When the Middle Class Lost Its Wealth

By Moritz Schularick, Professor of Economics, University of Bonn. Originally published at the Institute for New Economic Thinking

We live in unequal times. The causes and consequences of widening disparities in income and wealth are a defining debate of our age. Recent research by Thomas Piketty and his co-authors has made major inroads into documenting trends in either income or wealth inequality. But we still know little about how the two evolve together, and why wealth inequality is so much higher than income inequality.

In a paper with my co-authors, “Income and Wealth Inequality in America” (Kuhn, Schularick and Steins 2018), we exploit a unique new dataset that allows us to track the joint distributions of income and wealth in the U.S. since 1949. The dataset builds on historical waves of the Survey of Consumer Finances (SCF), conducted by the Survey Research Center at the University of Michigan from 1948 to 1977. We linked the historical survey data to the modern SCFs that the Federal Reserve redesigned in 1983.

What do we find? Most importantly, we show that rich and poor households have very different assets. Middle-class households prominently own houses, while the top-10% predominantly own shares and business equity. This gives rise to a race between the housing market and the stock market in shaping the wealth distribution. Housing booms lead to wealth gains for leveraged middle-class households and tend to decrease wealth inequality. Stock market booms primarily boost the wealth at the top of the wealth distribution. Asset price changes can therefore lead to major changes in the wealth distribution. Over extended periods in postwar American history, such portfolio valuation effects have been key drivers of shifts in the U.S. distribution of wealth.

Moreover, asset price changes can decouple trends in income and wealth inequality for long time periods. This was predominantly the case in the four decades before the financial crisis when the middle class rapidly lost ground to the top 10% with respect to income but, by and large, maintained its wealth position thanks to substantial gains in housing wealth. Incomes of the top 10% more than doubled since 1971, while the incomes of middle-class households (50th to 90th percentile) increased by less than 40%, and those of households in the bottom 50% stagnated in real terms. Our data confirm a strong trend toward growing income concentration at the top.

However, when it comes to wealth, the picture is different, at least until the financial crisis. For the bottom 50%, wealth doubled between 1971 and 2007 despite zero income growth. For the middle class (50%-90%) and for the top 10%, wealth grew at approximately the same rate, rising by a factor of 2.5. As a result, wealth-to-income ratios increased most strongly for the bottom 90% of the wealth distribution.

Price effects accounted for the dominant part of the wealth gains of the middle and the lower middle class before the global financial crisis. For the bottom 50% virtually all wealth growth over the 1971-2007 period came from higher asset prices. From a political economy perspective, it is conceivable that these large wealth gains for the middle and lower middle class helped to dispel discontent about stagnant incomes for some time.

When house prices collapsed in the 2008 crisis, the same leveraged portfolio position of the middle class brought about substantial wealth losses, while the quick rebound in stock markets boosted wealth at the top. The bottom 50% lost 15% of wealth relative to 2007 levels, mainly because of lower house prices. By contrast, the top 10% were the main beneficiaries from the stock market boom and were relatively less affected by the drop in residential real estate prices. Substantial wealth losses at the bottom and in the middle of the distribution, coupled with wealth gains at the top, produced the largest spike in wealth inequality in postwar American history between 2007 and 2016.

We also study another central dimension of inequality, namely the racial income and wealth gap between black and white households. We show that income disparities between black and white households are as large today as they were in the pre-civil rights era. In 1950, the income of the median white household was about twice as high as the income of the median black household. In 2016, the median white household still has double the income of a black household. The racial wealth gap is even wider, and is as large as it was in the 1950s and 1960s. The median black household persistently has less than 15% of the wealth of the median white household, and the typical black household remains poorer than 80% of white households. Over the past seven decades, next to no progress has been made in narrowing black-white income and wealth differences. Designing policies to address these persistent racial inequalities more successfully than in the past thus remains an urgent policy priority.

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  1. Alex V

    Can’t sell some of your house if you need cash to survive. Same isn’t true of stocks and bonds. Wealth isn’t wealth if it isn’t liquid for necessities.

    1. Anarcissie

      In a sense you can: you can borrow money on your equity in the house.

      However, a consideration of the differences between the wealth and income of the people at different economic levels ought to include the fact that those at a high level have a different relationship to money and property than everyone else. For instance, in recent years, deliberately depressed interest rates available to the rich only have created a large but variable amount of funny money wealth, such as that embodied in stocks, bonds, real estate and collectibles. This funny money can be traded for actual goods and services because the poor have to labor for it, but under some circumstances it can vanish almost instantly as much of the middle class’s alleged wealth did in 2008.

      1. todde

        but even that is harder to do then getting a loan on your stock equity.

        Real estate needs appraised, stocks (publicly traded) don’t.

      2. todde

        I would like to know what the property tax rate on stocks is compared to my property tax rate on homes…

        O, it is 0% on stocks and 3.5% on real estate.

        1. Anon

          …and the transaction costs of selling equities is much lower than real estate. Then there is the tax advantage of “long term” gains.

          However, you can’t live in your stock portfolio. And learning the equities game is essentially learning how to gamble. (Even blue-chip stocks dive for the long-term; See:IBM.)

            1. Anon

              Only if you buy another one of equal or greater price.

              And I’m not paying a quarterly tax bill on my stock portfolio.

      3. Alex V

        A home equity loan is not the same as selling a stock. You now get to pay interest on the loan, in exchange for some immediate cash. When you sell a stock you get cash. There is no further obligation or any requirement to front collateral. Stocks are also priced in far smaller increments than homes.

        1. RUKidding

          True but typically one may have to pay taxes of some sort on the sale. I was dinged quite a bit on a sale of equities last year. It definitely cut into the total amount of the sale, albeit I still came out of it with more liquid cash than what I had liquid prior to the sale.

          IOW, there is a sort-of type of “interest” payment that one pays when selling equities – at least for someone such as myself, who is a commoner, not a billionaire (eg, my tax accountant can only do so much for me).

          1. drumlin woodchuckles

            Did the taxes you had to pay on that stock sale amount to more money than the amount of money you got for selling the stock? Or were the taxes you had to pay on the money you made selling your stock only a part of the money you made selling the stock. In other words, after you sold the stock and paid the taxes, did you still have some of the money you got for selling the stock?

      4. Amit chokshi

        The irony with borrowing against the equity you build in your home is the bank is unlikely to lend you money when you run into a cash crunch. You lose your job or have financial challenges but have a lot of equity as a percent of the homes total value – the bank will balk. Ultra rich understand incentives and push moral bs on middle class.

        A guy like Wilbur Ross will give the keys to the bank and never would pay down debt. This makes sense.

        If you pay down debt for a home it will be a lot easier for the bank to recoup its remaining debt through foreclosure. If you have a large mortgage that will require the bank to do a lot to sell it and recoup they willl he willing to Work with you relative to the former.

        I always say focus on net worth, let the cash sit at 0 pct vs pay the bank assuming you got a mortgage you can handle.

  2. sleepy

    One policy that would help reduce a wealth gap would be to abolish the Medicaid provision that allows a clawback from a beneficiary’s estate.

    1. Jeremy Grimm

      As you point out this post views the growing wealth disparity in terms of dueling bubbles, strangely making no mention of tax policy. There is also no mention of policies for dismantling domestic labor and industry, or bringing in foreign labor to bid down wages and salaries, or allowing Corporations to consolidate markets, or transferring wealth from the public coffers into the Corporate til where it can trickle … flow … inundate the wealthy with more income and wealth. The post doesn’t mention the way the equity markets seem to favor the wealthy with the highs while settling lows onto pension funds and middling investors in what appears to me like a great-game of inside baseball. The post doesn’t mention the ways that funding for the public good has withered to nothing while prices and debts are allowed to balloon for amenities like health care and education.

      I suppose this post does deserve some accolades for its great economies in what it leaves unsaid.

      1. Anon

        Hear! … Hear!

        The inequality didn’t just “happen”. There is a finger on the scale. (If not in my eye.)

      2. Telee

        Good point Jeremy. As Joseph Stiglitz has recently said, the main driver of inequality are policy decisions. This raises the possibility of correcting the imbalance by changing policy. However since the financial elite influence on policy is vast this is unlikely. A recent example is the way the mortgage crisis was handled. The TBTF banksters were bailed out and protected from prosecution while help to the people who were losing their home or whose mortgages were underwater was largely nonexistance. Debt remained in place without restructuring. We are headed for neofuedalism and debt deflation.

    2. DHG

      Yep, they were not able to claw back a penny from my mothers estate as there was no estate, was all jointly owned and the home passed with a Lady Bird deed, nothing they could do.

    3. LyonNightroad

      This is not a solution to anything other than perpetuating the cycle of generational wealth. What about those of us with parents that have no estate? What about those of us with mentally disabled parents that we have spent tens of thousands of dollars and thousands of hours of our time just to give them a decent life? We should sit and watch you receive entitlement to the money equivalent of 5-20 years of my own labor just because you were born to the right people?

  3. Craig

    A house is not an investment. This is a hoax perpetuated by the builders and realtors. Your heirs can get a big payday from your house some day. You need a place to live.

    There is a belt and handbag company which makes excellent products and on the top of their home page it says:


    For some people at some times this is not funny at all. The first time I saw it I thought it was hilariously funny.

    1. KLG

      Saddleback Leather. The products are very good, but I don’t really think my kids will give a sh*t about the briefcase…

    2. JW

      I agree.

      One definition of “asset” or “investment” is property that generates revenue or is expected to do so.

      Unless you’re renting out rooms in your house, it’s not an investment any more than your car or your silverware, and hoping for the value to increase or even hold steady is just speculation.

      Also, the “middle class wealth” locked up in housing is a mirage, since the Boomers’ children have to buy their inflated-cost houses for the “wealth” to be realized, so it’s just the kids subsidizing mom and dad, only with added inequality for those kids whose mom and dad missed the gravy train.

      I don’t know why this author didn’t examine that obvious fact considering that it is a major driver of politics today. Within the party primaries, your age, along with your race, is a major predictor of who you vote for.

      1. todde

        it’s an asset, usually bought with a liability, with a yearly tax obligation attached.

        it’s not a very good investment, but then you get personal use out of it.

        1. The Rev Kev

          It’s an asset only when you realize it as such. Otherwise it is a liability as you have to pay taxes on it, upkeep & maintenance, etc. Socially though it is totally an asset as it helps commit yourself to your family, your community, and commits you to the economy as well. A nation of renters has different attitudes as compared to a nation of home owners and I tend to favour the latter.

          1. Comradefrana

            “A nation of renters has different attitudes as compared to a nation of home owners”

            And those are? Aside from less negative attitude to renting usually stemming from better tenant protection…

          2. Tomonthebeach

            The problem is that in the run-up to the GR, way too many middle-class households leveraged themselves into trouble, not unlike the Roaring 20’s. First, some took out 2nds based on bubble equity. Second, others bought condos and houses by a) lying about their income and assets, b) used balloon mortgages that they intended to dodge by flipping at a profit. Most of them (not all) flipped themselves into bankruptcy. Wall Street was enabling the whole circus with junk mortgage-based equities (Big Finance’s version of flipping).

            When the $hit hit the fan, mortgagees did not have lobbyists on the hill – just greedy congressmen who held equities. Banks, on the other hand, did.

      1. Amfortas the hippie

        during my Wild Years…roaming around the South in a green VW van…there were five times when I was broke down somewhere at the a$$ end of nowhere, walking to get a part or some gas, when I found a hundred dollar bill in the grass by the road.
        walking along, wondering how I was going to pay for whatever necessity and still eat…and there it was.
        I’ve wondered about how that happens often in the ensuing years…do some people keep their big bills on the dash board with the windows down?
        then when bernanke was talking about helicopters, that’s what came to mind.

        1. Jean

          Naaw, it was probably some gal’s ‘mad money’ that she dropped and or blew out of a car.

          For those that don’t know, that’s the cash that’s needed to pay for all or part of a restaurant meal and get a cab home when a date turns out to be a disaster.

        2. Scott1

          5 times you found 100 dollar bills? That is some kind of luck. Some people are lucky and some aren’t.
          I found 80 dollars once when I was flat broke in NYC. Was late on the floor in the lobby of the building I lived in. Made it last 2 weeks.
          Piketty ends up saying two things. One is “You can’t beat Compound Interest”, and the other is that the main way people become wealthy is thru inheritance.
          For the majority what they inherit is citizenship, as a world wide thing, & some are lucky born where they are, and some really really are very unlucky.

          1. Heraclitus

            If wealth does compound at 5% real annually, how do we get in on the action?

            There are wealthy Europeans who got that way via inheritance over many generations. Americans, not so much. And Ferdinand Lundberg, in ‘America’s Sixty Families’ or ‘The Rich and the Super Rich’, I don’t remember which, says that the wealth of Europe disappeared in a thunderclap in WW1.

            See what Rob Arnott has to say about it:


            1. rd

              That’s the job of wars and recessions – to flatten inequality. Unfortunately, the process is quite destructive with lots of collateral damage.

              This is the opportunity that we missed in 2009 – many individuals were well on their way from being Masters of the Universe to middle-class (some might even have become felons in the process). Instead, the system was rigged to protect their jobs and wealth at the expense of the normal collateral damage. So I think the main lesson they learned is that they really are special and deserve a participation trophy.

    3. JEHR

      Craig, I have never understood why homeowners think of their house as an investment–its a roof over your head and as such a necessity. Treating a home as a piggy bank (i.e., for equity loans) is a risky business. The banks are busy advertising getting loans using equity because it makes them a profit.

      It seems that banks make money through loans so they are busy creating debtors to fulfill their own wishes.

      1. RUKidding

        Agree. I see my house as a place to live. I have to pay quite a bit in upkeep to make sure it’s in good condition & not falling apart. There’s a possibility that I’ll make some money on it when I sell, but that money will just be transferred – in one way or another – to the next place I live until I’m pushing up daisies.

        In fact, I’d much prefer to rent, but unfortunately rentals are skyrocketing where I live, so it is actually now more cost-effective to own (with my particular financial status) at this time.

        I’d rather rent and have the landlord deal with all of the crap that goes into home ownership.

        1. Synoia

          What’s the value of you home?

          The sales value of the home less the value of the land

          You’d be surprised how little a home, the structure, is worth.

        2. polecat

          One would be lucky to have a laird that actually deals, in a positive manner … with all the obligations re. maintainence, that goes into whatever domicile one chooses, or is forced into, by necessity, to rent …

          Many ‘land lords’ are notoriously bad actors .. doing the absolute minimum required … while collecting their ‘due’ .. On Time !

          1. RUKidding

            The last two landlords I had were pretty good. I know it’s a crap shoot, though. I wouldn’t have minded staying in my last apartment. It was a great place. The landlord and manager were both pretty responsive. But rentals are skyrocketing here, so they were acting accordingly. I couldn’t totally blame them for that, but it was the rental cost that drove me to buy a home.

            I’m probably a step ahead in my house, even with the various costs involved.

      2. RepubAnon

        My house is an investment – a “negative annuity.” I purchased a place to live for an amount that does not change for the life of the loan, and then drops considerably.

        It’s not an ATM, and I don’t want to borrow against it. However, given massive rent increases, it’s nice knowing that I don’t have to worry about getting kicked out of my home so that the landlord can boost the rent, or convert it to an AirBNB unit, or…

    4. SerenityNow

      I couldn’t agree with you more…sadly the federal government, the banking system, and local zoning powers go to great lengths to buy in to the whole scam.

  4. Louis Fyne

    Or to put bluntly what the article nibbles away at….the lower down you go on the income ladder (whether regardless of race/ethnicity), the less likely you can diversify your assets/income.

    Eg, it’s 2007 and you have a nice full-time job at the fly-over-country town factory and $25k equity in your house. If the factory moves to Mexico, your income takes the hit, your home equity takes a hit and also quite possibly your pension too (whether 401k, or an underfunded traditional defined benefit).

    Good luck digging out of that deplorable hole.

    1. Anon

      …and that is what drives the political animosity in the US. The Coasters want a leveled playing field while it seems mid-America wants the old playing field back no matter whom they have to vote for.

      (And neither party is intent on being responsive to the real needs of the populace.)

      1. crocagator

        the coasties want a level playing field so badly that they fight affordable housing tool and nail.

        The bay area is an egalitarian paradise and a template for the rest of the country – should we all be so lucky that we get the chance to pay $2,500 for a one bedroom next to a 7/11 that has frequent stabbings.

  5. Ranger Rick

    The worst part about the whole homes-as-wealth scenario is what happens (and is happening) to latecomers when the housing market is doing great and home values are rising. Either they settle for renting and spend their lives making someone else rich, or they take out a loan they are unlikely to be able to repay in their lifetimes.

    The growing gap in wealth is going to create a marked disparity in public policy outcomes for people concerned about asset prices. If the electorate don’t own houses or land, there’s no incentive for them to vote for or support anything that could increase asset values. Ditto for the stock market. What happens to financial institutions when nobody has a job that offers a 401k?

  6. stolte

    ” Designing policies to address these persistent racial inequalities more successfully than in the past thus remains an urgent policy priority.”

    Non-whites that I know, who have worked hard developing their skill set that is compatible with the needs of our modern society have done very well financially, while those most susceptible to the skills of “policy designers,” not so much.

  7. bob mcmanus

    The last paragraph is accurate, but misses important points because of the wide view. Blacks in America have had periods of progress and relative equalization, not great but significant. A 70s surge was reversed by the Reagan years, and blacks had made a lot of progress in gaining housing wealth, but were particularly devastated by the Great Recession, both in lost houses and equity and loss of jobs with gov’t cutbacks.

  8. juliania

    Thanks for this, Yves – the startling fact for me is the huge jump that the mortgage crisis brought about. But I would also factor in health coverage and most importantly student loan statistics as the latter in particular affects youth and young families in a devastating way.

  9. Altandmain

    The only time that people make money on housing are those who buy near the bottom of the bubble, sell during the peak of the bubble.

    Either they relocate to an area that is cheaper than their current residence or the kids inherit it (hint: this is a bad thing becuase it means those born to the less well off have another disadvantage).

    Buying such a home requires a lot of luck. You have to buy at the right time and place then sell high, so to speak at the peak of the bubble.

    Yes, you are able to research the possibility of a home appreciating in value, but it still has a lot of luck involved. Plus such speculation is not going to make the world a better place, unlike more productive work. Quite the opposite in fact.

    1. JTMcPhee

      The exception that proves the rule? So happy for you.

      Not so happy for the rest of us. But then we are all on our own, aren’t we? Like the lone caribou, away from the herd, with the wolves ripping its hamstrings, its throat and then its guts…

      Lucky you, they haven’t spotted you yet.

      1. Todde

        If it makes you feel better i lost a great job in 08, took a beating in the stock market and barely kept my home.

        I was midly successful in my life a couple times in real estate.

        Its gonna be alright.

  10. JTMcPhee

    What a nice example the link is of economastication. Chew the data to fit a model that makes what the Looters do seem so reasonable and inevitable. QED.

  11. Jean

    Great discussion, as usual.
    To those weighing the costs of housing and returns, long term, one trick we learned and practice and that has paid off is to use commercial quality everything when replacing, maintaining and repairing mechanical systems in your house.

    i.e. 2″ cast iron pipe replaces 1 1/2 plastic when there are frequent clogs and a frequent need to rotor-rooter.
    Over insulate, over build, use 4x4s instead of 2x4s etc. Use 20 amp wire instead of 15, commercial quality USA made Speedqueen washers…etc.
    The material costs differences are small, labor is about the same,the life of the product is forever.

  12. Norb

    It seems that the American economy has decoupled from the notion of making the citizenry prosperous in any longterm manner. The building of individual wealth is an illusion used to dupe the unwary into living a life of continuous toil and striving, only to end with ones death. Any meaningful evaluation of a nations wealth must be viewed collectively. At best, working people break even, while the best looters and strivers finish with more. Opportunity for new generations becomes more restricted over time, ossifying the nation into a land of high inequality. How does such a system not end badly?

    The collective wealth generated by a society must be recycled back into the community in order for survival. From the working class perspective, breaking even in ones lifetime is a good outcome- only if ones children are offered the same opportunities. If this outcome is denied, the system is one of tyranny and slavery- however the exploiters try to mask and cover their actions with obfuscating rhetoric.

    America is a land of great potential, but the nation was build on a foundation of aspirations. Without the realization of those aspirations- the pursuit of life, liberty, and of happiness, what are Americans other than frauds. Americans are caught in a constant whirlwind of competition and personal conquest. The social goal must be the reduction of inequality over time, not the expansion. Of truthfully striving for the realization of our nations founding aspirations.

    Unfortunately, these hi-minded ideals seem to be loosing their power to motivate. It is easier to be a nation of looters- or looter wannabes. This contradiction is well illustrated in the current crop of hack politicians. Their empty rhetoric no longer masks their actions or true motivations. Unfortunately, this situation can carry on for years to come.

    Nations striving for conquest are eventually broken on the rock of solidarity. Nations dedicated toward defense of the common good- whatever the political form that nation adopts- seem undefeatable. Successful defense requires solidarity. That solidarity is based on a connection to the land and common culture.

    As America is hollowed out and its citizens lives are made more precarious by the day, I wonder how secure all the wealth accumulated by the elite really is.

    A stable, conservative, humane society rests on the pillars of affordable housing, healthcare, and education for ALL. The true radicals are those striving to either deny these essentials or use them as a means to increase their own wealth and prosperity.

    A great counterbalancing seems inevitable. No one can predict the outcome, but the eventual collapse of the West has the potential to be much more destructive than the implosion of the communist world. The exploiters just won’t stop exploiting. Authoritarianism practiced under a different name. Freedom to exploit the weak and powerless. The definition of the weak and powerless changing over time to allow constant conflict and exploitation.

    Boom and bust cycles are really and insane way of organizing a society. Good for the winners and tough luck for the losers is a poor survival strategy. I guess nature will have to make that point more clear.

    All these societal problems need to be understood as class problems. How can one talk about wealth in all its forms without addressing class structures. I would say you can’t. Policy action and law are determined by class issues.

    The greatest propaganda coup in America is convincing the citizenry that they are in the middle class if they are not homeless on the street. That opens up an awful wide opportunity for evil doings.

  13. Nathan

    If we focus on this line – “For the bottom 50%, wealth doubled between 1971 and 2007 despite zero income growth” – it can expose a lot about the current system and the way the problem is being diagnosed. We need income, not ephemeral measures of wealth.

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