NCPA - National Center for Policy Analysis

Inequality Of Wealth Not Growing

February 3, 1997

Every few years, the Federal Reserve conducts a survey of consumer finances to find out information on family saving, debt and other factors that may affect monetary policy. In the course of collecting this data, the Fed also collects a considerable amount of data on family net worth that is often used to draw sweeping conclusions about inequality.

In 1992, for example, the Fed released the results of its 1989 survey, the first since 1983, that showed the wealthy significantly increasing their wealth and everyone else lagging behind. Papers like the New York Times trumpeted the figures on page one. Paul Krugman, an economics professor at the Massachusetts Institute of Technology, was quoted saying, "It's another example of a big unprecedented jump in inequality to Great Gatsby levels." Predictably, the Washington Post cited the data as confirming the fact that Ronald Reagan's economic polices only benefited the rich.

Since then two Fed surveys of consumer finances have contradicted the conclusions drawn from the 1989 data. The 1995 data have just been released by the Fed and are published in the January issue of the Federal Reserve Bulletin.

  • The two Fed surveys found that the net worth of those at the bottom end of the income scale have massively increased since 1989 -- by as much as 200 percent.
  • At the same time, many of those higher up the scale are actually worse off in terms of net worth.

However those with modest incomes haven't suddenly done phenomenally well while those with high incomes are faltering.

  • What the survey really shows is that the 1989 data were simply wrong.
  • The 1992 and 1995 data are, in fact, very consistent with the 1983 data.
  • In all likelihood, therefore, what is really happening is that the data have returned to trend after being off course in the 1989 survey.

The changes in family net worth are simply adjustments to figures that showed the wealthy doing far better than they actually were.

The Federal Reserve survey is based on a very limited number of families -- about 4,000 for the whole country. And because too few wealthy show up in a random population sample, the Fed must get a disproportionate number of wealthy families to respond and reveal intimate details about their finances--a difficult endeavor. Even so, there is no guarantee that the results will really be representative of the whole country. Thus it is the trend we need to watch and not focus too much on any one year's data. Contrary to liberal scaremongers the trend shows little recent change in the distribution of wealth in America.

Source: Bruce R. Bartlett, senior fellow, National Center for Policy Analysis, February 3, 1997


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