How Equitable Wealth Outcomes Could Create a Resilient and Larger Economy
Wealth or net worth is critical for enhancing the economic stability of households and communities, as it provides self-insurance against unanticipated setbacks and helps to finance critical investments such as education, homeownership, and entrepreneurship. Such investments can, in turn, contribute to economic growth. However, there are significant disparities in the ability to accumulate wealth based on demographics, with our research revealing that younger generations, families without a four-year college degree, and Black and Hispanic families typically possessing less wealth than their peers, with these groups accounting for 25% to 66% of U.S. households. Economic disparities, such as unequal employment and earnings opportunities, restrict the economy’s potential for growth. Thus, identifying and removing obstacles to wealth-building for all individuals could increase economic resilience and dynamism. This article explores the concept of equity by focusing on the expansion of wealth-building opportunities, which has the potential to stimulate personal consumption and innovation, two factors that can strengthen the economy. Wealth equity refers to the state in which all households have the chance to accumulate adequate wealth to ensure short-term stability and long-term economic mobility, regardless of demographic characteristics. Wealth created by households collectively impacts economic growth by influencing personal consumption expenditures, which comprise the largest part of the economy at 70% of GDP. As people become richer, they tend to spend more, resulting in an increase in economic growth. Conversely, when their wealth declines, they are likely to reduce their spending, leading to a decline in aggregate consumption and consequently a decrease in economic growth. The economic contraction leading up to and following the Great Recession (2007-2009) demonstrated both aspects of the wealth effect, as the decline in house prices caused by the bursting of the housing bubble resulted in US households losing $8.3 trillion in wealth, including home equity and other types of assets. This led to the balance sheet recession, during which households tried to rebuild their finances, resulting in a weakened consumption. Wealth equity could help alleviate economic declines and stimulate economic growth during expansions.