Fed Study: Rich Got Richer, Even as Everyone Else Got Poorer

The recent Fed report on household wealth contains yet more evidence of how distorted and unequal the U.S. economy has become.

The big headline around the study, which comes out every three years, has been that the household wealth of Americans dropped by 40 percent between 2007 and 2010, and is now basically where it was in 1992, adjusting for inflation.

Yet not all households took a hit, it turns out. While nearly every single income group saw their median net worth decline substantially, the top 10 percent of households actually saw a slight gain. There are a few reasons for this.

One is that affluent Americans have a more balanced portfolio of personal wealth, with money in both their home and stocks. Home prices may not have recovered from the bust, but stocks have -- and that’s helped to lift the households at the top, who own most of the stock. About half of Americans have no money in the stock market, and thus couldn’t benefit from the market’s rebound.

A second reason is that higher income households are more likely to save money every year, because they have extra cash coming in, building their household wealth even in tough times. The Fed study found that 81 percent of families saved in 2010, compared to 50 percent of Americans smack in the middle of the income ladder.

Third, and related, affluent families have more money lying around because key sources of their income are taxed at lower rates than what most of us pay. According to the Fed study, families in the top 10 percent got 55.8 percent of their income from wages in 2010 -- compared to 80 percent for families in the middle. A third of income for affluent families came from business, dividends, or capital gains -- which is mostly taxed at a lower rate than wages.

What’s striking about the Fed numbers is not just that the rich got slightly richer even during the worst of times; it’s also how the poor are getting poorer, a trend which appears to have pre-dated the 2007 crash according to the Fed report.

Back in 2001, the bottom 20 percent of families on the income ladder had a net worth of $9,600. That figure fell to $8,500 by 2007 and then really took a hit thanks to the crash, falling to $6,200. The income group just above the bottom, the lower working class, also saw a downward wealth spiral during this period: With their net worth falling  from $45,000 in 2001 to $40,000 in 2007 to $27,000 in 2010.

The new Fed data is the latest evidence that inequality is real. These grim stats also underscore why inequality matters, however cheap consumer products at Target may be. Not having assets is dangerous, because it means there is no cushion to fall back on if you lose your job or get sick. And not having assets also puts your kids at a disadvantage, since it forces them to borrow more to go to college.

The wealth gap in America is a bad thing, more serious in some ways than the income gap -- and it’s growing.