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The University of Chicago Socio-Economic Disparities

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The University of Chicago Socio-Economic Disparities THE UNIVERSITY OF CHICAGO SOCIO-ECONOMIC DISPARITIES IN PORTFOLIO COMPOSITION: THEIR HISTORICAL CAUSES AND THEIR CONSEQUENCES FOR INEQUALITY IN AMERICA A DISSERTATION SUBMITTED TO THE FACULTY OF THE DIVISION OF THE SOCIAL SCIENCES IN CANDIDACY FOR THE DEGREE OF DOCTOR OF PHILOSOPHY DEPARTMENT OF SOCIOLOGY BY MAUDE PUGLIESE CHICAGO, ILLINOIS MARCH 2016 To Laurence. Table of Contents List of Tables v List of Figures viii Acknowledgments x Abstract xii Introduction 1 Part 1. Asset Choices and Income Inequality Chapter 1. Mass Investment in Real Estate Assets: Consequences for Rates of Return to Capital and Income Inequalities 13 Part 2. The 1940s Shift in Working- and Middle-Class Investment Practices Chapter 2. A Methodology for Mapping Historical Trends in Household Portfolio Composition 63 Chapter 3. Trends in Household Portfolio Composition Across Income and Net Worth Groups from 1918 to 2013 92 Part 3. Access to Long-Term Amortized Credit and Investment Practices Chapter 4. The Great Credit Revolution: Changing Opportunities for Credit across Asset Classes 142 Chapter 5. The Uses of Credit in Wealth-Building Strategies 167 Conclusion 237 Appendix A. Measurement of Rates of Returns using PSID Data 247 Appendix B. Sub-sampling from the Original PSID Sample 260 Appendix C. Detailed Models Results From Chapter 1 263 Appendix D. Computation of Savings-Based Proxies 264 Appendix E. Comparing Savings- and Asset-Based Proxies for Investments in Assets 265 Appendix F. Summary of Changes to Federal Taxation 1918-1937 270 iii Appendix G. 1940s Trends in Investment Behaviors From Statistics of Income and Census Data 271 Appendix H. Investment Behaviors of African Americans 1950-1968 274 Appendix I. Robustness Checks on the Effect of Access to Amortized Mortgages on Home Purchases 278 Appendix J. Tables 282 Appendix K. Figures 328 References 341 iv List of Tables 1.1. Comparing the Full PSID Sample and the Regression Subsample 282 1.2. Descriptive Statistics for Key Variables Conditional on Net Worth 283 1.3. Descriptive Statistics for Outcome Variables Conditional on Family Income in 1984 285 1.4. Standardized Annual Rates of Returns as a Function of Income by SQRT of Family Member and Net Worth Reported in the Previous Survey Wave 286 1.5. Geometric Mean of Annual Rates of Returns as a Function of Family Income and Net Worth in 1984 287 1.6. In-Sample Standard Deviation of the Observed and Counter-Factual Total Income Variables By Survey Year 289 1.7. Share of Total Reported Income Reported by Families in the Top 10% of the Income Distribution in the Observed and Counter-Factual Samples By Survey Year 289 1.8. Share of Income and Net Worth Effects on Rates of Return Earned Explained by Various Mechanisms 290 2.1. Summary of Data Sources, Population, and Investment Proxies by Sub-Period 291 3.1. Ratio of Savings in Real Estate and in Corporate Securities to Annual Income in 1918-1919 and 1935-1936 among Families Earning less than $3,000 292 3.2. Change in the Ratio of Savings in Real Estate and in Corporate Securities to Family Income between 1918 and 1936 among Families Earning less than $3,000 292 3.3. Change in the Odds of Savings in Real Estate and in Corporate Securities versus Not between 1918 and 1936 among Families Earning Less than $3,000: Coefficient Estimates 293 3.4. Change in the Ratio of Savings in Real Estate and in Corporate Securities Between 1918 and 1936 among Families Earning Less than $3,000, Conditional on Ownership 294 3.5. Odds of Owning a Home As a Function of Income Between 1920 and 1940 295 3.6. Ratio of Savings in Real Estate and in Corporate Securities to Family Income between 1935 and 1950 by Income Bracket 296 v 3.7. The Effect of Income on Ratio of Savings in Real Estate and in Corporate Securities between 1935 and 1950 297 3.8. The Effect of (Income/GDP per capita) on Ratio of Savings in Real Estate and in Corporate Securities between 1935 and 1950 298 3.9. The Effect of Income on Ratio of Savings in Real Estate and in Corporate Securities between 1935 and 1950, Excluding the 1947 Sample 299 3.10. The Effect of Income on the Odds of Saving in Real Estate and in Corporate Securities Between 1935 and 1950 300 3.11. The Effect of Income on Ratio of Savings in Real Estate and in Corporate Securities between 1935 and 1950, Conditional on Saving Some Amount 301 3.12. The Effect of Income and Net Worth on Share of Real Estate and Corporate Securities in Portfolio between 1950 and 1968 302 3.13. The Effect of Income and Net Worth on the Odds of Owning Real Estate and Corporate Securities in Portfolio between 1950 and 1968 304 3.14. The Effect of Income and Net Worth on Share of Real Estate and Corporate Securities in Portfolio between 1950 and 1968, Conditional on Ownership 306 3.15. The Effect of Income and Net Worth on Share of Real Estate and Corporate Securities in Portfolio between 1953 and 2013 308 3.16. The Effect of Income on Investment Behavior, Depending on Population and Covariates 310 4.1. The Structure of Mortgage Loans between 1920 and 1950 310 5.1. Housing Costs, Access to Mortgage Credit, and Homeownership in 1935-1936 311 A.1. Summary of Data Available and Missing in PSID Data 312 A.2. Data Sources and Assumptions Made in Rates of Return Calculations by Asset Class 313 D.1. Composition of Savings Variables 315 E.1. Share of Real Estate and of Corporate Securities in Portfolio as a Function of Share of Income Spent in these Assets in 1950 319 vi E.2. The Effect of Income and Net Worth on Asset-Based and Savings-Based Proxies of Investment Preferences 319 F.1. Summary of Changes in Federal Taxation of Receipts 1918-1937 320 G.1. Evolution of the Dividends to Total Income Ratio by Income Bracket from 1937 to 1948 322 G.2. Evolution of the Income Effect on the Log Odds of Owning a Home between 1920 and 1960 323 H.1. Stock Ownership among African Americans and Other Americans 324 H.2. Real Estate Ownership among African Americans and Other Americans 324 H.3. Regression Analysis for Real Estate and Corporate Securities Ownership among African Americans between 1950 and 1968 325 I.1. Availability of Amortized Mortgages and Homeownership Rates among Working- and Middle-Class Families in 1919-1920 and 1930 326 vii List of Figures 1.1. Growth of a $100 Investment Over 27 Years When Yielding 2.5% and 3.3% Annually 328 2.1. Savings by Asset Categories as a Ratio of Income among Households in the Bottom 60% of the Income Distribution 329 2.2. Savings in Corporate Securities as a Ratio of Income among Households in the Bottom 60% of the Income Distribution 329 2.3. Savings as a Share of Income between 1918 and 1950 by Income Category 330 2.4. Average Share of Real Estate and of Securities in Portfolio between 1950 and 2013 by Net Worth Category 331 2.5. Average Share of Dividends in Total Income Earned between 1918 and 1950, by Income Group 331 2.6. Proportion of Homeowners between 1950 and 1960 by Income Category 332 3.1. Dividend to Income Ratio in the Bottom 60% of the Income Distribution as a Ratio of the Dividend to Income Ratio in the Top 10% of the Income Distribution from 1918 to 1937 332 3.2. Proportion of Homeowners by Income Group from 1920 to 1940 333 3.3. Share of Real Estate in Portfolio by Income Quintile from 1950 to 1968 333 3.4. Share of Real Estate in Portfolio by Net Worth Quintiles from 1950 to 1968 334 3.5. Share of Corporate Securities in Portfolio by Income Quintile from 1950 to 1968 334 3.6. Share of Corporate Securities in Portfolio by Net Worth Quintile from 1950 to 1968 335 3.7. Predicted Share of Real Estate in Portfolio as a Function of Net Worth in 1950 and 1968 335 3.8. Share of Real Estate in Portfolio by Income Quintile between 1953 and 2013 336 3.9. Share of Real Estate in Portfolio by Net Worth Quintile between 1953 and 2013 336 viii 3.10. Share of Corporate Securities in Portfolio by Income Quintile between 1953 and 2013 337 3.11. Share of Corporate Securities in Portfolio by Net Worth Quintile between 1953 and 2013 337 4.1. Liberty Loan Drive Advertising Poster 338 5.1. Housing Costs and Homeownership by Income Percentile Group in 1935-1936 339 5.2. Housing Costs and Homeownership by Income Percentile Group in 1936-1936 vs. 1960 339 5.3. Changes in the Age Structure of Owners of Select Asset Classes between 1950 and 1968 340 ix Acknowledgements This dissertation was realized with the financial support of the Social Science and Humanities Research Council of Canada, of the University of Chicago, and of the Mellon Foundation. This dissertation was also realized with the precious help of a number of people, whom I would like to thank warmly. First, immense thanks to all the members of my dissertation committee: Monica Prasad, James T. Sparrow, and Linda J. Waite (I reserve special thanks to the chair for the end). I could not have realized this dissertation without their feedback on sometimes very early drafts, without their fine and always constructive criticism, and without the rich conversations I have had with each one of them. These conversations fueled my historical and sociological imaginations in ways so profound that they are difficult to account for.
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