SAVING THE POOR THROUGH SAVINGS
What can government do to get middle-class and poor people to save more? Higher interest rates don't do the trick -- people didn't save more in the early 80s when interest rates were stratospheric. High stock returns don't do the trick either -- in the booming 1990s, people actually saved less, seeming to prefer to "let the market do their saving for them."
Instead, the answer is to change America's culture of (not) saving. This sounds hard, but actually it is probably very doable. For years, behavioral economists such as Richard Thaler have been studying ways to "nudge" people to save more. The most famous "nudge," which has been endorsed by President Obama, is to make employee pension plans "opt-out" instead of "opt-in". But there are plenty of others. In lab experiments, just giving people information on how to save money makes them save a lot more.
This means that more financial education in public schools is a must. I'm not talking about teaching kids the Capital Asset Pricing Model. I mean what Bob Shiller calls "basic Suze Orman stuff." How to make a monthly budget. What "saving" and "borrowing" mean. How wealth builds over time. How to avoid borrowing lots of money at high interest rates (e.g. credit cards and payday loans). Etc. The new Consumer Financial Protection Bureau can help a lot with this too, by preventing companies from tricking poor people into taking out high-interest debt.
RETURN TO EQUALITY
In addition to "nudging" middle-class and poor Americans to save more, we can help them get a better return on their assets -- the second thing that has a huge effect on wealth in the long run. This means helping middle-class people invest in stocks without paying high fees. The first part of this is teaching middle-class people to avoid making frequent changes in their stock portfolios. Studies show that individual investors consistently lose money when they try to buy and sell and buy and sell, mostly because they tend to ignore trading costs. So financial education should teach people to let their stock portfolios just sit there for decades, and ignore the ups and downs.
The second way to get better returns is to avoid actively managed funds. Actively managed mutual funds charge high fees to purchase portfolios of stocks that, statistically, are no better than simply buying a low-cost "index" fund that tracks the overall level of the market. Pension plans like TIAA-CREF tend to charge even higher fees, meaning even worse returns. Financial education can teach middle-class people what a low-cost index fund is, and how to invest in one.
This is not to say that middle-class people should put all their money in stocks. And many poor people can't afford to take the risk of investing in stocks. But in the long run, "asset allocation" -- i.e., how much of your savings you put in stocks and other high-return assets like corporate bonds -- is a major determinant of whose wealth grows and whose stays the same. The government, through financial education and "nudge" programs, can help people take advantage of high-return investment opportunities without paying high fees and trading costs.
In the short run, wealth equality is closely tied to income equality. But in the long run, it's all about thrift, frugality, and saving -- in other words, cheapness. If America's middle-class and poor people learn to be more cheap, then in 30 years, we will see a very different distribution of wealth.