The Hidden Nature of Wealth
During a recent in-class exercise, I had my students play a game. Each of them got cards denoting a certain point value, and the object of the game was to negotiate with one another to trade cards and end with the most points.
After the game was over, we talked about the strategies they used to try and maximize their points. Some people felt like they had enough and decided not to trade with their classmates at all. Others wheeled and dealed to get points and sometimes lied, even to their friends. A few students felt like they had plenty and gave cards away for fewer points than they received in return.
While at first it might seem like the game only revealed individual differences, as they talked about the cards they started off with many students were stunned to find out how many more points their classmates had at the start of the game. The game’s “winner” had doubled his points, but he also started off with far points more than most of his peers.
Just as in real life, people started this game with far more than others, and no one was told exactly how much anyone else had. Students had to learn during the game that having a lot of cards did not necessarily mean the cards had high point values. And just like in real life, we tend to think that people who have the fanciest cars, most expensive clothes, and extravagant homes are the wealthiest. But wealth is often more hidden than we think.
While many people attempt to convey status through consumption, most of us keep our true net worth a secret. We learn early on not to share our annual income with others, even close friends and family members. It’s often considered tacky to talk about how much wealth we have accumulated, or shameful to mention our debt. Instead we use consumption as a proxy for displaying signs of wealth, but it isn’t an accurate measure.
Your friend with the new car and brand-name everything might have a mountain of credit card debt. And the third richest man in the world, billionaire Warren Buffett, lives in same suburban home he purchased in 1958 in Omaha, Nebraska.
Buffett’s wealth isn’t exactly a secret, since his net worth is a mainstay on Forbes magazine’s list, but most Americans aren’t aware of exactly how much money the wealthiest among us have accumulated. Nor do we tend to know how concentrated wealth in America actually is. In 2007, the wealthiest 1% owned 35% of Americans' total net worth, while the bottom 80% owned 15%.
You’ve likely heard the phrase “a rising tide lifts all boats,” meaning we all benefit from a good economy. When times are good, some boats (or yachts) rise far higher than others. During the economic boom of the 1990s, a time we now often look back on with nostalgia considering the sluggish economy we have today, the vast majority of the gains went to the top 1%. According to a study by the Congressional Budget Office (CBO), between 1979 and 1997 the average annual after tax income rose 157% for the top 1%, but actually fell by 1% for the poorest 20% of Americans.
The disparity between the wealthiest 1% grew even bigger during the 2000s. According to economists Thomas Pikkety and Emmanuel Saez, the incomes of the top 1% grew on average more than $521,000 per year between 2002 and 2007. According to their research, during this time the top tenth of one percent grew by an average of nearly $3.5 million per year. In the same five year period the average annual income of the bottom 90% grew by about $1,200 per year.
During these tough economic times, many people might be thrilled to have any income and would be even more excited if their incomes grew at all. As the Los Angeles Times reported earlier this year, the recession has touched just about everyone, even the wealthy. In 2008, the number of millionaires in the United States declined…but soon rebounded in 2009 as the stock market rose.
By contrast, the unemployment rate has hovered near 10% for better than a year, and home values remain depressed. Most Americans’ economic well being stems from income from work and from home equity, while the wealthiest 1% typically gets most of their income from investments and are less impacted by a bad job market or by real estate fluctuations.
The Times article also reports on a study that showed an increase in the concentration of wealth between 2007 and 2009:
“The recession is going to end up accentuating the inequalities of income and wealth we've seen for 30 years,” said Larry Mishel, president of the Economic Policy Institute in Washington. “This requires attention if we're going to see robust wealth growth going forward.”
The hidden nature of wealth enables inequality to flourish. Some of my students felt angry when they learned that their classmates had started the game with so much more than they did. Others admitted that they began to look down on their classmates who had little to trade during the game. Overall they demonstrated a variety of different strategies and reactions to the way the game was structured. But it is much easier to play if you know how the game works.