Own­ing your home doesn’t make you rich. Own­ing some­body else’s does.

The Washington Post Sunday - - BUSINESS - BY AN­DREW VAN DAM an­drew.van­dam@wash­post.com

In the United States more than al­most any­where else, wealth and in­come are con­cen­trated among busi­ness own­ers and land­lords. And that club, blessed by cap­i­tal­ism, is be­com­ing in­creas­ingly dif­fi­cult to join.

Busi­ness own­ers and land­lords tend to be about four times as wealthy as the av­er­age Amer­i­can. That’s more than al­most any other coun­try in­cluded in a new study. On the other end of the spec­trum, renters in the United States tend to have about an eighth as much wealth as the av­er­age Amer­i­can.

In the recent work­ing pa­per, Aus­trian cen­tral bank econ­o­mists Pirmin Fessler and Martin Schürz used a long-run­ning U.S. wealth sur­vey and its newer Euro­pean coun­ter­part to com­pare wealth across con­ti­nents. It’s one of the first such com­par­isons to look at wealth in terms of what peo­ple use it for, rather than at ar­bi­trary per­centile cut­off points. The widest in­equal­i­ties, they find, are be­tween groups in­side coun­tries, not across coun­try bor­ders.

In their anal­y­sis, they split house­holds into three groups. Home­own­ers, whose pri­mary wealth is also their pri­mary res­i­dence, form the bulk of the mid­dle and up­per-mid­dle class. Busi­ness own­ers and land­lords (about 15 per­cent of U.S. house­holds), tend to be among the wealth­i­est. Their wealth is typ­i­cally used to gen­er­ate ad­di­tional in­come. Those who pay to rent their res­i­dences (about 35 per­cent of house­holds), and whose wealth is typ­i­cally used to cover needs such as emer­gency ex­penses or re­tire­ment, fill out the bot­tom of the spec­trum. They’re joined by home­own­ers and busi­ness own­ers whose debt ex­ceeds their eq­uity.

The bot­tom 40 per­cent are most likely to be renters. The top 5 per­cent are most likely to own busi­nesses or rental prop­er­ties. The au­thors found this po­lar­iza­tion has in­creased since 1962.

In ev­ery coun­try Fessler and Schürz stud­ied, home­own­ers’ wealth hov­ers near the na­tional av­er­age. The big­gest gaps are be­tween those who own busi­nesses and rental prop­er­ties and their cus­tomers and ten­ants.

In terms of wealth, that gap is widest in the United States and Aus­tria. In terms of in­come alone, the United States tops the list.

This di­ver­gence be­tween worker and owner is per­haps the old­est take on wealth in­equal­ity. Yet econ­o­mists who mea­sure these things on a global scale have side­lined it in fa­vor of com­par­isons be­tween the “1 per­centers” and the other 99 per­cent. They had to. Many data sets don’t in­clude an in­di­vid­ual’s housin­gor busi­ness-own­er­ship sta­tus, for rea­sons of avail­abil­ity or pri­vacy. With­out those iden­ti­fiers, re­searchers can mea­sure wealth dis­tri­bu­tion only in terms of the wealth it­self.

James Davies, an econ­o­mist at Canada’s Western Univer­sity whose work on in­ter­na­tional wealth mea­sure­ment spans four decades, ob­served that largescale stock own­er­ship per­forms a sim­i­lar func­tion as own­ing rental prop­er­ties or busi­nesses. If Fessler and Schürz had taken eq­ui­ties into ac­count, the dif­fer­ences be­tween the United States and other coun­tries would prob­a­bly have been larger.

Davies said the share of busi­ness own­ers and land­lords across coun­tries is sim­i­lar enough to make him think the mea­sure leaves un­ex­plained a sig­nif­i­cant pro­por­tion of in­ter­na­tional vari­a­tions in in­equal­ity.

Un­der­stand­ing how own­er­ship of real es­tate and fi­nan­cial as­sets dif­fers across lev­els of wealth helps econ­o­mists eval­u­ate other con­se­quences of wealth in­equal­ity such as dis­par­i­ties in safety, so­cial power and con­sump­tion, said Max­i­m­il­ian Kasy, a Har­vard Univer­sity econ­o­mist who has col­lab­o­rated with Fessler.

The anal­y­sis “helps with un­der­stand­ing the causes and con­se­quences of dif­fer­ences in the dis­tri­bu­tion of to­tal house­hold wealth across time and across coun­tries,” Kasy said. Those dif­fer­ences arise when peo­ple use their sav­ings to make up for miss­ing or in­ef­fi­cient pub­lic pen­sion sys­tems, higher-ed­u­ca­tion op­por­tu­ni­ties, hous­ing and health care.

Fessler says so­cial re­la­tion­ships re­veal how wealth lev­els and wealth uses in­ter­act. A renter might use her wealth to fund re­tire­ment, while a busi­ness owner might use her wealth for tech­nol­ogy, ma­chin­ery or even in­flu­ence by mak­ing po­lit­i­cal do­na­tions or run­ning for of­fice.

“It is not the same to save for an emer­gency, or to ac­cu­mu­late wealth in or­der to ex­er­cise power in so­ci­ety,” said Schürz, Fessler’s co-author. “When re­searchers only mea­sure the dis­tri­bu­tion of net wealth be­tween house­holds, they risk over­look­ing these dis­tinc­tions.”

Univer­sity of Michi­gan econ­o­mist Gabriel Ehrlich said the un­der­ly­ing in­equal­ity squares with his un­der­stand­ing of the gulf be­tween renters and own­ers in the United States, but he ques­tioned the broader ap­pli­ca­tions of the “so­ci­o­log­i­cal” frame used by Fessler and Schürz.

In a work­ing pa­per re­leased in 2016 by the Na­tional Bureau of Eco­nomic Re­search, Ehrlich and Univer­sity of Illi­nois econ­o­mists David Al­bouy and Yingyi Liu wrote that be­cause hous­ing is a ba­sic need and an ex­pense that can’t be avoided, price in­creases hit poor Amer­i­cans hard­est. They found “in­creases in the rel­a­tive price of hous­ing have in­creased real in­come in­equal­ity by 25 per­cent since 1970.”

“In terms of well-be­ing, the gap is even wider than it first looks,” Ehrlich said. “It’s pre­cisely be­cause lower-in­come house­holds spend more of their money on hous­ing. They are get­ting hurt more than the of­fi­cial sta­tis­tics would sug­gest.”

Hous­ing costs have risen 40 per­cent more than the prices of other goods since 1970, Al­bouy, Ehrlich and Liu found. The share of renters who spent more than half of their in­come on hous­ing dou­bled be­tween 1970 and 2011.

The wealth lad­der

Past per­for­mance is no guar­an­tee of fu­ture re­sults, as they say, but home­own­er­ship has tra­di­tion­ally pro­pelled peo­ple up the lad­der from rent­ing to own­ing to sell­ing things to renters and cus­tomers of their own.

A 2016 study by so­ci­ol­o­gists Alexan­dra Kille­wald of Har­vard and Brielle Bryan, now of Rice Univer­sity, con­firmed this. Af­ter con­trol­ling for other fac­tors, they wrote, “each year of home­own­er­ship be­tween 1986 and 2008 is as­so­ci­ated with about $4,400 more in midlife wealth.”

But it’s get­ting harder for renters to be­come home­own­ers. “Prices have gone up rel­a­tive to in­come,” Ehrlich said. “A 20 per­cent down pay­ment is a lot more money now than it was 30 years ago.”

Ac­cord­ing to Ehrlich, zon­ing re­stric­tions have helped raise home prices, es­pe­cially in high­cost com­mu­ni­ties. He said that, ac­cord­ing to an­other recent anal­y­sis he con­ducted with Al­bouy, “the ef­fect in terms of rais­ing home prices turns out to be big­ger than any of the ben­e­fits.”

He pointed to an anal­y­sis by Univer­sity of Min­nesota econ­o­mist Kyle Herken­hoff and col­lab­o­ra­tors. Their work re­veals that decades of rising land-use re­stric­tions have slowed eco­nomic growth and made homes more ex­pen­sive.

Stricter lend­ing rules in the wake of the hous­ing cri­sis also put home­own­er­ship out of reach, Ehrlich said.

Un­til re­cently, home­own­er­ship hadn’t budged for a decade, even as the number of renter house­holds climbed.

The next step on the lad­der, own­ing a busi­ness or rent­ing out prop­erty, also seems to be slip­ping out of reach. Small-busi­ness start-ups in the United States cratered dur­ing the re­ces­sion and haven’t re­cov­ered.

When the av­enues of mo­bil­ity dry up, the dif­fer­ences be­tween renter and land­lord, and be­tween cus­tomer and busi­ness owner cal­cify. Rent keeps flow­ing up the lad­der, from renter to land­lord, but the renter doesn’t get the same op­por­tu­nity.

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