Like many Americans, Treasury Secretary Jack Lew overestimates the significance of disciplined saving and financial literacy in determining one’s wealth status. While it is true that households accumulate wealth either from help from family, saving some of their current income, or realizing gains from appreciating assets, it is important to understand the circumstances in which households find themselves.

Economic orthodoxy insists that wealth accumulation follows a life cycle pattern. Interested in maintaining a high but stable level of consumption, households dissave when young as they invest in their education, save prodigiously during midlife in anticipation of retirement, and then dissipate their wealth as they approach death. In this view, wealth is seen merely as a store of future consumption.

Yet, wealth is a source of power. Its possession allows one to avoid unexpected harm, take advantage of unforeseen opportunities, influence public policy, and assure the prospects of one’s offspring. The Wealth Privilege model insists that holding wealth makes it easier to accumulate more wealth, whether through saving, asset appreciation, or family transfers. It predicts that a system of wealth disparities is fully capable of promoting economic stratification as wealth is transferred across generations.