The Ownership Society (Part 1): Defining the Problem

By Lori Swanson

November 8th, 2017

There has been a lot of commentary about the income gap and wealth gap in America. While many of the solutions need to be initiated at the federal level, we must roll up our sleeves at the state level to do what we can to build a stronger middle class. This paper—which is the first in a series—starts by defining the problem.

I should note that I was appointed as Chair of the Federal Reserve Board’s Consumer Advisory Council in 2006. I was appointed to the Council by Alan Greenspan. I quickly realized that we saw the economic problems of America through different lenses. Let me give you my perspective.

The Ownership Society and Economic Flotsam

The Income Gap. When I was a child in the 1960s, almost 55% of U.S. households fell into the category of “middle class,” earning in today’s dollars $35,000 to $100,000 per year.[1] Today, about 45% of all households do. The statistics do not show the real change, however, in large part because other members of the household have been added to or stayed in the workforce since the 1960s.

First, women in large numbers entered the workforce in the 1970s, 1980s, and 1990s. Median household income rose even though the incomes of individuals did not. The climb ended in 1999. Since then, median household income has fallen.[2]

Second, a significant share of middle class households—approximately 20%—are now headed by people over age 65. Some have higher income than their children due to retirement savings and pensions. Many have not left the labor market. Middle class households in this age group have more than doubled since 2000. But older Americans are getting pinched due to rising pharmaceutical and health care costs, not to mention housing.

The Social Security Administration recently calculated the salaries of the median employee born in each year since 1932. A typical 27-year-old man’s annual salary in 2013 was 31% less than a typical 27-year-old man in 1969.[3]

The Wealth Gap. Income inequality is a major cause for erosion of the American middle class. But the wealth gap also undermines upward mobility.

Look at the statistics. According to the Federal Reserve, the wealthiest 5 percent of American households held 54 percent of all wealth in 1989.[4] Their share rose to 61 percent in 2010 and 63 percent in 2013. By contrast, the rest of those in the top one-half of the wealth distribution—families with a net worth between $81,000 and $1.9 million in 2013—held 43 percent of wealth in 1989 but 36 percent in 2013.[5]

The lower one-half of households held just 3% of wealth in 1989 but only 1% in 2013. These 62 million households had an average net worth of $11,000. One-quarter of these families reported zero wealth or even negative net worth.[6]

Put differently, the richest 1% own 40% of the nation’s wealth. The bottom 80% own just 7%.[7]

The total net worth of U.S. households earlier this year was $94.7 trillion. This sounds like a record level of purchasing power. Divided equally among 124 million U.S. households, this would average $760,000 per family. The average means nothing, though, because the bottom 50% of families in wealth average just $11,000 net worth.[8]

The wealth imbalance is growing. According to Federal Reserve data, working families with a median income of $33,000 spend 15% on debt payments, a higher portion of their income today than three years age.[9] Total household credit card debt is now at $12.7 trillion, higher than the post-recession peak.[10] The Federal Reserve states that almost one-half of adults can’t pay for a $400 expense without selling something or borrowing money.[11] The costs of student loans, child care, housing, and health care continue to spiral upward, impeding the ability of people to save money.

The Education Gap. Education has traditionally been the great equalizer in America, providing a way for people to separate themselves from the circumstances of their birth. In 2014, Minnesota adults between 25 and 64 had the following employment rates: 87% with a bachelor’s degree; 81% with an associate’s degree; 75% with a high school degree; and 58% with less than high school degree.[12]

The data show the dynamic impact of education on income levels. In 2014, the annual median wage level for Minnesotans was $40,378. People with less than a high school education had a median wage of $21,937, high school graduates had $30,858, those with associate’s degrees had $36,333, people with bachelor’s degrees had $51,226, and individuals with graduate degrees had $66,580.[13]

Economic inequality leads to an education gap which is getting more pronounced. The achievement gap between children from high- and low-income families is roughly 30 to 40 percent larger among children born in 2001 than among those born 1975.[14]

The Gordian Knot

In short, we have a Gordian knot. The education gap contributes to income inequality, and income inequality contributes to the education gap.

The aspiration of this country is to build an ownership society with a strong middle class. In every way, shape, and form, we need to promote values premised on achievement, work ethic, and strong education. In coming papers, I will offer my thoughts on how to do so.

[1] https://www.nytimes.com/2015/01/26/business/economy/middle-class-shrinks-further-as-more-fall-out-instead-of-climbing-up.html

[2] https://www.nytimes.com/2015/01/26/business/economy/middle-class-shrinks-further-as-more-fall-out-instead-of-climbing-up.html

[3] https://www.washingtonpost.com/news/wonk/wp/2017/05/08/researchers-have-answered-a-big-question-about-the-decline-of-the-middle-class/?utm_term=.e0af87f13e72

[4] https://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm

[5] https://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm

[6] https://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm

[7]https://www.salon.com/2016/04/28/robert_reich_wealth_inequality_is_even_more_devastating_than_income_inequality_partner

[8] https://www.federalreserve.gov/newsevents/speech/yellen20141017a.htm

[9] https://www.nytimes.com/2017/10/19/business/credit-cards-debt-banks.html

[10] https://www.nytimes.com/2017/10/19/business/credit-cards-debt-banks.html

[11] https://www.washingtonpost.com/news/wonk/wp/2016/05/25/the-shocking-number-of-americans-who-cant-cover-a-400-expense/?utm_term=.b0f9c0200a35

[12] U.S. Census Bureau, 2014 American Community Survey—1-year estimates.