St. Louis Fed Publication Challenges Focus on U.S. Income Inequality

ST. LOUIS – An article in the latest issue of The Regional Economist, a publication of the Federal Reserve Bank of St. Louis, tackles the topic of inequality, which is at the forefront of current public debate.

Although household income inequality is on the rise in the United States, the disparity isn’t nearly as bad in the U.S. as it is across countries, according to coauthors Christopher J. Waller, research director and economist at the St. Louis Fed, and Lowell R. Ricketts, senior research associate at the St. Louis Fed.

“Income inequality in America is not as dire as that between developed and developing nations, but it remains a contentious domestic issue that will likely lead to greater class division and unrest,” they wrote.

Further, the authors wrote that, although income has driven the inequality debate in the U.S., the uneven spread of wealth in terms of net worth (household assets minus liabilities) is a much greater dilemma in America but is often not addressed beyond public debate about tax proposals.

To contrast the two measures of inequality, the authors broke down the distributions of income and wealth. They determined that the U.S. income inequality ratio is 21, versus a wealth inequality ratio of 385.

The authors noted that net worth inequality is a natural development of maintaining a stable path of consumption over the life span. For example, youths tend to be unskilled and have little money to their name. They borrow money to pay for school, homes and cars. During their middle years, they repay the debt and accumulate wealth for retirement. As they get older, they start spending down their wealth. “While this natural inequality doesn’t account for the entire wealth disparity across the population, it is important to understand that some inequality isn’t inherently bad,” the authors wrote.

More concerning to many is the imbalance in asset ownership. The authors noted that households in the bottom 25 percent of the net worth distribution derived close to three-quarters of their income from wages, about 4 percent from business equity and only 0.2 percent from interest or dividends and capital gains. In contrast, the top 10 percent of the net worth distribution gathered a little over half of their income from wages, 24 percent from business equity and about 11 percent from financial assets.

“The heavy concentration of financial assets on the balance sheets of the rich will only worsen the already severe wealth inequality without greater democratization of ownership of capital,” the authors wrote.

Waller and Ricketts noted that many people don’t know how to take advantage of the potential gains from financial assets. They offered a place to start on improving Americans’ ability to achieve the returns that are currently mostly enjoyed by the rich: “Financial education initiatives could use some of the energy devoted to the fierce policy debate surrounding income inequality in the U.S.”

The article, titled “U.S. Income Inequality May Be High, but It Is Lower Than World Income Inequality,” is an online-only article in the most recent issue of The Regional Economist, which can be found at www.stlouisfed.org/publications/re/.