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Wealth inequality is growing—and it’s partly due to how we invest

Note: The Biden Forum Highlight is a series of quick reads on the middle class. Each week, editors at the Biden Forum will highlight a key insight from new economic research and break down what it means for middle-class Americans. What should we highlight next? Email your questions or recommendations to [email protected].

Many Americans cannot recall anything other than an economy with skyrocketing inequality. For the past several decades, income gains have disproportionately gone to a small, wealthy share of the population, and years of disparate income gains have led to an even starker divergence in wealth. But it’s not just income that matters for wealth inequality; it’s also the nature of the investments undertaken by Americans at different income levels.

new study by economists at the Minneapolis Fed has shed light on the forces driving this inequality — namely, the recent high return to stocks relative to gains in housing. For the first time, experts developed a database that shows household income and wealth information, including seven decades of detailed data on household investments. One of the key findings from this unique dataset is that middle-class and wealthy households have very different types of assets, and that this difference has driven recent trends in wealth inequality.

In particular, the researchers found that the primary source of middle-class wealth is homeownership, while the primary source of wealth for upper-income households is stock. From the 1950s to the 2000s, Americans saw both home prices and stock prices climbing. As a result, middle-class and upper-income household wealth rose simultaneously (see chart above). Somewhat surprisingly, from the start of the series in 1950 through 2007, the return on assets for the top 10 percent and the middle 40 percent was nearly identical.

This has all changed since the financial crisis. During the crisis, the quick rebound in stock prices boosted wealth at the top. But as housing prices collapsed without a significant rebound, the middle class saw substantial wealth losses and had yet to recover by 2016. As a result, in the years following the financial crisis, our nation bore witness to the largest increase in wealth inequality in postwar history.