Every four years presidential candidates in the U.S. pledge to help the middle class.  Whether it's job creation or tax cuts, the promise to close the gap in the U.S. is a campaign throwaway line. While the global inequality gap is closing thanks to the growing middle class in places like China and India, the gap in the U.S. is wider than it has ever been. 

In a September paper titled Changes in U.S. Family Finances, the Federal Reserve released a paper on changes in household finances. In its summary, the Fed said, "these changes in aggregate economic performance led to broad-based income gains across many different types of families." However, while total wealth in the U.S is growing, the findings don't back this up. The disparity of wealth, income, and education between the top 1 percent and the rest of America is growing so wide that one could argue what we are seeing is the hollowing out of the middle class. 

Income and Wealth Gap

Despite unemployment in the U.S. at record lows, wage inflation remains subdued, pushing real wages lower, and what wage inflation there is goes to those who are already wealthy. Post-crisis and the demise of the U.S. manufacturing sector saw many in the rust-belt area out of work. With little or no qualifications they were forced into low paying jobs with no room for wage negotiation. This shift has suppressed low income wages for a decade. "Median income increased 9 percent for the top income decile, between 5 and 8 percent for the middle three quintiles, and 3 percent for the bottom income quintile," the report said. 

"These patterns are consistent with a widening of the income distribution between 2013 and 2016." 

As with the income gap, the wealth gap is just as alarming. As the economy recovered after the Great Recession, the gap between rich and poor widened. The record-breaking U.S. equity market coupled with the housing market recovery saw the average net worth of all families increase 16 percent to $97,300. However, the mean net worth rose 26 percent to $692,100 – meaning the recovery has disproportionately helped the rich. 

Source: Federal Reserve

The last three years is a continuation of a 30-year trend. In 1989, the top 1 percent of Americans made up less than 30 percent of total wealth, which was less than the next 9 percent, and the bottom 90 percent. A generation later, and things have flipped on their head. "The wealth share of the top 1 percent climbed from 36.3 percent in 2013 to 38.6 percent in 2016," the report said. 

"Similar to the situation with income, the wealth share of the bottom 90 percent of families has been falling over most of the past 25 years, dropping from 33.2 percent in 1989 to 22.8 percent in 2016." Translation: The top 1 percent of Americans are 70 percent richer than the bottom 90 percent. 

QE: Monetary Policy For the Rich

How did we get here? While the trends in inequality have been one way since the survey began in 1989, it has accelerated in the period 2007 to 2016. During this period the U.S. experienced one of the worst financial crises in history, which wiped out trillions of dollars of Americans' wealth. However, what's more impressive than the collapse has been the recovery. As the Fed outlined, the recovery has disproportionately fallen on the wealthy; those who own assets, namely houses and equities have experienced wealth increases like no other generation. 

What has driven the appreciation in asset prices? In response to the collapse, the Federal Reserve embarked on the great experiment of quantitative easing. By buying up trillions of dollars of assets they [the Fed] hoped cheaper borrowing rates would spur growth. However, the recovery has been slow; for the most part growth has struggled to top 2 percent, and inflation remains subdued. 

What hasn't been slow is the recovery in the stock market. Since the 2009 lows, the S&P 500 has risen by more than 270 percent to 2500: a bull rally like no other in more ways than one. Since 2009, stock ownership rates in the U.S. have fallen to record low levels, and those that have benefited from the rally are a smaller proportion of the people. The Federal Reserve observes that the bottom 80 percent of Americans are worth less than they were in 2007. (See also: Stock Ownership Slips, Inequality Creeps.) 

Source: Federal Reserve

Take Away

Despite the total wealth and income rising, it's a fallacy to say the U.S. has seen broad-based gains across many family types. The lower class continues to struggle, as the wealthy prosper. Sadly the so-called great recovery has benefited a not-so-great number of Americans. In real terms 80 percent of Americans are worth less than they were in 2007, those without a college education are being left behind, and the booming stock market is aiding fewer than ever before. 


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