The stock market bubble of the late 1990s and its subsequent collapse have been well publicised. But although a lot of small investors and pension funds got burnt fingers, the really wealthy seem to have come away relatively unscathed.
In the United States, recent financial scandals such as Enron and Global Crossing highlighted the fact that new entrepreneurs had built up (and sometimes siphoned off) hundreds of millions of dollars in assets in the late 1990s bubble. But these are the tip of the iceberg. There are now more than 4 million dollar-millionaires in America and Paul Krugman, the renowned economist, argues that wealth inequality has returned to the level of the golden age of American capitalism from the 1870s to 1929.
This was the period when Rockerfeller, Morgan, Vanderbilt, Carnegie, Mellon and others built up massive fortunes in iron and steel, railroads and finance. In recent years, Sam Walton (Wal-Mart) and Bill Gates (Microsoft), Larry Ellison (Oracle) and Michael Dell have also built up large fortunes. In Britain, we have entrepreneurs such as Philip Green, Sir Richard Branson and the landed estates of the Duke of Westminster and many others.
What's been happening to the distribution of income and wealth in Britain in recent decades and how does it compare with the US? The short answer is that both countries have become more unequal since the late 1970s. Income is a flow to individuals and households, whereas wealth is the stock of assets including savings, stocks and shares, houses and other property. In general, wealth tends to be more unequally distributed than incomes, not least because it reflects a build up over time.
A report from the Institute of Public Policy Research this week showed the gap between rich and poor has widened since Tony Blair became Prime Minister, accompanied by a rise in the number of people with no savings at all.
The distribution of wealth in Britain was much more unequal in the years before the Second World War than it is today, largely because the middle classes were relatively small and wealth was concentrated in the hands of landed interests, industrialists and landlords. Most households rented their houses and owned little or no property.
The growth of the middle classes post-war and, crucially, the growth of home ownership from about a quarter of households in 1939 to 70 per cent today, have greatly widened the distribution of wealth. In 1923, the wealthiest 1 per cent of individuals owned no less than 61 per cent of total wealth and the top 10 per cent owned almost 90 per cent (chart 1). By 1939, this had begun to reduce, and by 1960, the shares of the top 1 per cent and 10 per cent had fallen to 34 per cent and 74 per cent respectively. By 1976, when the home ownership revolution had begun to bite, these figures were down to 21 per cent and 50 per cent.
Nonetheless, the distribution of wealth in Britain is still far from equal. In 2001, the latest year for which figures are available, the top 1 per cent of individuals owned 23 per cent of all wealth, the top 50 per cent owned 95 per cent and the bottom 50 per cent just 5 per cent (chart 1). When housing is stripped out of the figures - leaving land, savings, stocks and shares - the distribution is much more unequal, with the top 1 per cent owning one-third of total wealth (chart 2).
What is perhaps most remarkable is that wealth inequality has increased rather than fallen since the late 1970s, with the big increase in the second half of the 1990s largely as a result of the rise of the stock market, the housing market and business prosperity. The share of total wealth owned by the top 1 per cent of wealth owners rose from a quarter to a third in this period, and the share of the top 5 per cent from 50 per cent to 60 per cent.
The US is even more unequal than Britain in both income and wealth. In the US, the top 1 per cent of wealth owners owned one-third of total wealth in 1983 but this had risen to 38 per cent by 1998, and the top 5 per cent owned 59 per cent. By comparison, the bottom 60 per cent owned less than 5 per cent of total wealth (chart 3).
What is remarkable about the US is that the group which has increased its share is just the top 1 per cent of wealth owners. The other 99 per cent have seen their share fall. This is very different from Britain, where the top 50 per cent have all gained, and it supports Professor Krugman's claim that America is moving back towards the gilded age of capitalism.
The number of American millionaire households rose from 2.4 million in 1983 to 4.8 million in 1998, and the number of households with net worth of more than $10m increased almost fourfold from 66,000 to 240,000, with almost all the growth since 1992.
A similar picture holds regarding incomes. In the US, the top 1 per cent of households took 13 per cent of total income in 1983, rising to 17 per cent in 1998. The next 4 per cent saw a slight growth, but every other group saw a decrease in its share. Incomes have been redistributed to the top 5 per cent and particularly to the top 1 per cent of households (chart 4). The gini coefficient, which measures inequality and ranges from 0 (total equality) to 1 (total inequality), rose from 0.48 to 0.53.
Income inequality in Britain, though marked, is considerably less than in the US. The gini coefficient rose from about 0.28 in 1980 to 0.35 in 1989 and it has remained stable since. In 2002-03, pre-tax and pre-benefit income of the top fifth of households (£69,300) was 17 times higher than those in the bottom fifth (£4,000). After taxes and benefits, the ratio was reduced to 4:1.
Why has inequality increased? Looking at pre-tax incomes, it can be argued that two very different factors are at work. At the top end of the distribution, we have seen the growth of what Robert Frank and Philip Cook have termed the "Winner-Take-All Society" where the incomes of top entrepreneurs, corporate executives (Jean-Pierre Garnier), lawyers, sport or entertainment stars (Elton John, Madonna, David Beckham) have risen disproportionately in recent years in line with global markets and market power. At the bottom end, we have seen the rise of low-paid service jobs paralleled by limits to welfare benefits which have hit low-income groups.
The period of greater equality and redistribution which characterised the post-war period until 1980 has reversed in the last 25 years.
Chris Hamnett is Professor of Geography, King's College LondonReuse content