U.S. wealth keeps moving into fewer hands. Here’s how it might impact the economy.
Will she or won’t she? That’s the question central bankers are asking days after last week’s symposium in Jackson Hole, Wyoming. At that meeting, Federal Reserve Chair Janet Yellen dropped several hints that an interest rate hike is in the near future.
Citing economic growth, a stronger jobs market, and increased consumer spending, Yellen told attendees, “…I believe the case for an increase in the federal funds rate has strengthened in recent months.” It’s true that current consumer spending is strong; it jumped at a 4.4 percent annual rate in the biggest bump since Q4 2014.
But new research outlines a huge threat to consumer spending. Dramatic wealth gaps along racial lines are projected to grow exponentially. The trending wealth gap between Black and White Americans would take centuries to close. And changing demographics mean that White Americans will keep earning the most substantial wealth gains even as they become the minority. Yellen has called the racial wealth gap “extremely disturbing.” A new report reinforces her worst fears.
A great divide
Yellen’s case for increased interest rates was preceded this month by new economic research. “The Ever-Growing Gap” was co-authored by the Corporation for Enterprise Development (CFED), the Racial Wealth Divide Initiative, and the Institute for Policy Studies. It reviewed trends in U.S. wealth accumulation from 1983 – 2013 to project what the next 30 years might bring.
The highlights? Between 1983 and 2013:
- The top 20 percent of America’s wealthiest households earned 99.4 percent of all wealth gains. This left the bottom 80 percent of households with 0.6 percent of total wealth gain;
- The one percent of Americans on the Forbes 400 list increased their wealth from $700 million to $5.8 billion;
- U.S. Black and Latino populations saw their respective wealth increase by an average of 69 percent and 29 percent;
- The average wealth of White U.S. families grew by 84 percent, while the wealth of those on the Forbes 400 list grew by an average of 736 percent.
The end result is that today’s 400 richest Americans own more wealth than the entire U.S. Black population and one-third of the U.S. Latino population combined.
The growing gap
Projections for how this wealth gap will grow are equally disturbing. If current trends in wealth gains persist throughout the next three decades, the wealth of the average U.S. household will increase to $850,030 in 2043. By contrast, the wealth of the average Forbes 400 member will grow eightfold to $48 billion.
White Americans have earned disproportionate wealth compared to Blacks and Latinos. But U.S. population growth is being fuelled by nonwhites. 12 percent of the country’s 3,142 counties – home to almost one-third of Americans – are “majority minority” populations.
As of July 2015, America’s Hispanic population rose 2.2 percent while the Black population increased 1.3 percent. By contrast, the non-Hispanic white population grew 0.1 percent during this period.
This is bad news for consumer spending. As U.S. minority populations rise in numbers, they are not expected to earn substantial wealth gains. “The Ever-Growing Gap” report predicts a three-percent annual wealth increase for Whites, a two-percent annual increase for Latinos, and a one-percent annual increase for Blacks. Comparing these gains to the long-term inflation rate – an average of three percent – shows that minority populations will continue to lose wealth.
“As we move towards becoming a majority minority nation, the racial economic inequality that has kept minorities economically unstable will continue to take apart the historic American middle-class economy,” Dedrick Asante-Muhammad, Director of the Racial Wealth Divide project at CFED who co-authored the report, told GRI exclusively. “Racial wealth inequality in the future threatens to make America a country where homeowners are no longer a majority, and [create] an economy where Americans are losing their power to keep it strong.”
Spending to survive
The results of “The Ever-Growing Gap” will not surprise Yellen. On June 22nd of this year, the Federal Reserve released its semi-annual Monetary Policy Report to Congress. It included a special section which asked if wealth gains have been widely shared. The answer was a resounding, “No.”
The Fed’s report found that the median Black household income in 2014 was $40,000 compared to the median White household income of $67,000. This gap threatens long-term consumer spending in two ways.
The first is the future wealth-to-spend ratio of most Americans. Wealthy individuals tend to spend less of their income on essentials like food and income than poor and middle class individuals do. Since Whites have disproportionate wealth but are projected to be the minority by 2060, America’s long-term consumer spending growth rate could constrict.
The second is the role consumption plays in relation to earned income and wealth accumulation. The wealthiest Americans tend to spend more on retirement programs and insurance plans than the poor and middle class. Additional insights from the National Bureau of Economic Research found that the rise in consumption inequality mirrors income inequality.
The wealthy tend to invest in their futures; the poor must spend to survive today. If current income inequality and consumer spending trends persist, in a few decades the U.S. will have an electorate that’s politically supreme yet economically demeaned.
Yellen is the first to admit that direct links between wealth inequality and consumer spending are “frankly complex.” But since wealth inequality in the U.S. is nothing new – and its long-term impact is here to stay – more research on the correlation between consumer spending and wealth inequality is needed. “The Ever-Growing Gap” report should also be a wake-up call for politicians to design more inclusive wealth-building policies.
In the meantime, we should not be blinded by this year’s uptick in consumer spending. The future is poised to look drastically different.