[Stephen Mihm] The children of the rich will always be with us

In the popular imagination, dynastic wealth is a fragile thing indeed. The old adage — “from shirtsleeves to shirtsleeves in three generations” — captures the conventional wisdom: Founders of family fortunes are doomed to watch their idle children fritter away the money, leaving nothing for the grandchildren.

But how true is this? It’s a question worth asking, given the debate about growing inequality. Some $30 trillion in the US will reportedly be passed from the baby-boom generation to their heirs over the next 30 years, and recent changes in the tax code make passing along inherited wealth all the more easy.

Economists and sociologists have spilled plenty of ink studying how wealth and status can be transmitted from parents to children. Tracking that process to a third generation, to say nothing of four or five generations, poses a host of challenges to anyone studying the history of the issue. But several studies have tackled it over the years — and arrived at much the same conclusion.

A study by economist Jenny B. Wahl in 2003, for example, addressed the problem by focusing on federal estate-tax returns from the state of Wisconsin from 1916 to 1981. (Wahl chose Wisconsin because some of the grunt work of digesting the data had already been completed, but also because people in Wisconsin tended to move to other states at a lower rate, making it easier to follow the money.)

In order to link data across several generations, Wahl processed a vast amount of data using what she aptly described as “creative computer programming.” In effect, Wahl had to identify wealthy decedents at the beginning of the date range under study, track down their children when they, too, died, and then locate the grandchildren when they finally passed away.

After sifting tens of thousands of “linkages,” Wahl subjected her three-generations-long cohort to rigorous statistical analysis. The results should reassure the lucky heirs. While family wealth tends to regress toward the mean in the long run — meaning that the descendants of the wealthy will eventually resemble the average citizen — Wahl wryly noted that “the evidence presented here suggested that the long run may be long indeed.”

How long? Wahl offered this hypothetical: Imagine that the wealthiest family at any given point in time has 100 percent more money than the average family. According to this sample, it would take 13 generations — approximately four centuries — for this hypothetical wealthy family to return to having a mere 10 percent more than the average household.

Of course, the nation’s wealthiest families have assets thousands of times larger than the average family’s. If these rates remained operative for the super-wealthy, too, it would take immeasurably longer for their descendants to fall back into the common herd of humanity.

It’s noteworthy that Wahl’s study just happens to focus on a historical period when higher taxes on estates and capital gains might have accelerated the speed at which wealth gets dissipated. But since the 1980s, tax policy has shifted in the opposite direction, making the intergenerational transfer of wealth even easier and, presumably, more enduring.

Her findings largely echo the results of a study several years ago evaluating the persistence of wealth in Great Britain from 1858 to 2012. Rather than focus on one geographic area, economic historians Gregory Clark and Neil Cummins cleverly examined families with rare surnames, making it much easier to track descendants through the historical record.

Their results largely echoed Wahl’s findings: Families with the most wealth between the years 1858 and 1887 managed to hang on to most of their money, with a rate of erosion roughly comparable to what Wahl found. Moreover, as in Wahl’s study, this rate held steady over time, even in periods when tax policy — the estate tax, primarily — became much more punitive.

Clark and Cummins did find one silver lining in the data: Those at the very apex of the wealth pyramid may see their fortunes crumble a bit faster than those who are merely rich. Families classified as merely “prosperous” — the upper 10 percent — tended to see their assets wither away somewhat more slowly than those in the top 2 or 3 percent.

These and other studies — along with recent research on the persistence of educational attainment and income earnings over multiple generations — all highlight the folly of assuming that economic inequality is ephemeral, let alone that it will vanish within three generations, a belief that many economists in fact shared until relatively recently.

These more recent studies of long-run outcomes also offer evidence that mechanisms like the estate tax may not do much to frustrate the persistence of dynastic wealth, despite claims by the rich that such policies penalize their heirs. For reasons that remain murky, something else the wealthy possess — social connections, cultural capital — gets passed along from generation to generation many times over.

That’s not to deny that the super-wealthy can’t suffer reverses. The feckless children of a billionaire real estate developer, for example, may not do as well as their father and may well squander some of the family fortune. But their children — to say nothing of their children’s children and grandchildren — are exceedingly unlikely to rejoin the hoi polloi anytime soon.


Stephen Mihm
Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to Bloomberg Opinion. -- Ed.

(Bloomberg)