3%. This is disturbing given the fast-shifting racial composition of America’s population. In fact, for every four families, one is headed by a Hispanic or a black person, an improvement from 1 in 5 in 1989 (Alvaredo, Facundo, et al. 407).
Third, the wealth gap in terms of education has grown. The study conducted by Wolff revealed that 34 percent of the families had a head with a minimum of a four-year college degree in 2016, a definite improvement from 23% in 1989 (37). This may prove the point that college helps individuals get ahead financially, a sharp contrast of our initial take. True to this statement, families with a four-year degree or higher are averagely doing good; drawn in a pie chart representation, they own more than three-quarters of the wealth pie in 2016, an increment from half in 1989 (Wolff 45). After inflation adjustments, the four-year college graduates and post-graduates have witnessed their median wealth grow in real terms.
Statistically, for every $1 wealth the median white family had, the median black family had 11 cents, and the median Hispanic family had 12 cents in the experimental period of 1989-1998. Interestingly still, for every $1 in wealth the median white family had, the median black had 12 cents, and the median Hispanic family had 17 cents, 2010-2016 (Domanski et al. 5). These are comparative wealth data for non-college graduate families. This trend has been occasioned by reducing the number of white nongrads, whose wealth shrank from $101,000 to $88,000.
So, having captured some of the intriguing details inside America’s wealth inequality. What then causes wealth inequality in the United States? The prime cause is the reducing purchasing power of money (Wolff 41). For over a century, the monetary value has dropped by over 99 percent. An average annual decline of 5 percent. Salaries and wages have not risen in the same magnitude, though. This, in turn, has punished heavily individuals who rely on payments to make ends meet, and their wealth suffocated, whereas those who own assets have made a killing out of this economy.
The second cause is zero-interest-rate policies, which effectively lower the cost of debt (Wolff 30). On many occasions, debt has been associated with poverty, but making it cheap is, in fact, spoon-feeding wealthy corporations, families, and government because it is such a luxurious liability that comes at a minimal cost. And they reap a lot when the interest rate is lowered. Cheap debt lures many people to take more of it, which leads to higher asset pricing, which many “honest” guys who avoided excess debt or even were not qualified to borrow, must incur then. Surely, subsidizing debt is a trap and has been a big-time cause of wealth inequality.
Another cause is economic inequality, which is brought about by differences in income. The contributing forces to this gap in wages are education level, demands, and supply in the labor market, shifting technologies, and personal skills. The education attainment of a person usually corresponds to their abilities and skills- which is equated to the earnings (Saez, Emmanuel, and Gabriel 550). Besides, the skills are priced in the labor market that often changes. But the inequality comes in because both sets of skills are currently being replaced by new emerging technologies, so it is the owners of the firm or company that are getting rich at the expense of the workers.
Albeit, it is an excellent and convenient time to be rich, specifically in the United States. Things are working perfectly well for billionaires and millionaires as their wealth acquisition goes into overdrive. However, this wealth inequality can be fixed, and proper economic order restored to all citizens in the country. How possible is this? Well, by increasing the minimum wage. This has the possibility of bailing almost 4.6 million people out of poverty and at the same time, adding the nation’s general income by about $2 billion. Besides, increasing the minimum wage works in favor of the employment sector and also boosts economic growth (Alvaredo, Facundo, et al. 405).
Also, expanding the Earned Income Tax (EITC) works by positively impacting lives, helping the majority of the children languishing in poverty. This can remove many children out of poverty while offering solid economic support for the informally-employed or poor, more so single parents coming into the active labor force (Alvaredo, Facundo, et al. 407). Additionally, enacting policies that encourage building assets for working families can bridge this gap. Legislating economic policies that promote higher rates of savings and also reduce the cost of asset investments like buildings can work magic by offering financial cushioning to needy families or even middle class. It is on the same note that encourages workers to enroll in some retirement plans and earn a savings credit that can assist income households to compete favorably in the process of wealth generation (Wolff 26).
In conclusion, the paper has exhausted the underlying vital figures and facts concerning wealth inequality in the United States, looking into all possible aspects and even taking the tangent of establishing the relationship between being smart in brains and the probability of having wealth. From the findings, it is evident from the parking lots of the Universities that intelligence and wealth are not linked. University professors are presumably the smartest people. Still, if you look at the University’s parking area, it is sporadic to spot any single high-end vehicle, but rather, low-value cars are littered all over. Intelligence is not a factor in explaining wealth. People with little intelligence should not confine their minds to believe that they are disabled; equally, those with high IQ scores should not even imagine that they have an overwhelming advantage.
Works Cited
Alvaredo, Facundo, et al. “Global inequality dynamics: New findings from WID. world.” American Economic Review 107.5 (2017): 404-09.
Domanski, Dietrich, Michela Scatigna, and Anna Zabai. “Wealth inequality and monetary policy.” BIS Quarterly Review March (2016).
Ohio State University. “You Don’t Have To Be Smart To Be Rich, Study Finds.” ScienceDaily. ScienceDaily, 25 April 2007. www.sciencedaily.com/releases/2007/04/070424204519.htm
Robertson, Susan Lee. “Piketty, capital and education: a solution to, or problem in, rising social inequalities?” British journal of sociology of education 37.6 (2016): 823-835.
Saez, Emmanuel, and Gabriel Zucman. “Wealth inequality in the United States since 1913: Evidence from capitalized income tax data.” The Quarterly Journal of Economics 131.2 (2016): 519-578.
Wolff, Edward N. “Household Wealth Trends in the United States, 1962 to 2013: What Happened over the Great Recession?” RSF: The Russell Sage Foundation Journal of the Social Sciences 2.6 (2016): 24-43.
Wolff, Edward N. Household wealth trends in the United States, 1962 to 2016: has middle class wealth recovered? No. w24085. National Bureau of Economic Research, 2017.
Zagorsky, Jay L. “Wealth and Weight.” The Oxford Handbook of Economics and Human Biology. 2016.