Wealth Gap Continues to Grow

As Americans diligently work to recuperate from the worst economic recession since the Great Depression, recent reports show the road to recovery may prove to be very long.

The Great Recession, the economic downturn which began in 2007, led to a 40-percent drop in net worth for the median U.S. household. A family’s net worth includes all assets, such as real estate, minus debt. A combination of unemployment and a severe drop in home values contributed to the continued economic slump.

Middle Class Losing Wealth

While there have been small signs of a recovery, years of recession have created an enormous wealth gap between America’s most prosperous and the average family. According to the Economic Policy Institute, this gap has more than doubled in half a century. In 1962, the top 1 percent of people had 125 times the net worth of the median family. By 2010, however, the wealthiest Americans were said to have 288 times higher net worth.

Economists say the gap between the rich and the middle class has grown substantially for two simple reasons: the rich are acquiring more wealth while those in the middle class are losing it.

While the average American may have been experiencing a reduction in wealth for years, statistics show the trend gathered speed during the Great Recession. In 2010, the median household income was 6 percent lower than it was in 2000.

During this time, the median American household experienced a drop in net worth to $57,000, a large decrease compared to $73,000 in 1983, adjusting for inflation. The report suggests if wealth had grown equally across families in the last three decades, today’s median worth would be closer to $119,000.

The top 1 percent, on the other hand, saw growth from an adjusted $9.6 million in 1983 to $16.4 million, which some economists attribute to the rise in stock values. While people in the top 1 percent had only a 15-percent drop in wealth between 2007 and 2010, the median net worth of the average American household nearly halved.

Reasons for Reduced Wealth

Much of the reduction of wealth is blamed on the housing market collapse and the continuously high unemployment rate, which greatly affected both middle- and lower-income families.

According to the Economic Policy Institute’s biannual report, The State of Working America, the wages of average Americans, which include college graduates, are currently lower than they have been in more than 10 years. As hourly wages and compensation became stagnant after the 2001 recession, household incomes had already seen a decline before the Great Recession hit a few years later. Economists don’t see much change on the horizon and have forecasted Americans are most likely to lose another decade of growth as a result, according to the report.

Another large contributor to the economic gap is the American housing market. When the market spiraled downward several years ago, millions of homeowners were left with underwater mortgages, meaning they owed more on their mortgage than the property’s value. This removed the average American’s chance to acquire equity in the home. Then when people lost their jobs, millions were unable to make mortgage payments.

While all homeowners lost value on their homes, the report highlighted how this collapse greatly affected black and Latino households. The typical black household was left with a median net worth of $4,900 while the average Latino family saw an 86 percent drop to only $1,300 in net worth. White households were left with an average of $97,000 in net worth.

Economists blame the large gap in net worth on the fact that homeownership for blacks and Latinos grew rapidly during the housing boom, so they had more to lose when the market collapsed.

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

Lost Wealth

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    Sources:

    1. Economic Policy Institute (n.d.).The State of Working America, 12th Edition finds that policy-driven inequality has undercut low- and middle-income workers for past three decades. Retrieved on September 14, 2012 from http://stateofworkingamerica.org/12th-edition-press-release/
    2. Luhby, T. (2012, September 11). The wealthy are 288 times richer than you. Retrieved from http://money.cnn.com/2012/09/11/news/economy/wealth-net-worth/index.html?source=yahoo_hosted
    3. Luhby, T. (2012, September 12). Median income falls, but so does poverty. Retrieved from http://money.cnn.com/2012/09/12/news/economy/median-income-poverty/index.html?iid=obinsite