March 7, 2014
By Amir Sufi
For the past couple of years, the quarterly release of the Federal Reserve Flow of Funds data has been cheered because it has shown a sharp rise in household wealth, particularly of financial assets. We agree this is good news, but the aggregate headline numbers are incomplete.
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An indisputable fact is that the distribution of financial assets is heavily skewed to the rich. In fact, the top 20% of the wealth distribution owns over 80% of the financial assets in the economy! So when the aggregate Flow of Funds data show a rise in financial asset values, it is important to remember that the rise primarily benefits the rich. Here is the fraction of total financial assets held by the top, middle, and bottom quartile of the U.S. population in 2010.
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Our own research shows that the spending of poorer households is more sensitive to wealth movements. If stock market wealth is concentrated among the very rich, who are less likely to spend out of an increase in wealth, rising stock market wealth will have a smaller impact on spending. Indeed, research suggests that the effect of increases in stock market wealth on spending are weak.
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