America is experiencing not only income inequality, but also wealth inequality, which isn’t surprising. What’s shocking is how far it has gone.
The post-World War 2 gains made by the middle class have been completely eradicated, and U.S. wealth distribution is now back at 1940s levels, according to a new study by a pair of economists from U. of California-Berkeley and London School of Economics. “At the same time, the richest Americans have become richer, putting their share of wealth at the dizzying heights only seen during the era of ‘The Great Gatsby’ and the Gilded Age of the robber barons, the researchers note.”
Their study finds America experienced a “substantial democratization of wealth” after World War 2, creating the postwar middle class, but beginning in the 1980s “that trend inverted, leaving the middle class progressively poorer and the richest even richer.” By 2012, the top 0.1% of households owned three times as large a share of the nation’s wealth as they did in the late 1970s, i.e. 22% vs. 7%. (This group consists of 160,000 households with net assets over $20 million in current dollars.) “Interestingly, … households in the next 0.9 percent … decreased slightly during the past 40 years” in wealth share.
http://www.cbsnews.com/news/another-death-knell-for-the-middle-class/
Probably there are multiple reasons for the growing concentration of wealth in America. I happen to believe our capitalist system is the heart of it. Capitalism, by its very nature, tends to concentrate wealth and power in ever fewer people as stronger competitors drive out weaker competitors until eventually only a few companies and individuals are left standing, although undoubtedly there are theorists who would dispute this on the grounds that “creative destruction” and continual rise of new entrepreneurs have a wealth spreading effect. I would reply it doesn’t seem to be working out that way.
I don’t doubt that our political system has been bought, harnessed, and put to work for the benefit of the wealthy class that funds the political campaigns. You can’t get elected to much of anything anymore without Big Money money. Even school board campaigns can cost millions; a run for the White House now costs at least a billion dollars, and the only place presidential aspirants can get that kind of money is from Wall Street, so guess whose interests are served when economic policies are made and tax laws are written. When the super-wealthy control government policymaking, the nation’s economic fruits tend to concentrate even further.
Of course, income inequality is part of it, too. Part of what’s happening is technology has displaced a lot of workers from decent-paying jobs. Another piece is that technology enables thin staffing of huge companies; it’s not unusual anymore for a company with a billion dollars of sales to have only a few dozens or hundreds of employees. Our capitalist system now enables (a few) people to start companies and become billionaires without creating very many jobs. Gone is the billionaire whose factories provided work to hundreds of thousands of workers.
But the main income story is there’s been a hollowing out of the middle of the economy; as it becomes ever more technology-driven, fewer ordinary workers are need, and a relatively small number of highly skilled workers at the top of the technology pyramid earn more, while workers of average education, skills, and ability — which is most workers — displaced from the mid-level jobs that paid family wages and are pushed into ever-fewer low-wage laboring jobs. Increased competition for those jobs drives low wages even lower.
The middle class isn’t entirely a victim of large economic forces beyond individual control. Many people have bad financial habits that may permit a temporary and superficial lifestyle boost, but lead to net worth destruction, or more precisely move asset wealth from middle class pockets into he pockets of the wealthy. A primary vehicle for this is borrowing. Being able to spend a lot of money isn’t the same thing as having a lot of money. Owing a lot of money isn’t being rich. Buying on credit makes people poorer, not richer. But cultural influences, i.e. materialistic competition and showmanship, have encouraged many Americans to borrow money they don’t have to buy a lifestyle they can’t afford in order to show off. The “keeping up with the Joneses” impulse is very strong in our culture. This study confirms this:
“The ‘American Dream’ may be somewhat to blame for the decline [sic] in middle-class debt , with many households taking on larger mortgages and more debt for student loans, which is eroding many families’ wealth. During the stock market bubble in the late 1990s and the housing boom of the early 2000s, rising asset values helped pump up the wealth of many American families. The Great Recession brought a collapse of the average wealth for the middle class, the study found.”
How this wealth-collapsing effect of debt works is clearly explained in a book I’m presently reading entitled “House of Debt” by Mian and Sufi. Although everyone’s net worth declines when asset values fall, the higher leverage of poorer and more indebted households magnifies their losses more. To illustrate, if you borrow $80,000 to buy a $100,000 home, and all of your net worth is tied up in home equity, a 20% decline in home value will wipe out your entire net worth. Now let’s look at a more affluent homeowner who owes $200,000 on a $400,000 house and also owns $200,000 of stock. His nominal loss is greater — $80,000 vs. $20,000 — but his loss is only 13% of his net worth. For the very rich, who tend to park most of their wealth in financial assets and have less leverage or none at all, a decline in home values barely registers as a blip.
And then there was the government response to the Great Recession. We all know what happened: Stock prices soared, housing prices partially recovered, wages not at all. These policies primarily benefited the rich and did very little for the middle class. In fact, Federal Reserve chairman Ben Bernanke’s stated objective was to stimulate consumer spending by creating a “wealth effect.” Most of the increased wealth went to the rich simply because they owned most of the appreciating assets. The consumer spending gains, such as they were, mostly were for luxury goods. Very little of this stimulus trickled down to the middle class. Of course, you know this, because millions of ordinary Americans have complained loudly about it.
A fierce policy debate is developing over how — or whether — America’s political system should respond to this drastic reshaping of the American economy. Conservatives argue we need freer markets and less government intervention to encourage business activity and stimulate growth; and decry as “socialism” anything that smacks of “redistributive” (including unemployment benefits and food stamps). But we already have a redistributive economy. It’s simply that the capitalist system instead of government is the redistributive mechanism, and the redistribution that’s occurring is from the poor and middle class to the rich. What makes redistribution of wealth and income by capitalist forces inherently more virtuous than redistribution by government policy and taxes? Redistribution is redistribution. The only difference is the direction of the flow.
The conservative response to this has been no more profound than simply to say, “Capitalism good; government bad.” (Think Tarzan and Jane.) What does seem to bother conservatives is they’re outnumbered by the majority this kind of redistribution leaves behind. The response of America’s conservative political party, the GOP, has been perfectly rational: (a) defending economic elitism that benefits the wealthy at the expense of workers by demonizing non-capitalist redistribution in all its forms, and (b) committing vast resources and manpower effort to a vote suppression strategy. The party that protects the interests of the rich understands their best shot at preventing the 5 percent from being outvoted by the 95 percent and maintaining the policies that have given them their privileged position is by preventing millions of Americans from voting. It’s an intensely pragmatic approach to politics.
The CBS article concludes,
A ‘dystopian future’ might be in store for America, with middle-class families ending up with debts as high as their assets …. To avoid that outcome, the U.S. needs ‘policies that reduce the concentration of wealth, prevent the transformation of self-made wealth into inherited fortunes, and encourage savings among the middle class,’ the report added. They noted, ‘Progressive estate and income taxation were the key tools that reduced the concentration of wealth after the Great Depression. The same proven tools are needed again today.'”
I’ll conclude with this: After World War 2, the American middle class arose from a growing economic pie, made possible by the fact that given more pie, more people can share it; but now, America’s economy is increasingly becoming a zero-sum game, in which one group’s gain (higher profits for the wealthy) is another group’s loss (lower wages for workers); and our politics increasingly reflect the worries of the “haves” about the growing restlessness of the “have-nots.” Those who have exploited the capitalist system to concentrate economic wealth and political power in their own hands aren’t stupid nor ignorant of history. They understand that in every society the masses have a breaking point.
In America, this is unlikely to take the form of violent revolution, or even Greek-style riots in the streets, because our society has a safety valve: Democracy. At the end of the day, the power of the vote is still in the people’s hands, and as we saw in the 2008 and 2012 elections, the obstacles thrown up to voting can be overcome if the will is there; and all the money thrown at political advertising can go for naught if voters get tired or frustrated enough with the status quo. This is what the entrenched elites on Wall Street and in Washington D.C. truly fear. Once the popular will is aroused, it flows like a mighty river that no power can stop. If that happens, it’s possible this nation’s economic and social policies could again bend toward the benefit of the middle class workers whose hard work still creates virtually all of this nation’s munificent wealth. And that would only be fair, because without their labor, the capital owned by the wealthy would produce nothing and be worth nothing.