Missing the Forest for the Walton Trees

I see that Elias has jumped on the study making the rounds that the net worth of America’s wealthiest family, the Walton’s, is greater than the combined net worth of the bottom 30% of Americans combined.  I must admit that upon first glance, I was just about equally shocked by this statistic.  It certainly seemed that it was quite proper to tout the study as a particularly outrageous example of the severity of income inequality in this country.

But then I looked at the study a bit more closely.  It turns out that the study really may be indicative of a severe problem in this country.  But the statistic most being cited about the Waltons’ wealth in fact turns out to say extraordinarily little about inequality.  Instead, it mostly stands for the proposition that in 2007, just before the housing market crash, around 18% of Americans had more liabilities than assets, and that the next 12% had a net worth just large enough to cover the negative net worth of that 18%.  Believe it or not, had the report used the estimates on wealth in 2009, the percentage of Americans with a lower combined net worth than the Waltons would be even more sensational sounding – probably close to 40% – thanks to the devastating effects of the housing crash on net worth.

The study – the full version of which seems to be here – is based on a combination of data from the triennial Survey on Consumer Finances and, for calculation of the Waltons’ wealth, from Forbes magazine’s estimates.  As you will see, the Forbes estimates of the Waltons’ wealth are basically irrelevant.  Instead, what is important is how the wealth of the rest of us is calculated.  “Wealth” is susceptible to any number of different meanings and manners of calculation, many of which are laden with all sorts of normative values, but for purposes of this study, it seems that “wealth” was quite reasonably defined as “net worth,” i.e., current asset values minus current liabilities. Income and expected future income are essentially left out of the equation entirely.

It is entirely reasonable to rely upon this definition of “wealth,” as it is an accepted definition that is mostly devoid of normative valuation problems.

Unfortunately, by defining “wealth” as “net worth,” it is very difficult for any resulting comparison to tell us much of meaning about inequality.  This is because of simple math: if a sizable number of people have negative net worth because of student loans, mortgage payments, or car payments, then it will take a sizable number of people with small positive net worth to make the combined total reach a positive number.

So when we say that the Waltons have more wealth than any given percentage of Americans combined, without knowing the specific amount of the Waltons’ combined wealth or the specific amount of wealth owned by that given percentage of Americans, it is actually possible that the Waltons’ combined wealth was zero or even, for that matter, negative.  In other words, when we say that the Waltons have a combined net worth greater than the combined net worth of 30% of Americans, what we may well really be saying is just that around 30% of Americans have a combined net worth of zero.  As it turns out here, the source study indicates that in 2007, about 18.6% of Americans had zero or negative net worth, with an additional  11.4% of Americans having a net worth of less than $12,000 (2009 dollars).  In other words, these same statistics could be used to say that someone with a net worth of $1 had more wealth than about 30% of Americans in 2007.

Nor was this bottom 18.6% necessarily “poor” in any meaningful sense – it’s going to include renters with car payments, and just about anyone with student loans to pay off, regardless of their income or future income expectations.   In other words, that percentage would include a second year associate at a big law firm making $125,000+ a year in salary.  Indeed, such a person would have an especially negative net worth.

And, for that matter, it’s not even necessarily true that those who are poor were within this bottom 18.6% – a family on welfare who had a 30 year old, fully paid-for piece of crap car (or no car at all), rented their home, and having ancient, but fully paid-for furniture and maybe a couple of hundred bucks in a bank account somewhere could easily have a positive net worth.  Merely by having that positive net worth, they, too, would be “wealthier” by this definition than almost 30% of Americans combined.

In other words, what citing this statistic as “the Waltons are wealthier than 30% of Americans” does is to obfuscate that in 2007 about 18.6% of Americans had negative wealth (apparently the highest percentage for the preceding 25 years, though only slightly higher than in 1995), and that by 2009, thanks to the housing crash, this number likely jumped to a whopping 24.8%.  That is itself a very real problem.  Moreover, that number had been in the range of 15.5%-18.0% for about 25 years, and in 2004 was just 17%.  The 1.6% jump from 2004 to 2007 appears to have been the biggest three year jump since around 1983.

Then the housing crash hit and in 2009 (the last year of data and the year after the crash) it jumped up to 24.8 percent, which appears to be the highest level in at least 50 years.*  We don’t know whether or by how much that has increased or decreased since then, but it seems somewhat more likely to have increased than decreased.  In an unstable job market, having 25 percent of American households with more liabilities than assets is a recipe for very, very bad things.

Talking about how the Waltons in 2007 had a net worth greater than the combined net worth of 30% of American households when someone with a net worth of a dollar would have had a net worth greater than the combined net worth of perhaps 29 percent is disingenuous and distracts from this much more real and concrete problem of personal debt.

I’m not here dismissing that inequality can in and of itself be a real problem.  Nor am I dismissing the notion that there is massive and perhaps unjustifiable economic inequality in this country.  But if there is, saying that “the Waltons have more wealth than 30% of Americans combined” has nothing to do with it.
*Emphasis on “appears,” as the paper doesn’t provide data between 1962, when a little over 24% had negative or zero net worth, and 1983, when only 15.5% had negative or zero net worth.