Saez and Zucman: Telling the Truth About Wealth Inequality

It was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012—a level almost as high as in 1929. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined. The increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality. — “Wealth Inequality In the United States Since 1913: Evidence From Capitalized Income Tax Data,” by Emmanuel Saez and Gabriel Zucman, NBER Working Paper No. 20625, October 2014 (here)

The Saez/Zucman working paper is easily, in my opinion, the most significant development in inequality economics this year. Income inequality has been suggestive of a major problem for about a decade, and the best information we have on that score has been presented by Saez and fellow French economist Thomas Piketty. The problem with income inequality has been that it is far too easily rationalized away, and it has been. The proof of the problem lies in wealth inequality, which is the consequence of transfers of wealth to the top from lower down.

To be sure, they do not quite come right out and say that: There are allusions in this report to the inadequacy of taxation. But the political climate in America right now is extremely destructive. Mr. Zucman is with the London School of Economics and Mr. Piketty is with the Paris School of Economics, but Mr. Saez is on the faculty at Berkeley, and may face some uniquely American constraints. The findings of this study challenge some core underpinnings of “neoclassical” economics, which has been the mainstream ideology in the United States for over a century. He and Zucman are sensibly building a body of scientific evidence that will make the macroeconomic impacts of growing inequality undeniable. They are not contesting ultimate or political conclusions.

With this study, these two are pointing the way to real progress. Piketty published Capital in the 21st Century early in 2014, but unfortunately he could not overcome the constraints of supply-side modeling. He unveiled two “fundamental laws of capitalism” which revived outmoded production function-based growth models that, as he acknowledged, required a long-run equilibrium of savings and investment (a circumstance that never occurs) to be true. His paradigm was subjected to a great deal of criticism, but at least he deserves much credit for calling public attention to the problem of wealth inequality and for his discussion of income inequality in the United States. (See my three posts on Piketty, the second of which analyses the “laws of capitalism” from the perspective of Gardner Ackley, author of Macroeconomic Theory, the leading textbook in the early 1960s, here).

One thing seems certain: The details of this paper will be under attack by the powerful top 0.1% of wealth holders, whose wealth concentration is determined to be of paramount importance. They continue to hold fast to the trickle-down illusion with which they have misled nearly everyone (and by now, most likely, fooled themselves) into believing that their own tax avoidance is good for the economy.

The latest evidence of this is in this morning’s New York Times under the byline “Wall Street Wonders about Hillary Clinton,” and also on-line as “Hillary Clinton’s Comment About Corporations and Job Creation Raises Wall St.’s Eyebrows,” by Andrew Ross Sorkin, New York Times, October 27, 2014 (here). On the campaign trail in Boston, Ms. Clinton said this:

Don’t let anybody tell you that it’s corporations and businesses that create jobs. You know that old theory, trickle-down economics. That has been tried, that has failed. It has failed rather spectacularly.

She also said: “I love watching Elizabeth give it to those who deserve to get it.” Sorkin’s reaction:

Mrs. Clinton didn’t explicitly say who deserved to get it, but she appeared to be directing her ire at Ms. Warren’s favorite target, Wall Street banks. Within the world of finance, Mrs. Clinton has long been seen as a friend of Wall Street — or at least not an enemy. She has rarely engaged in the kind of vitriol that has made Senator Warren a hero of the progressive left.

Just about every time I hear an Elizabeth Warren speech, I hear her declare that trickle-down is a myth. It has, in fact, been repeatedly disproved since 1912. So, when people like Sorkin maintain that arguing for correct economics is “vitriol” and makes you an “enemy of Wall Street,” to me that reflects the powerful lock that economic ideology has on American politics and minds, and certainly on the mainstream media.

This is the atmosphere into which Saez and Zucman have published their NBER Working Paper for peer review and NBER approval. I looked for, but did not find, media coverage of the release. Frankly, without a free and open internet on which studies like this can be posted for people like me to find, important truths about our world might never be revealed. One of the main things this study does, in spades, is provide still more (and overwhelmingly conclusive) refutation of the trickle-down theory.

The 20th Century Growth of Wealth Concentration

Here is Figure 9 in the Saez/Zucman Appendix:

one percent 90 percent smallThere has been a common misconception that wealth inequality has not been growing much. However, Saez and Zucman concluded:

On the basis of new, annual, long-run series, we find that wealth inequality has considerably increased at the top over the last three decades. By our estimates, almost all of this increase is due to the rise of the share of wealth owned by the 0.1% richest families, from 7% in 1978 to 22% in 2012, a level comparable to that of the early twentieth century (Figure 1). The top 0.1% . . . includes about 160,000 families with net assets above $20 million in 2012.

The huge reduction in lower 90% wealth share after the crash of 2008 reflects the huge drop of home values, which constitute the largest portion of lower 90% wealth. Since then, there has been rapid growth of top 1% wealth while bottom 90% real average wealth has declined.  

This chart traces the growth of top 1% (not top 0.1%) wealth, but I want to make a few points based on this fractile share. First, compare the growth of top 1% income over the same period (“Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” by Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, NBER Working Paper 17616, November 2011, here) :


The income inequality comparison is with the bottom 99%, not the bottom 90%, but the similarity between the two charts is striking: The trends have nearly identical turning and crossover points. This underscores the fact that wealth accumulates fairly quickly from income, as well as from the compounding of existing wealth. Saez and Zucman reached this conclusion:

Rising income inequality does matter a lot for the dynamics of the top 1% wealth share. The share of income earned by families in the top 1% of the wealth distribution has doubled since the late 1970s, to about 16% in recent years. This increase is slightly larger (in relative terms) than the increase in the top 1% wealth share, suggesting that the main driver of the increase in the top 1% wealth share is the upsurge of their income. (p. 31)

There may be a major effort to discredit the Saez/Zucman study, both its approach and results, once it gets more publicity. Their basic approach was to develop savings estimates from “capitalized income” data, instead of relying on wealth survey data, such as the Survey of Consumer Finances. They needed to do this, they explained, because the dependability of survey data breaks down  in the case of very wealthy people, like the top 0.01 percent and the top 0.001%. They compared their results to survey results for SCF data, which showed considerably lower concentrations for the top 0.1%, both baseline and adjusted, since 2002.

From the standpoint of macroeconomic impacts, however, it is the the magnitude of the wealth transfers into the top 1% that is important, not how far up into the top 0.1% the highest concentration extends. My own study of that issue provides additional corroboration of the accuracy of the Seaz/Zucman approach:

my graph 1952-1982 c

My estimation of wealth transfers into the top 1%, shown in this graph (the purple line) which I prepared almost a year ago (see “Inequality and the National Debt.” posted April 9, 2014, here), is based on the application of Edward Wolff’s wealth distribution factors to the Census Bureau’s wealth (net worth) data. The trend line is nearly identical to the Saez/Zucman trend line, and that provides important corroboration for both of our results, which were based on different sources of wealth estimates.

There is an important difference between their estimate of the growth of total top 1% wealth and mine since 1980. My estimate is that top 1% wealth grew from $4 trillion in 1980 to $20 trillion in 2012, which is the last year of available data. I added a conservatively estimated $2-5 trillion of unreported offshore American wealth, based on the following:

There was an estimated $21-32 trillion of global wealth held in offshore accounts in 2012 (Tax Justice Network). U.S. GDP was $16.7 trillion, almost 20% of the Gross World Product (GWP) of $85 trillion, so a reasonable estimate of the amount of off-shore money coming from U.S. depositors would be $4-6 trillion. (“Inequality and the National Debt,” April 9, 2014, here)

I further adjusted my estimate of wealth transfers to the top 1% to account for massive wealth transfers to the to 1% in the first half of 2013. (Aggregate net worth had grown by $3 trillion in the first half of 2013, according to the Census Bureau, and Saez had reported that 95% of income growth was going into the top 1%, so most of the 2013 net worth growth, I reasoned, must have gone to the top 1%.) For comparability to the Saez/Zucman data, that adjustment must be excluded here.

The reported Top 1% net worth in 2012 was  $20 trillion in 2005 dollars (about $21.8 trillion in current dollars), according to Edward Wolff’s wealth distribution figures and the Census Bureau’s net worth data.  A rough estimate in 2010 dollars would be $21 trillion plus $2-5 trillion offshore wealth, resulting in a range of wealth of $23-26 trillion for 2012, or a growth from 1980 of $19-22 trillion.

The Saez/Zucman graph above presented estimates of the average wealth of individual taxpayers, not total wealth levels. To convert the 2012 amounts to total top 1% wealth, I’ll use the 2010 estimate of about 116.7 million households. This generates a figure for top 1% wealth in 2012 of $16.3 trillion; the 1980 population was 226.5 million, so we can estimate (on the assumption that the ratio of households to population remained the same between 1980 and 2010, there were 85 million households in 1980) that the total top 1% wealth implied by the Seaz and Zucman average was $3.4 trillion in 1980. The end result is a rough estimate of about $12.9 trillion increase in top 1% wealth from 1980 to 2012, compared to my estimate of top 1% wealth growth of $19-22 trillion.

Obviously a lot of work needs to be done here. One explanation for the difference may be in the Census Bureau’s use of households, rather than taxpayers, and my understanding is that converting the Census-based estimate to a taxpayer-based estimate would reduce the range to about $15.2-17.6 trillion, but I am uncertain about that. Beyond that, it may be important that Saez and Zucman, as I understand it, only capitalized income from revenue producing assets, and excluded from their definition of wealth a number of categories of assets into which income can be invested. (For example, they excluded wealth from non-profit institutions, “which amount to about 10% of household wealth” – p. 4.) Piketty and Saez, moreover, have acknowledged that their U.S. income database may have significantly understated top incomes. In any event, a thorough review will be needed to explain the discrepancy with the Census Bureau’s published net worth data. It is no easy matter to gather wealth data, and it is possible that all of these numbers are understated. The fact remains that all sources of “earned” income, as well as all money generated by preexisting assets, can be saved and converted into wealth. 

What would ultimately be useful are figures for per capita growth of top 1% wealth over this period. Why is this important? We know a few things for sure about the macroeconomic implications of these wealth increases at the top:

(1) Even the low estimate of a $13 trillion increase in top 1% wealth since 1979 is an unimaginably huge amount, representing more than $41,000 for every man, woman, and child in the entire U.S. population;

(2) That wealth did not just materialize out of thin air. It was generated by reduced incomes and savings in the bottom 99%, and from money created by federal borrowing to compensate for the tax reductions that allowed the top 1% to save so much more of its income; and

(3) the top 1% is continuing to evade its former tax responsibility, so the public debt burden continues to grow, income and wealth continue to concentrate, and the bottom 99% economy continues to decline.

The whole truth about the cost of inequality may well be a bit too frightening for a population used to thinking in ideological terms to absorb. Many will simply turn away and bury their heads in the sand. But we should all grab at least one piece of low-hanging fruit:


The wealth has stayed up, in numbers far greater than Hillary Clinton or Elizabeth Warren or other “progressives” on the “left” have so far even dared to imagine. The minions of the right, when this is all over (and it will end, sooner rather than later) will be known as “radicals,” not “conservatives.”      


The Saez/Zucman paper is far more sophisticated than my brief report reveals. The authors develop “synthetic savings rates” from the income data. Joseph Stiglitz and Robert Reich are among those who have (correctly) argued the Keynesian point that inequality reduces growth because rich people save much more than others, idling money that would be spent if left in the hands of those below them. That point is fully borne out by this study:

These results underscore that the key drivers of the rise in wealth inequality have been the surge in income inequality combined to an increase in saving rate inequality — and in particular the collapse of the saving rate of the bottom 90%. (p. 31)

And they explain further:

First, saving rates tend to rise with wealth. Bottom 90% wealth holders save around 3% of their income on average, the next 9% save about 15% of their income, while the top 1% save about 20-25% of their income. The main exception is the decade 1930-1939: during the Great Depression the top 1% saving rate was negative, because corporations had zero (or even negative) profits yet still paid out dividends, so that they had large negative saving. This decade of negative saving at the top greatly contributed to the fall in top wealth shares during the 1930s (see below). . . . [T]he fact that saving rates sharply rise with wealth implies that long-run top wealth shares will be substantially higher than long-run top income shares (when ranking individuals by wealth).

Second, saving rate inequality has increased in recent decades. The saving rate of bottom 90% families has sharply fallen since the 1970s, while it has remained roughly stable for the top 1%. The bottom panel of Figure 11 zooms in on the annual saving rate of the bottom 90%, which fell from around 5%-10% in the late 1970s and early 1980s to around -5% in the mid-2000s, and bounced back to about 0% after the Great Recession. The long period of negative saving rate for 90% of the population from 1998 to 2008, due to massive increases in debt (in particular mortgages) fueled by an unprecedented rise in housing prices (see e.g. Mian and Su_, 2014), is particularly striking. Even more striking is the fact that while bottom 99% saving fell a lot in the years preceding the Great Recession, top 1% families continued to save at a high rate. (pp. 29-30)

figure 11 savings

Figure 11 shows, in the top panel, how much more the top 1% is saving relative to the next 9% — the former middle class — and the bottom 90%. The alarming bottom panel shows that the bottom 90% has been accumulating debt since 1996. The interest on that debt just enriches the top 1%, exacerbating inequality, and creates debt “bubbles,” which like the housing bubble in 2008 eventually burst. This chart does not show the elimination of bottom bottom 90% negative savings because of an actual rise in saving or income; rather, the debt was wiped out by the loss of assets — their homes. Positive savings will not be established, even in the top 10-1%, with the expanding student debt bubble.


There is much more in this study that I could discuss here, but my purpose was to alert readers to this major development. Readers would do well to go directly to the working paper and reach their own conclusions. Those who do will find much more there than first meets the eye. My perspectives on the mechanisms of inequality growth, and the bases for my conclusion that income and wealth distribution are the primary factors determining prosperity or decline, are set forth in my recent article “The Economics of Inequality,” published in The Torch Magazine, Fall 2014  (here).

Wealth concentration is an inevitable, persistent, long-run phenomenon. John Maynard Keynes once famously said, “In the long run we are all dead.” True enough, but it’s also true that for wealth concentration, the long run is much shorter than Keynes might have imagined, as Saez and Zucman reveal. We have an inequality cycle that has become critical in just over three decades. It will likely take longer for economic research to catch up than there is time available. We must act immediately to enact sufficiently progressive taxation to avoid a major collapse.

It is a hopeful sign that Emmanuel Saez and Gabriel Zucman are working hard to uncover the truth, but the mountain that rises before them is high and steep. A new scientific understanding of how market economies work is badly needed, and much work remains to be done. This new study of wealth inequality in the United States, the first of its kind, is a welcome and important step in the right direction.

The mid-term elections are just a week away. In the worst case scenario, the powers of ideology will take complete control of Congress, and the ultimate disaster will be that much closer at hand. Emmanuel Saez and Gabriel Zucman will keep working hard, I am certain, and we all must do the same.

JMH — October 28, 2014 (ed. October 29, 2014)

This entry was posted in - FEATURED POSTS -, Economics, Taxation, Uncategorized, Wealth and Income Inequality. Bookmark the permalink.

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