Even in the richest 3%, there's a growing wealth gap

The "one percent" of income earners, and even the one-tenth of top one percent, might be the only segment in the United States that has caught up to pre-recession income and growth levels. Though I never support wealth redistribution, clearly the opportunity curve is… broken. If the middle and upper-middle class cannot advance, it's unlikely the economy can move forward for all citizens.

Even in the richest 3%, there's a growing wealth gap

Robert Frank | @robtfrank
Friday, 5 Sep 2014 | 3:13 PM ET CNBC.com

America's millionaire population hasn't grown significantly in 10 years, according to new government data, suggesting that not everyone at the top is benefiting from the recovery.

The latest Surveys of Consumer Finance from the Federal Reserve paints the familiar picture of widening income inequality in America. The wealthiest 3 percent of households control 54.4 percent of the nation's wealth, up from 51.8 percent in 2009.

But the gains are highly concentrated at the top of the top 3 percent. And as a whole, American millionaire households—those with a total net worth of $1 million or more—have not fared as well, either in the recession or the recovery.

According to the new Federal Reserve data, there were 11.53 million millionaire households in the U.S. in 2013, down from 11.98 million in 2010 and below the 11.65 million millionaire households in 2004. (The numbers are inflation adjusted).

In other words, it's been a lost decade for America's millionaire population.

Even in percentage terms, the millionaire population is the lowest in a decade. Only 9.4 percent of American households had $1 million or more in assets in 2013, down from a peak of 10.4 percent in 2004 and even below the levels in 2001.

How would a classical liberal address these data? I can only write for myself, but clearly the market is distorted to favor financial sectors and investors instead of active entrepreneurship and risk taking. We penalize earning an income, while we allow investors more favorable tax rates.

We must encourage job creation, job expansion, education, and innovation. Our system, over-regulated and over-taxed at the points that could and should advance economic growth, needs to stop favoring some over others, at all income and wealth levels.

Government policies that are inequitable contribute to the slow pace of economic recovery. Everyone should be seeing opportunities increase, but that's not the case.

A colleague reminded me that the bond market is overwhelmingly the domain of the wealthy. And the bond market, especially government bonds, is rigged with all manner of tax incentives to encourage lending of money to governments. The wealthy do "invest" in government, and reap the benefits of these investments in the form of interest paid to them from the taxes of the middle and upper-middle classes.

We have to ask if it is fair to tax any income at a lower rate than other forms of income.

There are other reasons the extremely wealthy are doing better, including:

• Quantitative easing that has helped push equities higher, benefiting the investment class.
• Recovering real estate values, with a massive influx of cash purchases of properties.
• Structural changes in the employment market, favoring special skills. 

We should ask ourselves if government policies are exacerbating the recovery and the inequity of opportunity. I believe the answer to that is yes, which is why I wouldn't look to good solutions from political leaders.