Wednesday, August 19, 2009

Guilded Age 2

Paul Krugman recently posted a graph showing over almost 100 years what percentage of the nation's income lands in the pockets of the top 0.01% of the country. In other words, it's a measure of inequality, or the growth in wealth of the richest of the rich.

When the record-keeping began in 1913, the top sliver of the country earned less than 3% of the money earned in that year. (In a strictly egalitarian society they would, I suppose, have earned 0.01%) The income of the rich peaked in 1928, just at the verge of the Great Depression, with the wealthiest one-hundredth of a percent of the population receiving 5% of the income. After the crash, their share dropped down to around 2%, and then there was a long moderation, from 1943 to around 1983, when the rich's share of all income earned hovered just above 1%.

Since I remember much of that time period, I can say that it was a time when the working class became the real heart and soul of America. Working men could buy houses and cars and take their 5 or 6 kids on vacation, and their wives could stay home and raise the kids. Middle class people could send their kids to college, and college students from the lower middle class could work for 3 months and earn enough to pay their room and board for the next 9 months. If they took a year off, they could save enough to pay for 2 years of school. It was a good time, in other words. And rich people seemed to be doing ok too. (though I didn't know any of them! But you didn't hear of too many jumps out of Wall Street windows!)

The picture begins to change in the 80s, with the rich crossing the 2% line for the first time since 1938. And then the line bounces between 2 and 3% for a while, and suddenly between 1997 and 2007, it leaps up to 6%, the highest level ever.

The data only goes as far as 2007, but there does seem to be a notable coincidence--the last time the rich controlled so much of the income, the Great Depression happened. This time, we're calling it the Great Recession of 2008.

Do I point this out because I'm jealous of the top 0.01% of income earners and want to punish them for being richer than me. No, I assure you, that's not the point.

The point is that it is deleterious for everyone, for the entire economy, when a very small number of people receive a large share of the wealth that is generated. Why? Because money that is spent creates demand for goods and services, creating jobs and opportunities for those in the lower segments of the population. And if those jobs are paid a slightly higher proportion of the income that comes into a corporation, it benefits everyone. That's why we had widespread prosperity and growth from WW2 till the 1980s.

But when money pours into the pockets of the very rich, they have no need to spend it. They invest it in the stock market instead, producing bubbles as capital expands much faster than the markets for actual good and services (since those at the bottom are more numerous but have less to spend.)

The spike is probably somewhat self-generating--as more money is in the hands of the wealthy, they invest more, driving up the price of stocks artificially, creating paper wealth, which shows up as income. But meanwhile, the real wealth, which is produced at the bottom of the food chain, and also largely consumed there, stagnates, so the spike leads directly to the crash. Paper wealth evaporates, reducing the rich folks share of the income, but not actually touching their lifestyle, while at the bottom, people living paycheck to paycheck lose their homes and their jobs and their health insurance, and their kids lose their chance to go to college, so the crash, though it hurts the rich more on paper, actually hurts the poor in personal ways.

What could stop the spike and collapse pattern? It seems like 2 things--more reasonable behavior by corporate boards, stopping the inflationary spiral of top executive pay and spreading the wealth more evenly down through the totem pole (Wal-Mart, for instance, doesn't *have* to create the 3 richest people in the country and also pay its workers low wages. The see-saw could tip the other way.)

And government could provide the nudge in the form of a tax system that treat all income equally, whether it is earned by work or by investment, and by raising the marginal tax rate on large incomes, so that corporations and small businesses would be incentivized to leave the profits at work in the company productively, rather than sucking them out and distributing them in wages and bonuses, which money is used for speculation rather than worthwhile investment in actual productivity.

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