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Who Is Responsible for the Growth in Wealth Inequality?

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Grow Your Wealth

A study came out recently which revealed that more than half of the income taken in the States during 2012 was made by the top 10% of earners. The same study also revealed that the top 1% gobbled up 95% of the income gains since the end of the Great Recession. There are a number of reasons why we’re seeing this come about and I am not trying to solve all the perils of wealth inequality in a singular blog post, as much of it is well beyond me, but I do want to take a stab at considering what might be beneath this change.

While it might be easy to point fingers and lay blame at the causes behind the growing disparity between the top 1% or 10% and the rest of “us,” I think it should cause us to look at what we can do in light of it and how we can seek to mitigate the issue of wealth inequality.

Where Has the New Growth Come From?

 

It would be easy to look at the top earners and think they’re simply working the system to make more bank and leave the rest of us behind. I am not deluded enough to think that there is not some of that going on, but I do believe that some of the gains made by the top 1% have been on the up and up. According to the study, a large chunk of the top earners garnered much of their gains through the stock market through either having access to “easy money” thanks to the interest rate climate or locking in gains last year to avoid higher tax rates this year.

That said, there is a growing sentiment that much of the reason why we have seen the growth in wealth inequality is because many in Washington have made it easier for those with money to make even more money. The argument goes that with higher incomes, individuals have access to better rates for loans, lower fees on products and overall better access to products that’ll help them grow their money.

That’s also not to mention that the top 10% of households, in terms of wealth, own reportedly 90% of the stock market. It’s hard to look at that and not think that the system is rigged towards the “upper crust” and slighted against the rest of us – it really is. However, I’d like to dig a little deeper on the wealth inequality as opposed to starting a hate fest on the rich.

What Does the Top 1% Look Like?

 

I admit, it can be hard to not disparage the top 1% and blame them entirely for our growing wealth inequality. Towards that end, I’ve seen numerous studies that have shared some of the numbers behind the top earners and it helped me reframe my outlook a little. In terms of income, this is what the top earners look like:

  • The top 1% of earners made $394,000 or more in pre-tax income last year
  • The top 10% of earners made $114,000 or more in pre-tax income last year

I look at that bottom number and know that here in Omaha, you can do quite well at $114,000 a year in income, but take that same amount of money and put it in San Francisco or New York and it definitely would not go as far. My point is that wealth, on one level, is relative and that there may be more at play then just the income. This of course does not touch on the uber rich though which really is a separate topic altogether, but a simple look at the richest people here in the States indicates that many made their own way or at least inherited it from someone who did.

Wealth Inequality is Simply a Reality

 

On one level, reading news like this pains me to see the growing wealth inequality as I feel that one of the results is that it’s broadening the gulf between the haves and have not’s and is making it tougher for middle class families to eek out some sort of wealth accumulation. The shrinking middle class is a prominent challenge that we’ll continue to face as a society and one that hopefully improves over time as opposed to widening.

Not to dismiss that very important issue, but looking back, wealth inequality is something we have always dealt with and will likely always deal with on some level. Sure, it has ebbed and flowed over the course of our history, but it’s something we’ve always had. Does this make me happy as an individual to see? Certainly not, but it is something that is an unfortunate reality of life and pushes me to continue to look for ways to create wealth for our family and encourage others to do so as well.

What Can or Should Be Done About This?

 

The topic of wealth inequality can definitely be a political topic, and it’s not really my desire to get into the politics behind it. With that in mind, should we bury our heads, throw our fist up at the top 1% and bemoan the state of affairs? While the jaded side of me says, “sure, go for it” I don’t see how that can benefit us as a society.

What it does motivate me to do is to continue the fight to encourage financial literacy in our society. The reading I have done on this topic largely points back to the reality that those who have money have it because they make their money work for them. My desire is to help others make their money work for them as opposed to being enslaved to it. I know that can be easier said than done, but I do believe it is possible.

While it would be easy to suggest government intervention to try and solve the issue of wealth inequality, how often has the government actually made a problem simpler to handle? Not very often from what I have seen. While wealth redistribution costs those receiving the funds nothing and opens opportunities for corruption, financial literacy empowers individuals and engenders character and maturity.

This leads me back to the teaching of financial literacy in many levels of society – from the home, to school to college in order to ingrain much of the basics behind making wise financial decisions known to more so they can implement it in their lives. Ultimately, it doesn’t necessarily matter how big your paycheck is; it’s how you manage it that counts when it comes to growing your wealth.

 

What is one thing you’d do to try and reduce the growing wealth inequality? Do you think government intervention is the answer?

 

Photo courtesy of: 401 (k)2013

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to GoBankingRates, Investopedia, Lending Tree and more. If you're wanting to learn how to monetize your blog, check out my blog coaching services to see how I can help you take your site to the next level.

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57 Comments

  • Ragnar says:

    I would like to also point out the fact that is frequently overlooked in these conversations but which you touched on:

    Wealth is a measure of accumulated assets, a number that is typically only taxed upon death. Wealth accumulation through income is taxed regularly and progressively (whether it is “progressive enough” is a matter of heated debate).

    The rich are the rich largely because of either diligence in accumulation or the conversion of ownership of business assets to personal assets (See Mark Zuckerberg). First generation wealthy have to overcome a lot, usually, to get there, including temptation and laziness and failure and I honestly don’t feel bad for their success. Look at how Elon Musk uses his fortune; cool, isn’t it?

    That second, second and third generation inheritors seem to fly in the face of the American dream of raising yourself up by your bootstraps and making something or yourself (look at the Walden kids). This class of individuals, this upper caste, was “supposed” to be avoided by the inheritance task which was meant to keep society more balanced, but which has been significantly bypassed in the last couple of generations. Is this “right”? Is this the way it should be? I don’t know.

    What I do know is simply this: it behooves me and my family to work toward a goal of intergenerational wealth now while it’s possible for the little guy to build it. As wealth becomes more concentrated, social mobility may become impaired.

    Work hard, save often, teach your children!

    • John says:

      Solid points Ragnar! I would definitely agree with you about those who are in the first generation – that they generally have overcome a number of things and say good for them for what they have accomplished.

      I love your last point, it does behoove us to work towards building and creating that wealth while it is possible. Sure, it’s not “easy”, but it can be done.

  • I agree it’s how you manage your paycheck or income. Someone can make 1% income but be really wealth poor while someone who makes well below that can be wealthy through choices.

    • John says:

      It doesn’t seem to make sense on one level, but you’re exactly right. You can make millions, but if you throw it out the window then it’s no good.

  • I think you are spot on that we have a pressing need for financial literacy in this country. I think it would be beneficial to see financial skills taught to our children not just in school, but at home as well (in fact, I would argue that this could be taught much more effectively at home than at school because parents are such powerful role models for children). To that end, I also think that there is a pressing need for adult financial literacy as well- after all, if adults do not have a good grasp of financial concerns then who will teach our children?

    • John says:

      Thanks Dee! I agree, I think it should be done in both places. Ideally, it would be done at home, but we know that will not always happen. If you do it at both, then you make sure more are reached. I could not agree more for financial literacy for adults, that is an incredibly pressing need we face.

  • Matt Becker says:

    There definitely seems to be some kind of systemic problem here. I think many of our laws favor those who have money (mortgage interest deduction anyone) and we need to do some work to fix that. But I also think it’s important as an individual to remember that you’re not defined by broad statistics. The reality is that there’s a lot of opportunity and you don’t have to be in the top 1% to take advantage of it. Yes there may be some things stacked against, but no those are not insurmountable obstacles. We need a more equitable system but we also need to take responsibility for ourselves and make the best of the situation we’re given. That second part will always be true, no matter how good the system is around us.

    • John says:

      I would definitely agree Matt in that I think much of it is systemic. That said, I think you’re spot on with the personal responsibility aspect. I don’t think everyone will or can own up to that, but many can in my opinion.

  • There is obviously a problem and the deck has obviously been stacked in the top 1%’s favor.
    This Youtube video shows the wealth disparity in our country in an easy-to-understand graph. It’s pretty amazing when you think about it.

    • I have no problem with the deck being stack in their favor. These are our job creators in this country and the investors that put money in up and coming businesses. Just think of all of the jobs that wouldn’t be created if we taxed them more heavily then we already do. Instead they would be paying more money in tax to a completely inept government who would squander it away.

      The key takeaway for me from John’s article is learn to manage your own economy. Because in the end that is all you have control over!

      • John says:

        I don’t know that I necessarily agree with the job creator argument as I believe many of the jobs created are done by small to medium size businesses. I don’t think taxing them to death is necessarily the solution either as we both know the government would find some way to still mess it up.

        That said, you’re exactly right about the takeaway from the article. It may not be “easy” for everyone, but you have to control what you can control and not worry about the rest.

    • John says:

      Thanks for sharing that video Holly. I had to remove it though as it was taking up much of the page. 🙂 That said, I’ve seen similar things to that recently and it is startling to see. It’s exactly why I think it’s very hard not to think that the deck has been stacked against the “rest” of us.

  • Kathy says:

    There has been government intervention for over 50 years and the problem still exists. The last thing I would advocate is further government intervention or wealth re-distribution. The harsh reality is that there will always be rich people and poor people. Playing Robin Hood only takes away the incentive for the poor to try harder and it takes away the incentive for the rich to continue earning since it will be taken away from them anyway.

    • John says:

      You definitely have a point Kathy. I think further government intervention is not the answer at all. I think something does need to happen, but not at the governmental level.

  • Ultimately I don’t think the government should be in charge of the free market. If anything they have destroyed unbelievable amounts of wealth through inflation driven by the Federal Reserve. Additionally, corporatism has been a driving force behind punishing those who aren’t in the “ultra wealthy” and have made it easier for those who do earn a lot to have a much better shot at “making more” than everyone else. Obviously these topics are beyond the scope of this blog post, so I will end my comment there 😉

    • John says:

      “Ultimately I don’t think the government should be in charge of the free market.” I would tend to agree DC. I think some do want that, but I just don’t think that’s the answer.

  • It’s hard to know what the solution is, but I don’t think the government is on the right track right now. I read an interesting article on CNN just a couple of weeks ago about it and what other countries have done. http://www.cnn.com/2013/10/29/opinion/sutter-international-income-inequality/

    But what it boils down to on a personal level is what are you going to do about it for you and yours? It’s no use just complaining about it. If you can make a difference, good, but sitting out on Wall Street with signs and not working isn’t going to do anything for anyone

    • John says:

      I agree Ben, I don’t know if there is really an easy solution, and the government is not going in the right direction.

      That said, you’re right on about what you’re going to do on a personal level. I understand the feeling the need to complain, but it’ll largely do you no good at all.

  • It is really easy to complain about the 1%, but I don’t begrudge anyone their money, especially if they worked hard for it. My brother in law makes more than that, but he did 13 years of school and training to become a surgeon, so I think he earned it. I saw an article this weekend about how there was continued job growth for the upper level earners and that service industry jobs grow as a result of that. Basically, the rich need more people to serve them at restaurants, stores, etc, so those jobs grow, but the middle income jobs are shrinking.

    I have a post coming out on Wednesday about the top 10 worst paying companies and whether they are the bad guys or not. I think most of the blame is on us because we don’t value education enough. You can’t get a high school diploma, have no skills, and go out and get a middle class job anymore. You could 20 years ago, but not now. We need to do more about preparing students for those realities, encouraging their strengths, and not failing them if they can’t pass two years of French. School is designed to teach to standardized tests and electives and vo-tech type training has gone to the wayside. We also need to keep kids in school. There is no reason why the US should not have at least a 90% graduation rate from high school, and I would love for students to come out with some skills instead of taking classes that don’t benefit them in the slightest. Wow, another good one. You got me thinking again. Dangerous for Monday morning!

    • John says:

      Glad I could get you thinking Kim. 🙂 I don’t begrudge anyone either, especially if they’ve put in the work to make that money. I say good for them. I, like you, see the problem in the shrinking middle class. Times have changed and that gulf has widened by quite a bit.

      You’re spot on with the vo-tech training. That is what my younger brother teaches and there are so few of those jobs out there for it which is a real shame.

  • Some have blamed Jesus “To those with more even more shall be added”, or we can blame the Pareto law, 20% of the population ultimately will control 80% of the wealth 🙂 That though won’t solve the problem. In my opinion it will require a concerted effort both from individuals and from the goverment. Individuals improve their financial literacy, live below their means and save. The goverment, am sure it can do something, if am not wrong Warren Buffet has been calling for increased taxation on the rich and closing of the many loopholes they do enjoy, i think he might be onto something!

    • John says:

      I do think a lot of it comes down to personal financial literacy. I am quite familiar with Buffet’s argument, though I doubt what that would do. It can be seen as penalizing the rich, and more importantly, the government would still find a way to mess it up.

  • I dont think the government needs to get in this. I think more people need to be reasonable and focused on what matters when it comes to gaining wealth. Is you want to build wealth stop spending money on foolish things that bring nothing back in return. Some of the top people worked hard, saved a lot, got lucky or inherited the money. Some has to start the process.

  • While the topic can irritate some, I don’t fault the people that are in the 1%. They work hard, take chances, and make the money. Nothing makes them special besides that they take more chances than the regular person. People that are in the 1% hustle hard and make good business decisions. Many of them might not be more educated then some, but they are risk takers. Without risk, there is not reward.

    • John says:

      I would agree Grayson. For the most part, I don’t fault them either, especially if it has come through hard work and taking on smart risks…which is usually the case.

  • It is a touchy subject, for sure, but I think the beauty of capitalism is that if you are Financial Literate and you are disciplined to implement sound financial principles then everyone can be a millionaire at one point in their lives. One thing I am doing personally is working with the Arizona Department of Economic Security to teach financial principles to those who are receiving benefits like welfare, food stamp, etc. My hope is to equip these people with the knowledge and resources to better their financial situation. There is so many ways to approach it, but that is the route where I think I can have the biggest impact.

    • John says:

      That’s awesome you do that Deacon! I think so much of it does come down to teaching those principles and instilling them. Education can be a great thing, it just has to reach those that need it.

  • “Ultimately, it doesn’t necessarily matter how big your paycheck is; it’s how you manage it that counts when it comes to growing your wealth.” Amen, John! I don’t have the answer to fixing the wealth inequality in this country but I do agree that how you use your money is what matters. Given the role money plays in our lives, it’s so unfortunate that so few truly understand how to use it. We just how to spend it and even then, not necessarily on the things that truly matter to us. I agree that our lack of financial literacy does not help. It needs to become something taught within our homes and schools. To stop focusing on how everyone else uses their money but to instead figure out what we want to do with our own money.

    • John says:

      I agree Shannon, so much of it does come down to how you manage your finances personally and not focusing on what others are doing with their money.

  • I don’t begrudge those in the 1% but I don’t think it can just be assumed that they got there by working hard. I have no problems with a surgeon making a good salary or a business owner taking risks and being successful. There is plenty of nepotism and corporate welfare at the top that people don’t see, and there needs to be some government intervention (not too much though) to level the playing field.

    • John says:

      That is a good point Andrew. I wouldn’t say that everyone in the top 1% is there because of hard work, but do think most are. Though, I shudder to think of what more government intervention would bring.

      • Oh no, I don’t want more government intervention. I’d like better government intervention. Plus, when most people talk about government intervention, they generally talk about intervention to help the less fortunate, but there is also plenty of intervention that helps the rich and big corporations which perpetuates the inequality at times.

        • John says:

          I would agree Andrew, I think the intervention aspect cuts both ways. I think that’s part of the reason why we see the level of inequality that we do. I don’t know that I’d blame it all on that, but it definitely plays a role in it.

  • A great place to start would be mandating SOME wealth management/ financial literacy courses in public schools. Maybe in Home ECONOMICS? Can’t we learn something beyond sewing and cooking?

    • John says:

      ” Can’t we learn something beyond sewing and cooking?” Lol, I could not agree more Stefanie! Those things have their place, but financial literacy instruction would be an excellent addition to Home Ec. courses.

  • SPBrunner says:

    It also depends on what people include in a person’s or family’s wealth. None I have seen include pensions and government pensions are a personal asset to my mind. Most government pensions are indexed and if you multiply the annual income by 20% you get a conservative value for this asset. Other people also have work pensions, lots of which are indexed also. (For an unindexed pension, you would multiply the annual income by 5 to 10% depending on how much you feel inflation will be.)

    Governments cover such things as health care. In Ontario where I live the cost is around $6000 per year per person. I would not know how to being to value this.

    Maybe the average person is not a poor as they think.

    • John says:

      I would agree with you on some of your points, though I would tend to disagree on your last point. I don’t know how it is in Ontario, but there is a growing disparity between those who have and have not here in the States. I am not going to touch health care costs though – that is for another post. 😉

  • FI Fighter says:

    The game is rigged and it isn’t fair. I guess you can either sit there and complain about it, or do something about it. The hardest part is getting started. Once you start generating passive income through assets, it invariably becomes easier to compound the gains. Whether through stocks, or real estate, etc.

    In the end, I feel like there’s enough wealth out there for all of us to have a slice. It may not be the largest slice, and I don’t dream of being in the top 1%. I just need enough to get by comfortably, and I think it’s still a totally realistic and possible goal in today’s society. Maybe I’m too optimistic, but I feel like the American dream is still alive and well.

    • John says:

      I would tend to agree as life really is not fair and the hardest part is simply getting started. I think that’s a large part of the reason why financial literacy is so important so you see the need to get started and know, to some extent, what to do.

      I think the American dream is still alive, though I think it may be a little more difficult to attain to these days than in years past.

  • Mike says:

    The government is already involved with wealth inequality by giving tax benefits and other benefits to super rich and corporates. It’s not about poor getting poorer anymore. After 2008 the middle class has impoverished significantly and that’s a real danger to whole american society.

    • John says:

      I agree that there is a real danger to the middle class and think it could continue to go down that path if things do not improve. The gulf between those who have and those who do not is wide enough already – we don’t need it to be any worse.

  • I think a healthy level of inequality is only fair, otherwise people are not rewarded to work more. In France you can sometimes earn more than minimum wage just by staying on welfare so people abuse the system. It is much easier to grow wealth once you are at a certain level of net worth but most wealth building comes from hard work and should be rewarded as such.

    • John says:

      Oh, I agree Pauline and we’re always going to see some level of inequality. That’s not really the issue at question though. The issue is the growing divide between those in the upper crust and those who have very little. What it ends up doing up is hitting the middle class the worst which makes it difficult for many to build true wealth.

  • Kathy says:

    It has been interesting reading all the comments. I had to come back on to comment about Warren Buffet. In my opinion, he is quite hypocritical. Yes, he donates a lot of money to charity and that is a good thing. However, it goes to his own charitable foundation which his family controls. His son operates a huge farm very near where I live and the farm is owned by the Buffet family foundation as well. So guess what, when Buffet or his son dies, the farm escapes the estate taxation that Buffet has endorsed for everyone else. Many smaller farm families end up selling their farm in order to pay the taxes but Buffet doesn’t have to sell. There is a huge difference between someone who has to pay 50% of his life’s savings to the government if he has 5 million vs. someone with 78 billion. One is barely still a millionaire but the billionaire is still a billionaire. If Buffet practiced what he preaches, he’d give his money direct to the government by writing a check to the Bureau of Public Debt rather than making a charitable donation for which he gets a tax deduction and then advocating higher taxes for poorer people.

    • John says:

      Thanks for your comment Kathy. I can understand your point. Living in Omaha myself, and only about 10 minutes from Warren himself I’ve been able to see what he does for our city in terms of charity and yes a lot of it does go to his charitable trust.

      That said, I can’t blame Buffett for what he is doing as anyone can do it if they have the knowledge and know how to do it. I may not like it, but he does have every right to do it.

  • Micro says:

    I think the wealth disparity is one part of the subject and a subject most Americans would be okay with if not for the other part. The other part being economic mobility in this country. If you see someone who is well off, you don’t pay much attention because of the ingrained belief that if you work hard, you too can move up the ladder. That has been harder and harder to do lately. When someone can’t seem to move up in the world, it becomes much easier to want to punish those that have done well. The mentality of “I can’t seem to get by because the game is rigged so why should they have it easy”. I’m not sure what the solution might be to restore some of that mobility.

    • John says:

      That’s a great point Micro. I failed to mention that in my post and I think you’re spot on with your thoughts. I do agree that that mobility has become increasingly more difficult in today’s society. That said, you’re right in that it does become much easier to want to take it out on those who have.

  • “Ultimately, it doesn’t necessarily matter how big your paycheck is; it’s how you manage it that counts when it comes to growing your wealth.”

    Well said! What’s amazing to me is that I could possibly save up a ton of money, manage it well, and then live off of the capital gains. If I kept it under $72K, I’d pay 0% in taxes! I’d also not be considered rich enough to be in the top one percent. BUT I’d be so rich that I don’t have to work. How does that compute?

  • Government intervention is never the answer. I’m a firm believer that if you try to redistribute wealthy by taking away from the more fortunate and giving to the less fortunate you will completely destroy the motivation for people to work hard and get extra ahead. I don’t have the answers, unfortunately, but I would hope we can find a way to pull the people on the lower rungs up without pulling the people on the upper rungs down.

    • John says:

      I could not agree more Travis. I hate to see the problems that the middle class is seeing and the growing divide, but giving from some and giving to others would do more harm than good in my opinion. I don’t have the answers either, and while I think something needs to change, I firmly believe that government intervention is not the answer.

  • I noticed Warren Buffett came up a couple times in the comments. I have to agree with him that the rich are not taxed enough. Some of this country’s very prosperous times (late 1950s) were when the rich were highly taxed. Mr. Buffett has also stated that cap gains and dividends should be taxed the same as income. That would obviously affect most investors, myself included, and I know I wouldn’t like it, but it would make the world of income taxation more fair.

    • John says:

      He did Bryce and I would tend to agree as well – to a certain point. There needs to be a balance between taxing and not punishing them for doing well. Something like that would impact me as well and I wouldn’t like it, but I think it would make it more “fair”.

  • The Warrior says:

    I don’t want to get into political arguments, but do want to state an opinion.

    I feel that the gap shouldn’t be as large. I do believe there will always be some inequality, but the gap is so wide it’s hard to argue it as a valid aspect to the US economy. Along with that, I worry that financial regulations allow the few to excel at a much easier rate than those struggling.

    That is all a part of the circle of concern so I try to not lose sleep over it. I focus on the circle of control. What can I control and bust my butt at that.

    The Warrior
    NetWorthWarrior.com

    • John says:

      I could not agree more Warrior. I think that is the real shame of it, that the gap is so huge. We will always have some sort of inequality, but the current gap does put a squeeze on the middle class as well as making it easier for those who do have more to get further ahead.

  • Jim says:

    Great points John, it goes back to the old adage, Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. We need to think this way about financial literacy, the more people know the better off everyone is!

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