Spikes in American Wealth

In Wealth and Democracy Kevin Phillips argues that large spikes in wealth have been driven by three factors:

• New technologies

• Financial speculation

• Government policies supportive of free markets and the wealthy

Spikes in American Wealth, cont.

Three major waves of wealth:

• Gilded Age

• Roaring Twenties

• Third Wave

Gilded Age

• Post Civil War era

• New technologies: railroads, oil, and steel

• Government supportive of large corporations

• Mid-1800’s largest fortune was about $20 million, by 1900 John D. Rockefeller had worth of $1 billion

• By 1890 approximately half of the countries wealth was held by top 1%

Roaring Twenties

• Long expansion following WWI

•New technologies: radio, moving pictures, autos, and telephones

• Reduced taxes on dividends

•Number of millionaires rose from about 6,000 in 1921 to about 30,000 in 1929

• Top 1 percent still held about half of the nation’s wealth

Post WWII Period

• Substantial amounts of wealth created but more widely distributed

• Substantial growth in manufacturing employment

• High marginal tax rates (maximum of 91%)

• Share of nation’s wealth held by top 1% fell to just over 20% in late 1970’s

Third Wave

• 1990’s to present

• New technology: information technology

• Half of America’s total wealth has been created over the last 10 years

• Substantial reductions in marginal tax rates in the 1980’s and Bush administration

• Substantial reductions in taxes on capital gains and dividends

• Top 1% holds about 33% of wealth

Creation of Financial Wealth

Value of stock is based on expected future profits

New technologies may create high expectations of profits

Expectations of profits can create high valuations of stocks, individuals can become “paper millionaires” or realize the capital gain (liquidity event)

New York Times, March 29, 2007

Categories of New Rich

• Founders (Entrepreneurs who went public)

• Stakeholders (nonfounders who cash out when the company goes public)

• The acquired (founders who sell to other companies)

• Money movers (investment bankers, hedge fund managers)

• Salaried rich (stock options)

Wealth

To be in the top 1% need to have net worth of $6 million

To be in Forbes 400 you need to be a billionaire (Only needed $418 million in 1995)

Sources of Wealth

If $10 million is defined as “rich”:

• About 60% reported wealth as equity or post-equity

• About 23% reported source of wealth as “executive”

• About 10% reported “inherited”

• About 3% are celebrities

Investing

Stocks – Ownership in company, returns are capital gains and dividends

Bonds – Some type of IOU, returns are in difference between price and face value

Investing

Want maximum return for minimum risk!

Power of compounding (rule of 70)

Returns on Stocks

Returns on Bonds