Fools and Knaves

MIND THE GAP

Let’s get some numbers on the table right away: the wealthiest ten percent of Americans now take in 50% of our national income, an increase of twenty percentage points in just a few years. Further, in 2011 the cumulative net worth of the Forbes Magazine 400 wealthiest Americans increased by some $200 billion even as the median household income of Americans fell by approximately 4% [U.S. Census Bureau]. These three data points, taken together, tell a powerful and sad story about just who is writing our nation’s laws. When the wealthiest people either run for office or pay whatever it takes to get self-interested others to run for office, we cannot be surprised to discover, firstly, that the rich are effectively writing the tax code; secondly, that the capital gains tax rate has been reduced to 15% and, finally, that these people have found very effective ways to move their wealth into ‘investments’.

It’s pretty much all legal but ‘legal’ doesn’t always add up to ‘right’. Like Mitt Romney, the wealthiest 1% are paying every dollar they are required to pay and not one dollar more. Also like Mitt Romney, they really couldn’t care less that it’s as bad for America as it’s good for them. When we add to this sorry state of affairs the GOP’s insistence that our debt problems can be solved only by reducing spending to the poor and middle-class, we know that something is very much amiss.

Since George W. Bush took office, we have become a much more unequal economic society. When Bush left office, the 400 richest Americans had a combined net worth that is greater than that of the bottom 150 million Americans. Further, the wealthiest one percent of Americans possessed more wealth than the entire bottom 90%. When all is said and done, according to Emmanuel Saez, an economist at UC, Berkeley, the last five years of the Bush 43 presidency saw some 65% of all economic gains going to the wealthiest one percent of American households, just the kind of change for which the wealthiest 1% hope. As for the other 99%, they came away with the Great Recession, huge job losses, record-setting home foreclosures and diminished asset values. Wealth was successfully shifted not only from the middle-class to the super-rich but also from future generations to those of today’s generation who demanded immediate gratification.

There are a number of aspects of this inequality with which we must come to terms. It is important that we understand, firstly, what risks we face when economic inequality grows and, secondly, it is important to understand – at a gut level – how this particular inequality came about because the risks we face when income inequality increases are very real and will impact us all.

In a 2007 update to a report by T. Piketty and E. Saez, Income Inequality in the United States, we learn that in 2007 the share of total income (including capital gains) going to the top one percent of households was 23.5%, the highest level of income concentration since 1928, the year before the start of the Great Depression. In contrast, consider that in the 1970s the wealthiest one percent of American households took in 9% of the nation’s total income. Put another way, in real dollars the median worker today earns less than he did 30 years ago.

In their 2013 update – four years after our nominal recovery from the Great Recession – Piketty and Saez note that 95% of all the gains from that recovery have gone to ‘the 1%’. In fact, the IRS data shows that more than 60% of those gains went to people who earn more than $1.9 million p.a. [Paul Krugman in the NY Times: September 13, 2013]

In sum, then, we see three inescapable facts:

1. The economic policies of the conservative Republican administration of George W. Bush, ably assisted by a solidly Republican Congress, served only to reprise the very same conditions that gave us the Great Depression of 1929 and today, even as we try to extricate ourselves from the after-effects of the Republican Great Recession of 2008, we teeter on the edge of another recession.

2. Republican economic policies led directly to a bubble that, once burst, removed almost $8 trillion in wealth from the American middle-class alone. It was this loss of wealth, coupled with the loss of jobs that flowed from the Great Recession of 2008 that effectively hollowed out the American middle class. The wealthiest Americans, on the other hand, benefitted not only from Bush 43’s wildly disproportionate income tax reductions but then suffered relatively few losses from the burst housing bubble, thanks largely to a massive taxpayer bailout of the Wall Street institutions that created the bubble in the first place. Post-bubble bailout money from the American taxpayer – largely the middle class – was even used to pay additional bonuses to bank officers and traders, many of them having employed fraudulent business practices in the process of inflating the bubble.

3. This hollowed-out American middle class, having lost almost $8 trillion in housing-based wealth as well as millions of jobs, no longer has sufficient purchasing power to fulfill its traditional role of driving our consumer-driven economy out of recession and return it to prosperity. The American middle class today is diminished in number, diminished in purchasing power, buried in debt and cowed by fear.

Why, after all, are we so worked up about this growing gap in income and wealth? Is this simply an issue of ‘fairness’ and morality? Although there are arguments to be made along this line, we, however, are far more pragmatic than moralistic about this issue. Two specifics will suffice here: (1) If we study the economic life of societies that are highly stratified in terms of wealth and income, we see that their economies tend to be relatively unstable, i.e., recessions tend to come with increasing frequency. (2) Further, we know as a matter of historical experience that there is an inverse relationship between the relative distribution of national wealth and the national economic growth rate, i.e., as the gap between rich and poor grows, the GDP growth rate tends to fall. Conversely, as the wealth gap narrows, the GDP growth rate tends to rise . . . and growth happens to be the sine qua non of our economic existence. This is too important not to repeat. There is an inverse relationship between the relative distribution of national wealth and the rate at which the national economy grows, i.e., as the gap between rich and poor grows, the GDP growth rate tends to fall and, as the wealth gap narrows, the GDP growth rate tends to rise.

In an April 2011 report, the International Monetary Fund unequivocally confirmed this dynamic. Given this unavoidable truth, we must understand that, at some point, the widened gap is not only not serving everyone’s best interests, it is no longer serving anyone’s best interests. Of course there will always be those whose only interest is in grabbing everything within reach right now and to hell with everyone else and to hell with tomorrow. This is further evidence that the unfettered free market does not necessarily, in and of itself, always lead to the best overall outcome.

The wealthiest among us should see intuitively that it makes no sense to impoverish the consumer but, yet, the wealthiest do overreach and, when it happens, consumers do lose buying power. Similarly, lawmakers must know that enabling plutocrats to suppress market growth by spinning fantasies of supply-side economics and the unfettered free market is not what public service is supposed to be about, but they, too, will best serve those who best pay.