Wealth Inequality in the US – The Result of Unintended Consequences and How This Time Can be Different

Guest post by Jeffrey L. Feldman – Director, Poliwogg

The United States economy is on its way to a recovery from the Great Recession of 2008. The unemployment rate is down to 5.5% and Gross Domestic Product (GDP) is projected to grow at a rate of at least 3% per year. But the benefits of the recovery have not been shared equally. In fact, the distribution of wealth from the richest to the poorest has skewed dramatically to the very top over the past five years and has never been greater [1]. Much has been written about the so-called “1%” who have seen their net worth soar while the “99%” have suffered with stagnant wages for more than a decade. The problem is actually worse than that; a small percentage of the 1% have garnered most of the increases.

This paper will show that in 1982, the beginning of the bull market that would last until 2000, wealth was reasonably distributed. [2] During that time, a tremendous amount of wealth was created in the U.S. [3] The households at the pinnacle of the wealth pyramid captured the vast majority of this new wealth. This paper will also show that in perverse counterpoint to the large amount of new wealth, a similar amount of new private debt was also created. This massive new liability was assumed almost entirely by the 99%.

This paper will study the root causes of this phenomenon and will suggest some solutions. We agree that income inequality is a problem that must be addressed but we believe the critical issue is wealth inequality. This is a recent development, which has occurred over the past 50 years. It results from the unintended consequences of the convergence of several seemingly unconnected trends and events. Here is a timeline of the most important of these, each of which will be discussed in detail below:



Most Americans were not stock market investors until the creation of retirement accounts in 1974. Even in 1981, the year preceding the beginning of the bull market that would last for 18 years, only about 32 million of us owned stocks[4]. By the year 2000, that number had grown to more than 100 million. While many Americans developed an appetite for investing, the same opportunities were not available to everybody. Wealthier “accredited investors” were able to invest in private companies while everyone else (more than 97% of the population) was restricted to investing in publicly registered securities.

Historic Background:

During the Great Depression, thousands of banks failed and most depositors lost their savings. In 1933, as part of the Glass-Steagall Act, the Federal Deposit Insurance Company (FDIC) was created to provide government insurance of deposits. Initially the insurance was limited to $5,000 per depositor per account. This was increased to $20,000 by 1969 and $40,000 in 1974. Today it is $250,000.

World War II ended in 1945 and the 26 million returning soldiers went home, started families and got jobs. Many were able to buy homes because of a large government subsidy (through the GI Bill), creating a building boom. To this generation, who had lived through the Great Depression and the war, home ownership and security were the highest priority.

Regulation Q, a Federal Reserve Board regulation that was in effect from 1933 until 2011, imposed interest rate ceilings on bank deposits, including savings and time deposits. Regulation Q was of little significance to banks until the 1960s because interest rates were below the legal ceilings during most of the preceding period.

Inflation was benign in the 1960s and early 1970s so interest on passbook savings provided a real rate of return. That coupled with the desire for security kept most investors out of the stock market. In 1960, only 12 million Americans owned stock [5]. Those who did invest mostly invested in the largest, most successful companies. This basket of stocks came to be known as the “Nifty Fifty,” which were thought to be stocks an investor could hold forever. Coca-Cola, IBM and General Electric were the leading names in this portfolio. Americans either saved their money or invested in the tried and true industrial giants. Nobody thought about innovation and nobody invested in it. Nobody thought much about saving for retirement either. In 1970, fully half of all workers in the United States were covered by a pension plan. Most people planned on working until age 65 and had an expectation that they would not be alive for very long after that. Life expectancy in the U.S. in 1970 was 70 years.

In 1980, personal savings as a percentage of disposable personal income was approximately 12%. By comparison, it was less than 2% in 2005 and is about 5% today [6].

In the 1960s and 1970s, tax rates were very high. The maximum federal tax on unearned income (including interest) in 1970 was 70% while the top tax bracket for earned income was 50%. State taxes were incurred over and above those rates. As an extreme example, a resident of New York City with unearned income of more than $190,000 in 1965 faced a marginal effective tax rate of 85%. The effect of these confiscatory tax rates was that it was extremely difficult to create wealth.

On the other hand, in an economy that was growing rapidly, a youthful population found it quite easy to achieve a middle-class lifestyle. Very few people who were not already wealthy were thinking about upward mobility due to the limiting effect of high marginal tax rates. Everyone, other than the wealthy, was creating very little discretionary capital and what they had, they saved. There was not enough risk capital to fund innovation. In addition, in the early 1970s, there was very little innovation to fund. Manufacturing was the primary industry group in the United States and a young, well-paid population provided the consumption required to allow the economy to grow steadily.

This period of widespread but limited prosperity came to an end in the 1970s, which was the crucial decade for defining the economy and, in particular, its distribution of wealth. A series of shocks, some exogenous, but others driven by changes in law and regulation, began dismantling the postwar system, and created the drivers of inequality that have emerged over the past thirty years.

The First Systemic Shock

The first shock to this system occurred in 1973, when OPEC instituted an oil embargo against the United States. Beginning in 1970, domestic oil production had begun to drop off dramatically so there was little oil in reserve. The embargo caused the price of oil to spike from $3.39 per barrel in 1970 to $9.35 per barrel in 1974 [7], substantially increasing the price of gas at the pump. This significantly decreased GDP. In 1972, U.S. GDP was growing at the rate of 11.6% per year. In 1974, GDP contracted by 2.7% [8].

The stock market lost nearly 45% of its value [9]. Because of the stock market crash, increased energy prices and lower tax revenues, liquidity completely dried up in the banking system resulting in skyrocketing interest rates. The 4 or 5% return that savers had been getting from their passbooks was perfectly acceptable in a period of benign inflation. Now, as inflation approached 10%, savers were seeing their principal eroded in real terms. Wall Street responded by creating money market funds, which could buy high-yield securities and provide higher interest rates to savers. The money market funds were not subject to the Federal Reserve cap on interest rates. They also did not have FDIC insurance so savers were initially reluctant to close their passbooks and move into the new funds. Nevertheless, as high inflation persisted through the 1970s, cash moved in droves into the money market. Individuals still saw themselves as savers, not investors, but they were willing to forego government insurance for higher interest rates.

Of equal importance, the huge run-up in energy costs weakened the competitive position of virtually all American manufacturers. In particular, heavy manufacturing (steel, automobiles, non-ferrous metals) began its decline from the pinnacle of the American economy. The middle-class jobs that were lost from these industries were generally not replaced.

The Second Shock: Retirement Accounts and the Rise of Mutual Funds

In 1974, Congress passed the Employee Retirement Income Security Act (ERISA), which created retirement accounts and a set of regulations for corporate pension plans. While the timing of this legislation seems odd given the crises in the financial markets and the banks, this legislation came to fruition without any thought to what was happening in the general economy. In fact, the original proposal for ERISA had been introduced by President Kennedy in 1963 and took 11 years to become law. ERISA created the standard retirement accounts (IRAs and 401ks) that most of us have today. The legislation contained language suggesting that such accounts should not be placed in unduly risky assets. As stated in the prudent man rule, found in ERISA Section 404(a)(1)(B), fiduciaries must act:
“with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. ”

Investment firms were unsure as to whether or not this language allowed retirement accounts and pension funds to invest in any type of risk assets such as stocks or private equity. In 1978, the Department of Labor relaxed some of the strictures of the prudent man rule, making it clear that retirement accounts could invest in such securities. As a result, private equity funds, venture capital funds and mutual funds flourished over the next 20 years. However, everyone was not permitted to invest in the private securities markets because of an SEC rule that went into effect in July 1974 (SEC Rule 146). Under Rule 146, only a small percentage of the population (accredited investors, as defined) were able to invest in private companies while everyone else was restricted to the purchase of publicly registeredsecurities.

The Third Shock: The Rise of Venture Capital and Institutional Money

In 1957, George Doriot, a professor at Harvard, created a venture fund called American Research and DevelopmentCorporation (ARDC). ARDC invested $70,000 in a startup in Lynn, Massachusetts called Digital Equipment Corporation(DEC). In 1967, after the DEC initial public offering (IPO), this $70,000 investment was worth over $355 million [10]. This set off a frenzy among investors to find the “next DEC.”

The SEC, which was created in 1933, was focused almost exclusively on regulating investment in public companies and had no experience in the oversight of private investments. As many partnerships were suddenly being formed, some with clearly nefarious intent, the SEC recognized the need to protect investors from investment activities that had no chance of success. Rule 146 was promulgated to regulate private placements.

The regulatory philosophy underlying Rule 146 was that private placements of securities could be offered to an unlimited number of investors capable of bearing the risk of investment (i.e., accredited investors). Such investors could invest $150,000 or more (a considerable sum at the time) but only 35 could invest less than $150,000. Those 35 had to demonstrate they were sophisticated and could bear the risk of loss. In the alternative, an unsophisticated investor was required to have an offeree representative who could evaluate the investment on his or her behalf. Anyone who met the accredited Investor standard was deemed to be sophisticated.

Most of the early private placements under Rule 146 attracted very few who invested $150,000 or more. The syndicator of the investment therefore wanted the 35 investors to invest as much as possible. If 35 people invested $10,000 each, only $350,000 could be raised which, after expenses of the offering, would leave little to invest. Thirty-five investors at $100,000 each would amount to $3,500,000, enough to fund a real estate transaction or an early stage company.

The rule dictated that the bankers and brokers who effected these transactions had to seek out the wealthiest people they could find in order to make this business viable. There is no evidence that wealthier investors were smarter than anybody else but since they could provide adequate capital, they were given the opportunity to invest.

If the limit on unaccredited investors had been 500 instead of 35, the world would be quite different today. Five hundred investors contributing $10,000 each would raise $5 million. The importance of this single action cannot be overstated. In a rather arbitrary fashion, the SEC created a clear division in the investment world, providing one group with access to all potential opportunities, and another much larger group with no such opportunities. Given that investment in private companies has produced higher returns over the past thirty years than investment in public companies, this action alone created a meaningful gulf between persons on either side of this divide.

By the end of the 1970s, assets were beginning to accumulate in retirement accounts. After the clarification of the prudent man rule, brokers began recommending mutual funds. The Investment Company Act of 1940 (the Investment Company Act) allows for a “distribution fee” under section 12b-1 of the Investment Company Act. This is an annual fee paid to the broker for marketing the fund. The rationale behind the fee, which has never been proven, is that the incentive to the broker will bring more assets to the fund thus lowering the expense load for each individual shareholder. A fund can call itself a “no-load” fund (i.e., a fund with no commissions or fees) and still pay a 12b-1 fee of up to 0.25% annually to the broker who sold the fund. In 2013, 12b-1 fees totaled $20 billion.

The World War II generation was a nation of savers and those with passbook accounts were reluctant to relinquish the FDIC insurance of such accounts. However by 1980, millions of Americans had moved their savings to money market funds that provided monthly account statements. As they became familiar with this process, it became very easy to begin moving money to stock mutual funds. If that money had still been in passbooks with guaranteed returns, it is possible it would have taken much longer for the public to embrace mutual funds.

Private Equity Develops

In the late 1970s, wealthy investors were provided the opportunity to invest in private offerings, most of which offered some kind of tax shelter. Much of the wealth was attributable to increases in executive compensation and dramatically high Interest rates. In 1984, banks were offering certificates of deposit that provided close to 13%interest.

In the late 1970s, executive compensation began to rise dramatically. This was a sea change as employee compensation had been rising faster than executive pay since World War II. Executive compensation would skyrocket over the next 20 years, morphing from cash payments to equity-based compensation consisting primarily of stockoptions. From 1978 to 2011, CEO compensation has increased more than 725%.[11]

Due to high tax rates in the 1970s and early 1980s, wealthy individuals with large sums of cash sought investment opportunities that provided tax shelter. Tax shelters were offered in the form of private placements under Rule 146. Over the next decade, tax reforms eliminated most forms of tax shelter but by that time, high net worth individuals had become familiar with private placement memoranda.

When tax shelters disappeared, they were replaced by equity offerings in early-stage companies. The “new wealthy” had become comfortable with private placements so the transition to private investments in equity was made easier.

By 1973, the oldest “boomers” had reached their mid-20’s and began to establish a middle class lifestyle. Commercial banks had developed enough computing power to offer installment debt on credit cards and began mailing millions of unsolicited credit cards to young professionals. Quickly, many of these folks simply thought of their credit lines as part of their purchasing power. They would max out the credit lines but as long as they were current with their payments, the banks would raise the limits. Thus began a spiral that would culminate in the financial collapse in 2008, by which time we had accumulated $15 trillion of consumer debt [12].

In 1973, Fisher Black and Myron Scholes created the Black-Scholes model for pricing stock options allowing for the standardization of that marketplace. Stock options became a standard part of executive compensation. The combination of private equity investment and equity-based compensation for executives redefined sources of wealth in the United States.

To summarize, Rule 146 (1974) allowed a small percentage of high-net-worth individuals to invest in private placements. ERISA (1974) was responsible for the creation of retirement accounts. Higher income and high tax rates in the middle 1970s drove the demand for tax shelters, which were offered as private placements. This accustomed the marketplace to the purchase of unregistered securities. Even though this was a time of severe recession, high unemployment, high energy prices and severe inflation (stagflation, as it was called), the ingredients were in place for the bull market that would begin a few years later.

Consider the new players that were appearing in the investment world. Kleiner, Perkins, the august venture capital firm, was founded in 1972. New Enterprise Associates, another leading venture capital firm, was founded in 1976, as was the pioneer of leveraged buyouts, Kohlberg, Kravis and Roberts. Montgomery Securities, a leading investment bank specializing in technology investment was founded in 1978. None of these firms was created to serve the middle class. Their clients were institutions and wealthy individuals. At the same time, the mutual fund industry began to take shape.

On May 1, 1975, an amendment to the Securities Act ended the decades long practice of fixed commissions on securities trades. Dubbed “May Day” on Wall Street, this change was of tremendous significance because it induced retail investors to purchase stock. On May 1, 1975, Charles Schwab started offering discount commissions for retail investors, driving down costs for all of the investing public.

The “baby boom” generation, people born between 1946 and 1964, currently totals 78 million. The oldest boomers reached their 35th birthdays in 1981. Most equity securities have historically been owned by people between the ages of 35 and 55. Folks younger than 35 usually have not accumulated enough capital to be investors (the Silicon Valley generation being the exception) and those over 55 are interested in liquidity for their retirement, rather than investing.

When the oldest boomers came of age in 1981, they found the mutual fund industry waiting for them. More importantly, the manufacturing age was ending and the computer-based information age was beginning. Apple Computer went public in 1980; Federal Express went public in 1978; Microsoft went public in 1986 and Cisco Systems was founded in 1984. A new generation was coming of age,; a new technology was sweeping the nation; and a new form of investment came on the scene to connect those two mega-trends. If World War II had started five years earlier and the boomers had been born five years earlier into a manufacturing economy that was stagnant, our modern economic history would be quite different.

Approximately five million boomers celebrated their 35th birthday every year from 1982 through 2000. The peak earnings years for most individuals are between 35 and 55 so over that 18 year period, there was a huge influx of cash into retirement accounts. Mutual fund assets soared from $300 billion in 1982 to $7 trillion in 2000 (and rose to $15 trillion at the end of 2013). A nation of savers in 1970 had transformed itself into a nation of investors by 1990. However the total market capitalization of all publicly traded securities in the United States was less than $1 trillion in 1982.

In order for mutual funds to invest $7 trillion in the public markets over the next 15 years, two things had to happen. There needed to be many more securities available for purchase and the price of those securities had to rise. We know securities prices rose because the Dow Jones Industrial Average was 1,000 in 1982 and reached 10,722 by March, 2000 (an increase of more than 10 times) [13]. More significantly, there were 3,500 publicly traded companies in the U.S. in 1982. Over the next 18 years, approximately 6,000 companies would go public. These were mostly companies that had been privately formed in the 1970s.

Of course, only accredited investors were allowed to invest in private companies. The implementation of Rule 146 in 1974 opened the door for these investments and the passage of ERISA, also in 1974, created an exploding market in which these very investors could find an exit.

Now consider how mutual fund managers are compensated. They receive an asset management fee, not a performance based fee. In other words, the larger the assets under management, the more they earn. The mutual funds bought shares in most of the IPOs that were offered between 1982 and 2000. One cannot recall ever hearing that a mutual fund passed on an IPO because it was too expensive. In fact, there was great competition amongst funds to secure the most shares possible.

It is difficult to calculate the average price/earnings ratio (PE) for these IPOs but we know it was well above 17 to 18 times earnings, which is fairly standard for public companies. Of course many of the companies that went public had no earnings at all. Netscape, a company with no profits at the time of its IPO, priced at $28 per share, giving it a market cap of $3 billion. Up to the pricing date, the market had anticipated it would price at $14 per share. No investors backed out as a result of the price increase and, in fact, the stock closed at $58 at the end of the first day of trading. A mutual fund manager makes four times as much money on a $58 stock compared to one trading at $14.

With hindsight, we can clearly see the game was rigged. There was no conspiracy. This was a convergence of unrelated events resulting in a giant unintended consequence. Private placements under Rule 146, retirement accounts and the resulting expansion of mutual funds, the end of negotiated commissions, the advent of installment debt, the emergence of the personal computer and the coming-of-age of the baby boom generation came together to allow a few people to become very wealthy at the expense of virtually everyone else. The staggering fact is that this occurred during the greatest bull market in history. The 1% has accumulated $30 trillion of wealth while the 99% incurred $15 trillion in debt. We cannot let this happen again.

There are many economic similarities between 1982 and 2015. In1982, there were 78 million baby boomers. In 2015, there are more than 75 million millennials [14]. In 1982, the information age began while 2015 can be characterized as the beginning of the biotechnology and molecular age. In 1982, mutual funds became important to the investing public while in 2015, the JOBS Act and Regulation A+ are changing the investment landscape. Once again we have a coming-of-age generation, exciting new technologies that can change the world and new and better investment vehicles to bring the two together. But because of the polarization of wealth that has occurred over the past 30 years and the strong belief that the deck is stacked against retail investors, there is a pervasive attitude amongst many that the 99 percent should not participate in investing in startups and innovative companies. We made a terrible mistake thirty years ago. We must not allow that to be repeated.

In 2000, the 18 year bull market came to an end. The demand for equity investments had outstripped the supply of quality investment opportunities. The new “dot-coms” were being valued entirely on their potential, with little regard for the business model or management. At the same time, 2000 was the year that the youngest boomers turned 35 and the oldest boomers reached 54 years of age, a time at which they would become less interested in investment. Many of the valuations of publicly traded companies could not be sustained. As a result, the NASDAQ index, which peaked at 5,132 in 2000, fell to 1,100, a decline of 80%. Individuals saw the value of their retirement accounts fall by more than 60%. Worse, pension funds, which had a larger exposure to technology stocks, saw their reserves obliterated.

The pension funds, which at the time did not have to fully fund their obligations, adjusted their projections to assume they would earn 10% annually from equity investments in order to meet their obligations. Many recognized this was unrealistic and started to invest in private equity and venture capital to seek outsized returns. However, only a small portion of the endowments could be invested this way. The pension funds made it clear to the investment community that they wanted to reduce risk and increase returns. While that sounds like a fantasy, and in fact it is, Wall Street will sell the market what it wants to buy, whether it exists or not. Financial engineers came up with a variety of sophisticated, complex products that had the appearance of high yields and low risk. Many of these took the form of securitizations of home mortgages.

In 1999, Glass-Steagall, the Depression Era legislation that separated banking from investment banking, was repealed. Several of the large commercial banks bought investment banks so they could sell their depositors investment products. After the stock market crash of 2000, the Federal Reserve established a policy of very low interest rates and plentiful money supply. The banks found themselves flush with reserves at a very low cost and recognized that mortgages represented easy money because they could be securitized and sold to investors through their investment banking operations. Better yet, the banks convinced the rating agencies (namely Standard and Poor’s and Moody’s) that pools of mortgages represented very low credit risk. The banks, taking advantage of low rates and easy credit, greatly expanded the number of mortgage loans, securitized them into heavily leveraged packages that the rating agencies rated AAA and sold them to pension funds. The rationale was that the default rate on mortgages is low and the price of housing had only risen for the past 25 years and should continue to do so. Very quickly, by 2005, every creditworthy borrower who wanted a mortgage had one.

The pension fund demand for these products was soaring, so Wall Street turned its attention to sub-prime mortgages. A scandal of epic proportions developed (which need not be discussed here) and eventually substantial loans were being made to individuals who had no hope of repaying them. Now real estate was in the hands of individuals who had never owned homes and were not prepared to do so. Historically, it has been demonstrated that 64% of adults keep current on their mortgage obligations. By 2007, mortgages were held by 73%, of adults, which meant millions of homes were in the hands of people likely to default on their mortgage. Yet all of these mortgages had been securitized into packages that were rated investment grade.

It is important to point out that the SEC had been very careful to exclude “unsophisticated” non-accredited investors from buying private placements. Even publicly registered securities carry dozens of pages of risk factors and disclaimers. But there were no such warnings about the perils of sub-prime mortgages. There were no consumer advocates warning people about getting in over their head or seeking to protect them from themselves.

By 2008, there were seven million sub-prime mortgages with a total value of $2.7 trillion [15]. By 2010, 80% of these mortgages exceeded the value of the home. The average sub-prime mortgage was more than $180,000. If any of these people had invested in private placements, the most any one person might have invested is $10,000. We stopped people from investing $10,000 in a private company but we allowed them to borrow $180,000 that most of them could not possibly repay. It is true that many private placements fail but the odds are no worse than investing in sub-prime mortgages. Many people would have made enough money to buy a house for cash and those who lost money would be far better off than they were when facing foreclosure and eviction, which millions did.

It is not at all unusual for government agencies to find themselves fighting the last war. Regulation and legislation advance very slowly. The Dodd-Frank Wall Street Reform and Consumer Protection Act became law in 2010 in response to the financial meltdown that occurred two years earlier. But now, in 2015, it has still not been completely enacted by the SEC. The aura of Dodd-Frank hangs over the financial markets as there is a strong sense that the markets have been unfair to individual investors and the playing field is not level. There is no arguing that point but the remedy is very troubling.

In 1974, we made the mistake of excluding most of the population from investing in innovation because they were deemed “unsophisticated.” The regulatory forces want to exclude them again pretty much for the same reason. We know empirically that this is a mistake. Also, while there is an effort to stop individuals from investing in private companies, there is no similar effort to stop them from taking large loans, buying lottery tickets or losing their paychecks in casinos. Individuals engage in all kinds of risky financial behavior and the only place they are effectively stopped is the only one where there is a reasonable chance they can make money.

There is a syndicated television series on CNBC called “American Greed.” It chronicles a litany of financial scams perpetrated on unsuspecting individuals, mostly through the device of a Ponzi scheme. When the victims are inevitably asked why they made such a foolish investment, the reply is always something like “I wanted to invest like rich people.” So ironically, in protecting individuals from making legitimate investments in risky assets, the regulators drive them into frauds.

Today, there is strong sentiment amongst regulators, Congress and a variety of consumer protection advocates to prevent most individuals from investing in private companies. This makes no sense. We must recognize the facts about where we are today and how we got here. We must also recognize that advances in technology and regulation have truly changed the landscape. Perhaps, most important of all, social media is an effective medium that allows for the instant sharing of information. Any investment opportunity that is displayed in a completely transparent way online can be subjected to scrutiny by thousands of people.

The greatest scam of all, perpetuated by Bernard Madoff, would not have lasted a week if it had been offered online. There is no way Madoff could have convinced the public that his trading strategy worked if he had to explain it in a transparent forum. In fact, the only way he could raise money was in private meetings where he extolled a “black box” strategy that he didn’t explain and told people they could trust him based upon his exalted position in the financial community.

Madoff is the nadir of a trend that has been in place on Wall Street for too long. In the past 20 years, the business model of financial firms puts profitability above all else. There have been countless examples of financial firms taking advantage of their clients. It was not always that way. Wall Street understood its job was to create capital for the industries that were working to improve society. Now firms are willing to trade esoteric securities and engage in high-frequency trading without any regard for the greater good.

The good news is that a combination of technology, social media, an emerging generation of millennials and the JOBS Act are converging to create the same kind of opportunity that existed in 1981. There will be consequences but this time, we should plan for the ones we want.

Websites already exist where investors can build their own baskets of securities and share those ideas with friends. Under the JOBS Act, Regulation A+ allows companies to raise $50 million BEFORE they go public and that law allows everyone to invest, both accredited and non-accredited investors. Investors today can form their own syndicates of friends and colleagues and can find more like-minded people with whom to share ideas. Wall Street firms need play no role here. They no longer will control capital formation and deployment.

Individuals, working with groups they choose, can now decide which companies and industries will get funded. Instead of trading and arbitrage strategies that benefit the few, capital can be directed to societal needs. Some will want to invest in the environment, others in education and still others in medicine and biotechnology. The emergence of the millennial generation will create a flood of innovation and we as a society need to give as many of them as possible a chance.

Large corporations are still experiencing a technological revolution that allows them to reduce employment. Most future employment will come from smaller companies and start-ups. Our capital markets are now perfectly positioned to support this activity.

In 1974, when ERISA was passed, it was decided that IRAs and 401Ks should be called retirement accounts. We believe this was a major mistake. Nobody in their 20s cares very much about retirement. In fact, many boomers who have reached retirement age do not want to retire. More than half of all people over 55 have less than $25,000 in their retirement accounts. So we know that label was not an inspiration. These accounts should be called net-worth accounts so that individuals are incentivized to build their value.

We must allow individuals a broad range of investment opportunities that goes beyond a selection of mediocremutual funds, which is what is offered in most 401K plans. By providing the 99% the opportunity to invest in private placements, they will be able to share in the wealth only available to the 1%.

[1] US. Bureau of the Census, Income Gini Ratio for Households by Race of Householder, All Races [GINIALLRH], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GINIALLRH/, March 31, 2015.

[2] Saez, Emmanuel and Gabriel Zucman “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data”. NBER Working Paper, October 2014, online at http://gabriel-zucman.eu/uswealth/

[3] Trennert, Jason. “Remembering the Reagan Bull Market.” WSJ. N.p., 13 Aug. 2009. Web. 06 Apr. 2015.

[4] New York Stock Exchange, Inc. New York, NY, Share Ownership , 1981

[5] New York Stock Exchange, Inc., New York, NY, Census of Shareowners 1959, 1962.

[6] US. Bureau of Economic Analysis, Personal saving as a percentage of disposable personal income, retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/A072RC1A156NBEA/, April 2, 2015.

[7] McMahon, Tim. “Historical Crude Oil Prices (Table).” Historical Oil Prices: InflationData.com. InflationDATA, n.d. Web. 09 Apr. 2015.

[8] U.S. Bureau of Economic Analysis.

[9] Dow Jones and Company, The Dow Jones Averages, 1885-1990. Edited by Phyllis S. Pierce (Business One Irwin, 1991).

[10] Szycher, M. The Guide to Entrepreneurship: How to Create Wealth for Your Company and Stakeholders. N.p.: n.p., n.d. 127. Print.

[11] Waldron, Travis. “Study: CEO Pay Increased 127 Times Faster Than Worker Pay Over Last 30 Years.” ThinkProgress RSS. N.p., 03 May 2012. Web. 09 Apr. 2015.

[12] Yoon, Al. “Total Global Losses From Financial Crisis: $15 Trillion.” Real Time Economics RSS. WSJ, Oct.-Nov. 2012. Web. 09 Apr. 2015.

[13] Dow Jones and Company, The Dow Jones Averages, 1885-1990. Edited by Phyllis S. Pierce (Business One Irwin, 1991)

[14] Census Bureau.

[15] WALLISON, PETER J., and Author F. Burns. “FINANCIAL CRISIS INQUIRY COMMISSION DISSENTING STATEMENT.” FELLOW IN FINANCIAL POLICY STUDIES AMERICAN ENTERPRISE INSTITUTE (n.d.): n. pag. Http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_wallison_dissent.pdf. Web. 2 Apr. 2015.

Jeffrey L. Feldman

Feldman has been a Wall Street entrepreneur for the past 43 years, focused on financial innovation and capital formation. He has spent the past 10 years on study and investment in the innovations taking place in healthcare, particularly in biotechnology, molecular diagnostics and genomics.

In 2005 he founded and served as CEO of X Shares aAdvisors, a creator and issuer of exchange traded funds (“ETFs”). XShares created and sponsored HealthShares Exchange Traded Funds, which consisted of 19 ETFs that divided the healthcare industry into its logical sub-sectors (cancer, metabolic disease, central nervous system disorders, cardiovascular, etc.). In conjunction with TD Ameritrade, XShares also created the TDX Independence Funds, which are a series of lifecycle ETFs. XShares total assets under management reached $270 million before the crash in 2008. XShares was sold to Deutsche Bank in June of 2010.

From June of 1989 until January of 2000, he was the managing member of Superior Street Capital Advisors, which he merged into Broadmark Capital Corporation LLC, where he was a principal until 2003. Both companies were NASD members and served as agents for private placements for private technology companies in the technology sector and for PIPES for developing public companies. 
From January of 1974 to June of 1989 he was the Chairman, CEO and Founder of Cralin and Company, an NASD firm specializing in private placements to high net worth individuals. Mr. Feldman built the firm from 2 to 250 employees, including 120 salespeople in 12 offices nationally. Cralin’s products included real estate syndications, energy partnerships (oil, gas and coal), and private placements in early stagecompanies. It had a New York Stock Exchange seat and acted as a government bond dealer. From 1968 to 1973 he was a Research Analyst at Goldman, Sachs and Co. Since 1973, Mr. Feldman has taught as an Adjunct Instructor, Adjunct Lecturer and Adjunct Professor in Economics at several schools in New Jersey as well as NYU and St. John’s University. His field of specialization is macroeconomics; he has also taught microeconomics, investment theory, money and banking, statistics, business management and entrepreneurship. He co-authored “Three Paths to Profitable Investing,” (FT Press, 2010), which outlined strategies for investing in healthcare, green technology and infrastructure using ETFs. Mr. Feldman holds an MBA from St. John’s University, a BA from Queens College, and Series 7, 24, and 63 licenses from FINRA. He is a resident of Princeton, New Jersey.

Alexander M. Amini

Mr. Amini joined Poliwogg in March 2015. He is responsible for diligence performance with respect to potential issuers, assesses them for inclusion on the platform and collects and manages data.

Prior to Poliwogg, Alex previously worked at Contently, a technology company that finds writers, designers and photographers for companies seeking to market their products through native advertising.

He is a graduate of Skidmore College, with a degree in business. He resides in Brooklyn, New York.

Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Jeffrey L. Feldman. This work reflects the law at the time of writing in April 2015.

3 thoughts on “Wealth Inequality in the US – The Result of Unintended Consequences and How This Time Can be Different

  1. Hi Jeffrey and Alexander ,

    Another interesting trend is the rise of robo-advisors, which by 2020 will manage about $2.2 trillion in assets (see below). While less likely to be helping HNWI, they may well open up the possibility of new money and Millennials entering the investment market. This way, more of the common folk may have access to what was once a perk of the 1%?

    Who knows, maybe the wealth management industry will also become automated in the coming decades, like much of industry and eventually, much of everything?




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