Should-Read: Nick Bunker: The forces behind the highly unequal U.S. wealth distribution: "Two papers... give us some guidance on the forces that have led to such an unequal wealth distribution in the United States...

...Jess Benhabib and Alberto Bisin... an overview of previous research... three broad mechanisms or explanations that have been the focus of previous research and consider how much they could help explain this “fat tail” of wealth.... The first mechanism deals with income inequality and how that arises from shocks to individuals’ earnings. The second is related to capital income risk, or differences in the rate of return on investments at different levels of wealth. The third factor is “explosive” wealth accumulation....

Benhabib, Bisin, and Mi Luo (also of NYU), is an attempt to parse out the influences of these three factors on U.S. wealth distribution.... Differences in the rate of return on capital and in savings rates are the main factors explaining the distribution of wealth in the United States. As suggested by the first paper, the differences in income caused by shocks don’t explain much—though shocks do contribute significantly to mobility up and down the rungs of the wealth ladder. The differences in savings rates—documented elsewhere in research by University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman—are motivated by a desire to pass wealth down to children. If this is true, then an inheritance tax may do quite a bit to reduce wealth inequality. Citing other research on differences in returns on capital, the authors note that the variances in returns are high for housing, business ownership, and private equity investments. The role of housing may be key in explaining the differences in wealth, not only among the entire population but between racial groups as well.

While the rise of income inequality has inspired a great deal of research on its causes, the economic literature on wealth inequality is relatively sparse. The new findings in these papers are an important guide for future research in this area. Understanding why wealth inequality is so high may very well help us understand its effects on our economy.

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