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This time, the rich aren't getting richer
WEALTH GAP: New data suggest this recession hit the very affluent harder
Published: Friday, August 21, 2009 at 1:00 a.m.
Last Modified: Thursday, August 20, 2009 at 11:18 p.m.
By DAVID LEONHARDT
and GERALDINE FABRIKANT
The New York Times
The rich have been getting richer for so long that the trend has come to seem almost permanent.
They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. Recent news about resurgent Wall Street pay seemed to suggest that not even the Great Recession could reverse the rise in income inequality.
But economists say -- and data are beginning to show -- that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.
For every investment banker whose pay has recovered to its pre-recession levels, there are several who have lost their jobs -- as well as many wealthy investors who have lost millions. As a result, economists and other analysts say, a 30-year period in which the super-rich became both wealthier and more numerous may be ending.
Just how much poorer the rich will become remains unclear. It will be determined by, among other things, whether the stock market continues its recent rally and what new laws Congress passes in the wake of the financial crisis. At the very least, though, the rich seem unlikely to return to the trajectory they were on.
Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.
Bill Gates, Warren E. Buffett, the heirs to the Wal-Mart Stores fortune and the founders of Google each lost billions last year, according to Forbes magazine.
In one stark example, John McAfee, an entrepreneur who founded the antivirus software company that bears his name, is now worth about $4 million, from a peak of more than $100 million.
McAfee will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the simultaneous crash in real estate and stocks.
"I had no clue," he said, "that there would be this tandem collapse."
Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price. In one ZIP code in Vail, Colo., only five houses sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick.
"We had a period of roughly 50 years, from 1929 to 1979, when the income distribution tended to flatten," said Neal Soss, the chief economist at Credit Suisse. "Since the early '80s, incomes have tended to get less equal. And I think we've entered a phase now where society will move to a more equal distribution."
Few economists expect the country to return to the relatively flat income distribution of the 1950s and 1960s. Indeed, they say that inequality is likely to remain significantly greater than it was for most of the 20th century.
But economists say that the rich will probably not recover their losses immediately, as they did in the wake of the dot-com crash earlier this decade. That quick recovery came courtesy of a new bubble in stocks.
This time, analysts say, Wall Street seems unlikely to return soon to the extreme levels of borrowing that made such a bubble possible.
Perhaps the broadest question is what a hit to the wealthy would mean for the middle class and the poor. The best-known data on the rich comes from an analysis of Internal Revenue Service returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning 1/10,000th of households was roughly $2 million, in inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5 million.
One of the starkest patterns is the extent to which the incomes of the very rich are tied to the stock market. They have risen most rapidly during the biggest bull markets: in the 1920s and the 20 years starting in 1987.
"We are coming from an abnormal period where a tremendous amount of wealth was created largely by selling assets back and forth," said Mohamed A. El-Erian, chief executive of Pimco, one of the country's largest bond traders. Some of this wealth was based on real economic gains, like those from the computer revolution. But much of it was not, El-Erian said.
"You had wealth creation that could not be tied to the underlying economy," he added, "and the benefits were very skewed: they went to the assets of the rich. It was financial engineering."
But if the rich have done well in bubbles, they have taken enormous hits to their wealth during busts. A recent study by two Northwestern University economists found that the incomes of the affluent tend to fall more in recessions than the incomes of the middle class.
This time, the rich aren't getting richer
WEALTH GAP: New data suggest this recession hit the very affluent harder
Published: Friday, August 21, 2009 at 1:00 a.m.
Last Modified: Thursday, August 20, 2009 at 11:18 p.m.
By DAVID LEONHARDT
and GERALDINE FABRIKANT
The New York Times
The rich have been getting richer for so long that the trend has come to seem almost permanent.
They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. Recent news about resurgent Wall Street pay seemed to suggest that not even the Great Recession could reverse the rise in income inequality.
But economists say -- and data are beginning to show -- that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.
For every investment banker whose pay has recovered to its pre-recession levels, there are several who have lost their jobs -- as well as many wealthy investors who have lost millions. As a result, economists and other analysts say, a 30-year period in which the super-rich became both wealthier and more numerous may be ending.
Just how much poorer the rich will become remains unclear. It will be determined by, among other things, whether the stock market continues its recent rally and what new laws Congress passes in the wake of the financial crisis. At the very least, though, the rich seem unlikely to return to the trajectory they were on.
Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.
Bill Gates, Warren E. Buffett, the heirs to the Wal-Mart Stores fortune and the founders of Google each lost billions last year, according to Forbes magazine.
In one stark example, John McAfee, an entrepreneur who founded the antivirus software company that bears his name, is now worth about $4 million, from a peak of more than $100 million.
McAfee will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the simultaneous crash in real estate and stocks.
"I had no clue," he said, "that there would be this tandem collapse."
Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price. In one ZIP code in Vail, Colo., only five houses sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick.
"We had a period of roughly 50 years, from 1929 to 1979, when the income distribution tended to flatten," said Neal Soss, the chief economist at Credit Suisse. "Since the early '80s, incomes have tended to get less equal. And I think we've entered a phase now where society will move to a more equal distribution."
Few economists expect the country to return to the relatively flat income distribution of the 1950s and 1960s. Indeed, they say that inequality is likely to remain significantly greater than it was for most of the 20th century.
But economists say that the rich will probably not recover their losses immediately, as they did in the wake of the dot-com crash earlier this decade. That quick recovery came courtesy of a new bubble in stocks.
This time, analysts say, Wall Street seems unlikely to return soon to the extreme levels of borrowing that made such a bubble possible.
Perhaps the broadest question is what a hit to the wealthy would mean for the middle class and the poor. The best-known data on the rich comes from an analysis of Internal Revenue Service returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning 1/10,000th of households was roughly $2 million, in inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5 million.
One of the starkest patterns is the extent to which the incomes of the very rich are tied to the stock market. They have risen most rapidly during the biggest bull markets: in the 1920s and the 20 years starting in 1987.
"We are coming from an abnormal period where a tremendous amount of wealth was created largely by selling assets back and forth," said Mohamed A. El-Erian, chief executive of Pimco, one of the country's largest bond traders. Some of this wealth was based on real economic gains, like those from the computer revolution. But much of it was not, El-Erian said.
"You had wealth creation that could not be tied to the underlying economy," he added, "and the benefits were very skewed: they went to the assets of the rich. It was financial engineering."
But if the rich have done well in bubbles, they have taken enormous hits to their wealth during busts. A recent study by two Northwestern University economists found that the incomes of the affluent tend to fall more in recessions than the incomes of the middle class.
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