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Wealth, Income, and Power
by G. William Domhoff
September 2005 (updated January 2011)
This document presents details on the wealth and income distributions in the United States, and explains how we use these two distributions as power indicators.
Some of the information may come as a surprise to many people. In fact, I know it will be a surprise and then some, because of a recent study(Norton & Ariely, 2010) showing that most Americans (high income or low income, female or male, young or old, Republican or Democrat) have no idea just how concentrated the wealth distribution actually is. More on that a bit later.
As far as the income distribution, the most amazing numbers on income inequality will come last, showing the dramatic change in the ratio of the average CEO's paycheckto that of the average factory worker over the past 40 years.
First, though, some definitions. Generally speaking, wealth is the value of everything a person or family owns, minus any debts. However, for purposes of studying the wealth distribution, economists define wealth in terms of marketable assets, such as real estate, stocks, and bonds, leaving aside consumer durables like cars andhousehold items because they are not as readily converted into cash and are more valuable to their owners for use purposes than they are for resale (see Wolff, 2004, p. 4, for a full discussion of these issues). Once the value of all marketable assets is determined, then all debts, such as home mortgages and credit card debts, are subtracted, which yields a person's net worth. In addition, economists usethe concept of financial wealth -- also referred to in this document as "non-home wealth" -- which is defined as net worth minus net equity in owner-occupied housing. As Wolff (2004, p. 5) explains, "Financial wealth is a more 'liquid' concept than marketable wealth, since one's home is difficult to convert into cash in the short term. It thus reflects the resources that may be immediatelyavailable for consumption or various forms of investments."
We also need to distinguish wealth from income. Income is what people earn from work, but also from dividends, interest, and any rents or royalties that are paid to them on properties they own. In theory, those who own a great deal of wealth may or may not have high incomes, depending on the returns they receive from their wealth, but inreality those at the very top of the wealth distribution usually have the most income. (But it's important to note that for the rich, most of that income does not come from "working": in 2008, only 19% of the income reported by the 13,480 individuals or families making over $10 million came from wages and salaries. See Norris, 2010, for more details.)
As you read through these numbers, please keep inmind that they are usually two or three years out of date because it takes time for one set of experts to collect the basic information and make sure it is accurate, and then still more time for another set of experts to analyze it and write their reports. It's also the case that the infamous housing bubble of the first eight years of the 21st century inflated some of the wealth numbers.
So farthere are only tentative projections -- based on the price of housing and stock in July 2009 -- on the effects of the Great Recession on the wealth distribution. They suggest that average Americans have been hit much harder than wealthy Americans. Edward Wolff, the economist we draw upon the most in this document, concludes that there has been an "astounding" 36.1% drop in the wealth (marketableassets) of the median household since the peak of the housing bubble in 2007. By contrast, the wealth of the top 1% of households dropped by far less: just 11.1%. So as of April 2010, it looks like the wealth distribution is even more unequal than it was in 2007. (See Wolff, 2010 for more details.)
One final general point before turning to the specifics. People who have looked at this document in...
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