Thinking

Something very peculiar is going on at the top of the US wealth distribution

Inspired by the FT piece on the world’s überwealthy, I decided to explore the very top of the US wealth distribution. Figure 1 displays the average net worths in constant 2016 dollars of the top 1 percent, 0.1 percent, 0.01 percent, and 0.001 percent of the wealthiest adults in the United States over the past 100 years. (All data that appears in this post is from here.)

NetWorths

Figure 1. Average net worths at the top of the food chain.

We see that the neoliberal wealth boom is simply unprecedented. After fluctuating at historical levels until the 1980s, the fortunes of the richest Americans took off like a rocket. The rich have never been quite as rich as they are today.

Figure 2 zooms into the past twenty years. Within a very broad upward march, we can see dramatic fluctuations with the asset price booms of the late-1990s and the mid-2000s. But notice how the fortunes of the really rich had a different trajectory from the merely rich; especially over the past decade. Why?

AvgNetWorth19952015

Figure 2. Average net worth of the wealthiest over the past twenty years.

Figure 3 zooms in even further to 2004-2014 and allows us to examine the anomaly up close. While the total net worth of the top 1 percent and the 0.1 percent contracted sharply in 2009, that of the top 0.01 percent and the top 0.001 percent suffered only a mild correction. Concretely, while the former fell by 17 and 16 percent respectively in 2007-2009, the latter fell by only 3 and 4 percent. Why? Conversely, the former grew by 6 and 4 percent in 2010-2011, while the latter contracted by 17 and 13 percent. Why??

CloseUp

Figure 3. Average net worths of the top echelons.

Perhaps thresholds contain some information that may help us figure out what’s going on here. Figure 4 displays the threshold net wealth required for admission into these rarified echelons since the mid-1960s.

Thresholds

Figure 4. Threshold net worths for the upper echelons.

We see that fluctuations in the top 1 percent, 0.1 percent and 0.01 percent are similar: Rapid rises in the late-90s and mid-2000s booms and sharp corrections during the recessions. But quite strikingly even the bottom rung of the top 0.001 percent seem to have avoided a comparable loss in 2008-2009. Again, we zoom in to see what’s going on over the past decade or so. Figure 5 below displays the threshold net worths for the upper echelons over 2004-2014.

Thres2

Figure 5. Threshold net worths for the upper echelons.

The evidence from the bottom rungs of the upper echelons is even more striking. It is clear that the very richest of individuals were able to protect themselves much better against global macro fluctuations than those right below them.

The 0.001 percent constitute the extreme top of the wealth distribution reported in the Piketty-Saez-Zucman database. The minimum personal net wealth in this rarified realm is a staggering $530 million. There are approximately 2,000 adults in the United States who clear that threshold. Their average net worth is $2.1 billion, up an astounding 792 percent since 1985. By comparison, the average net worth of the top 1 percent grew 322 percent and the average net worth of US households grew 289 percent over the same 30 year period 1985-2014.

More generally, over the past thirty years, the further up we go, the greater the gain. Table 1 displays the compounded rate of growth of average net worths in the upper echelons. The differentials may look small until you recall the magic of compounding. If your wealth grew at 7.2 percent instead of 4 percent, you’ll end up 2.5 times richer in thirty years. See the third column of Table 1 for exact figures.

Table 1: Accumulation rates.

Annual growth in net worth (1985-2014, compounded) In 30 years $1,000 invested at these rates accumulates to…
1 percent 4.03% $3,272
0.1 percent 5.04% $4,372
0.01 percent 6.14% $5,975
0.001 percent 7.24% $8,141

Piketty has shown in Capital that larger fortunes grow at higher rates. The Piketty-Saez-Zucman database corroborates that finding. One reason why that holds is that the truly wealthy have access to lucrative investment strategies unavailable to lesser investors. Another is that business equity accounts for a much greater portion of their net worth than that of lesser mortals. Yet another may be that they have easier access to leverage (which mechanically increases return on equity).

But all this still doesn’t explain how the truly rich enjoy greater protection against global macro fluctuations. Surely, they didn’t all short US housing in 2007? Perhaps the truly wealthy avoided the 2008-2009 bloodbath simply because housing is an insignificant portion of their portfolio?

It could also be that the billionaires who populate the very top of the food chain own serious equity in superstar firms which continued to perform relatively well through the financial crisis and the recession? Is that what explains this anomaly?

However this anomaly is resolved, one thing is clear. We should be very careful in extrapolating what we see in, say, the Forbes 400 to the rest of the rich. The oligarchs are in a class all by themselves.


Bonus round. In 2014Q4-2017Q1, US household wealth grew by 12.9 percent according to the Federal Reserve. If net personal wealth grew at the same rate it would be around $79 trillion. And if the shares of the upper echelons remain unchanged, the estimated aggregate net worths of the top 1 percent, 0.1 percent, 0.01 percent and 0.001 percent would be $29, $15, $8, and $4 trillion dollars respectively. That would place the aggregate net worth of the 1 percent at roughly the same level as the aggregate personal wealth of all US residents as late as 1990. See Figure 6 below.

Table 2: Aggregate wealth and wealth shares of the upper echelons (2014).

Aggregate Net Worth (trillions of 2016 dollars) Shares
1 percent 26 37%
0.1 percent 13 19%
0.01 percent 7 10%
0.001 percent 4 5%
Net Personal Wealth 70 100%
NPW

Figure 6. Aggregate personal wealth of US residents. 

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