Corporate profits

Wealth gap widens as rising corporate profits boost equity holdings

Protesters block the entrance to a courthouse in Los Angeles on August 21, 2020.

VALERIE MACON | AFP | Getty Images

The rich are really getting richer.

Two Federal Reserve economists recently looked at the evidence and concluded that the gap is widening further.

Federal Reserve economists Isabel Cairo and Jae Sim found that the inequality gap has widened because owners of assets such as real estate and stocks profit from the rise in corporate power and rising profits, as well as a declining workforce.

“The share of US corporate pre-tax profits has increased dramatically over the past few decades,” the authors wrote. The rise in corporate profits was strongly correlated with the decline in the workforce. “This correlation suggests that the rise in the profit share and the fall in the labor share may have been motivated by a common cause,” they said.

Stagnant wage growth and rising corporate profits have led to an increase in two forms of inequality: in income (the share of income of the richest households is steadily increasing) and in wealth (the value net of the richest 5% of households increasing by 186% from 1983 to 2016), largely due to capital gains.

This is evident when looking at the shareholder data. While an oft-cited Gallup poll found that 55% of households owned stocks in 2020, it is the very wealthy who control almost all of that asset. A separate Federal Reserve report says the richest 10% of households control 87.2% of that country’s stocks at the end of the first quarter. While the richest 1% have consistently controlled 70-80% of the market value since record keeping began in 1989, this is the highest level of ownership on record except for the fourth quarter of 2019, where it was 88.1%.

Who owns stocks: households by equity

  • Top 1% 51.8%
  • Top 90-99% 35.4%
  • 50% -99% 12.1%
  • 50% lower 0.7%

(Q1 2020)

Source: Federal Reserve

For Ivory Johnson, head of Delancey Wealth Management and member of the CNBC Advisory Council, these statistics are emblematic of the growing perception gap between Wall Street and Main Street.

“The majority of people don’t own stocks and they don’t care if the Nasdaq is up 30% this year,” he told me.

As the wealth gap has widened for decades, Johnson is putting part of the problem at the feet of the Federal Reserve, which he says has supported stock prices for years.

“Twenty percent of American companies are zombie companies – they only survive because the Federal Reserve supports them. You have a safety net for actions provided by the Fed, but only a limited version of it for people. who really need help. “

The broader wealth statistics recently released by the Federal Reserve aren’t much more encouraging. There is an equally large gap between what the rich have and what the bottom 50% own.

Much of it is real estate.

The richest 1% have 12.8% of their net worth in real estate. The poorest 50% have 54.4% in real estate.

The reverse is true for stocks. The richest 1% have 34% of their net worth in stocks, the poorest 50% have only 2.2%. The very rich also have a greater share of their wealth tied to private businesses and “other assets”.

Top 1% of households: Active

  • Shares 34%
  • Other assets 22.4%
  • Private companies 21.7%
  • Real Estate 12.8%
  • Retirement 5.9%
  • Durable consumer goods 3.2%

Source: Federal Reserve

50% of the poorest households: assets

  • Real Estate 54.4%
  • Durable consumer goods 20.4%
  • Other assets 12%
  • Retirement 9.4%
  • Shares 2.2%
  • Private companies 1.7%

Source: Federal Reserve

What to do? Cairo and Sim go so far as to suggest higher taxes on the rich as a means of redistributing wealth: “Carefully designed redistribution policies can be very effective. macroprudential policy tools and more research are warranted in this area. “

Johnson says taxing the rich won’t work, and not just because the rich have lobbyists. “You can tax the rich 100% and that won’t cover the deficit,” he told me. “The question is, what is right and what will work?”

The news is not all gloomy. Edward Wolff, a professor of economics at New York University who has studied trends in the distribution of wealth for many years, said the poor could see higher returns even on their smaller investments.

“The authors seem to ignore the fact that the poor have relatively higher debt and therefore leverage,” he said in an email. “What this means is that the poor actually have a higher rate of return on their portfolio than the rich and see their wealth increase over time through capital gains.”

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