America’s Middle Class Drastically Shrinks

The share of total net worth held by the 50th to 90th wealth percentiles has consistently fallen in the past three decades.

Data from the Federal Reserve Banks shows the middle class held 36% of America’s wealth in the 90s and all the way to 2003 as pictured above.

Since then however it has fallen to 28% as of Q1 2021, a drop of more than 8% to make it the lowest share of wealth by the middle class on record.

On the other hand the top 1% mirror the above chart in reverse, seeing a 9% gain in their share of wealth since the 90s.

The top 1% owned just 23.1% of the United States in 1990. Now they control 32.1% of all wealth in America.

One explanation might be that the very rich hold their wealth in stocks or other hard assets like properties which respond better to inflation.

The middle class instead gains most of its wealth through income which tends to be sticky with wages not rising in real terms since the 70s.

We see above thus a fall in share for the rich and an almost equivalent gain for the middle class during recessions as stocks and other assets tend to respond somewhat immediately and automatically, while wages take time to adapt.

Another reason for this divergence may be the tax system with one example being the inheritance tax that for UK begins at £325,000 at an unchanged rate of 40% since at least 2001 when the threshold began at £234,000.

That’s a fairly ordinary amount of wealth you’d expect an ordinary couple to make during their lifetime and pass on to their children.

A rich couple might pass on a billion dollars, or nowadays even $100 billion, yet they will pay the same amount of inheritance tax at 40% as everyone else.

The primary reason for this divergence however might be because the middle class is excluded from participating in some of the biggest gains possible: investing in startups.

The Securities Act 1933 prohibits anyone that earns less than $100,000 a year from funding the likes of Mark Zuckerberg when he was starting Facebook in 2004.

Facebook briefly reached one trillion dollars in market cap, with it part of an entire tech industry that began as small startups in basements and now are worth $10 trillion just for the top five, or about half of America’s GDP.

That’s a vast amount of wealth mostly created after the dotcom boom and bust in the late 90s and early 2000s.

It is also a gold rush in which the middle class could not participate unless they were entrepreneurs themselves, because they could not fund the thousands of tech startups that now dominate the world until after they went public.

The very rich on the other hand were there at the very beginning, funding Zuckerberg to start with just a few millions and then hundreds of millions in return for shares before the general public had the ability to buy these shares.

This has the effect of taking capital out of capitalism for the middle class, and thus we see the results above where their share dwindled after 2003 just as the tech boom took off.

There were attempts in 2010 to open up capital formation through crowdfunding, but the Securities and Exchanges Commission (SEC) instituted a crackdown.

The same repeated in 2017 with Initial Coin Offerings (ICOs), followed by SEC opening investigations and threatening with court even the likes of Kik.

Now in decentralized finance (defi) startups are following an airdrop model which might be outside of SEC’s jurisdiction, but a court case against XRP awaits the first judgment by the judiciary on the extent of the application of the Securities Act in the digital crypto realm.

Due to the mining model, investments like bitcoin or eth have been outside of this SEC restriction, and thus the middle class has been able to participate from the beginning, seeing the same gains as the top 1% with Facebook if they held onto their coins, which most didn’t.

Thus reforms on capital formation might be one way to address the wealth gap to expand participation in wealth creation so that the middle class can also be there at the very beginning of a new wave of innovation.