This week the Economic Innovation Group released a study, with accompanying multimedia tools, that finally tackles a frustrating data question. Where is America’s wealth concentrated?
When talking about economic issues we tend to conflate income with wealth, giving rise to endless distortions. Every so often social media lights up over an essay about a “struggling” family barely getting by on, say, $350,000 a year in income. How could people who are so “rich” have the gall to complain? Income is not wealth. A high income provides sparse protection against poverty. Only with insight, discipline and luck can an income be converted into the true currency of freedom in America, wealth.
Forming policy around mistaken assumptions about the world breeds dysfunction. Income is not wealth. Taxing income does not place any burden on the wealthy, only on those who aspire to be wealthy. High income people are not consistently wealthy people. The wealthy seldom need a high income to support their lifestyle. There are reasons that Mitt Romney pays less in taxes than Joe Biden. Failure to understand wealth drives these policy outcomes.
Researchers at the EIG built their analysis of American wealth by reviewing IRS data on income types. They separated wages from income derived from assets to identify wealth.
This is an imperfect analysis. Wealth need not always generate tax-measurable returns. For example, a stock portfolio that sits gaining value without selling, would not appear in this formula. A business interest or a portfolio of options being held without dividends would go unnoticed. Likewise, a very large portfolio being lightly utilized for dividend income would appear smaller than a much smaller portfolio of a retiree aggressively depreciating their wealth to support themselves. As a consequence, this analysis shows higher wealth in retirement havens like Florida, places where a large percentage of the population lives by depreciating an asset like a 401k. However, this is still perhaps the best publicly available portrait of wealth concentration you’ll find.
What is wealth? We generally equate wealth with capital, the ownership of productive assets. That that leaves out the influence of time.
Chris Rock summarized the difference between income and wealth in the context of the pro sports: “Shaq is rich. The white man who signs his check… is wealthy.”
A pro football rookie with no other assets who earns the league minimum $610,000 in W-2 wages this year is far less wealthy than someone who has no income at all, but holds $610,000 in a stock account. Depending on where they live, after taxes, that football player might take home as much as $425,000. Living an extremely frugal life, they might be able to save $375,000 or so. Even with the good fortune to earn an outsized, 1%-er income, it takes time to accumulate wealth. Few players do.
More than 75% of NFL players are broke within three years of their retirement from the industry. Only a minuscule fraction of professional athletes will ever accumulate the wealth required to own a team. Turning a high income into wealth takes time.
It’s helpful to think of wealth as more than just capital. Wealth = Money x Time.
Places with deep wealth are not towns like Benton, Arkansas, touched by a few rich families. They are places where many families have been earning and developing outsized incomes for generations. We’re not just talking about wealthy inventors or entrepreneurs, these are places where more or less ordinary people have been able to build and retain modest wealth, which over generations grows to immodest wealth. That kind of deep intergenerational capital creates a large well of public wealth, feeding not only new capital creation in a traditional business sense, but also public capital in the form of parks, hospitals, artistic and educational institutions, and other public infrastructure. Beyond these forms of capital, deep wealth fosters less tangible capital in the form of information networks, embedded know-how relating to public affairs and governance hard to develop through any level of investment over short timespans. Wealth is more than money. Wealth is Money x Time.
This formula helps explain why the Austin Metro area in Texas, a lucrative supposed “tech hub,” struggles to surpass the wealth already embedded in Detroit. Yes, Detroit. Thanks to a 150-year headstart on Austin and the continuing wealth-creation force of a powerful educational infrastructure, Detroit area residents are taking in roughly $36bn a year in wealth dividends compared to $27bn in marginally smaller Austin area. Austin has only just caught up to the smaller Cleveland, at $25bn. Prim Minneapolis sits comfortably at $34bn.
Thanks to the oil business, median incomes in Texas have risen over the past half century from near the bottom to almost the national average. Politicians have touted the state as a new center of wealth, but this is a distortion. A few of the state’s suburban counties now produce median incomes in the national top 50. Wealth, however, remains generations away. In wealth terms, Texas has only just begun to pull away from the poverty of the South. That progress remains tenuous, hampered by government policy that punishes urban development and education.
Chicago’s metro area comes in at about $116bn in annual wealth dividends compared to $68bn in the similarly sized Houston, or $72bn in Dallas. New York City by itself comes in at $105bn, before even beginning to calculate the staggering wealth in Long Island or the neighboring counties in New Jersey and Connecticut. Wealth is Money x Time. New York was wealthy before Houston was carved out of the swamp.
The comparison is even more stark when looking at California, the wealth-creation leader of the world in our generation. Keep in mind a couple of factors that make California’s numbers even more impressive. The state isn’t very attractive to retirees due to its cost of living and tax structure. With a relatively young population, this report of dividend income is likely an extreme under-reporting of its overall wealth.
California shows the benefits of generations of ordinary wealth creation coupled with the new wealth engine of the tech industry. Bay Area residents are taking in roughly $190bn a year in wealth dividends. Los Angeles County alone takes in $145bn.
Why does any of this matter? That dual income family of an accountant and a lawyer each working 50 hours a week while trying to raise two kids is not wealthy by any measure. They have a shot at wealth, a much better shot than most people, but they’re just as likely to fall short. Converting that income to wealth could take a lifetime of health and luck.
A kid from a working class family who wrangles a full scholarship to a great school will likely struggle all the way through, and perhaps fail to finish at all, because surviving in that environment calls on the benefits of wealth, benefits that go far beyond what we measure in income. They won’t be taken into an elite fraternity on their father’s influence. They won’t speak the language and cadence of the elite. They won’t have aunts, uncles and cousins to tell them which courses to take, which advisors to meet, which mentors to connect them with jobs, or family support to keep them fed while they serve in unpaid internships. Wealth is something greater than either income or money. Time turns money into not just a line item on a financial ledger, but an intangible network of advantages.
And of course, wealth in America is white. Only a small minority of Black or Hispanic families possess any retirement savings at all. The LA Lakers spend $133m each year on the team’s overwhelmingly Black roster of players, which includes the superstar LeBron James. Their owner, Jeanie Buss, inherited the team from her real estate developer father. She holds roughly four times the team’s annual payroll in her own personal wealth. LeBron will spend a career sweating and aching, performing at the absolute peak of a brutally competitive business to accumulate the kind of wealth that the Lakers’ owner simply inherited. LeBron is rich. Jeanie is wealthy.
In our country, wealth is the only true freedom. No one in America gets to choose their own path in life until they can buy their way free. That’s why we scorn income taxes, or any public burden of any kind. Any obstacle slowing the path to wealth meets fierce resistance, while citizens of other countries enjoy as a matter of course lifestyles that most very successful Americans will never experience at any income level. Shared wealth, in the form of public investment, creates lifestyles and security that personal wealth could never attain. Americans don’t understand this, because this realization would have consequences for our most privileged classes.
It’s often said that to understand politics we need to “follow the money,” but that formula is incomplete. Understanding American politics means following the wealth.