At Bloomberg Alexandre Tanzi and Mike Dorning put some meat on the bones of something I have been whinging about around here for some time—the tremendous change over the last several decades in the distribution of wealth in the United States:
After years of declines, America’s middle class now holds a smaller share of U.S. wealth than the top 1%.
The middle 60% of U.S. households by income — a measure economists often use as a definition of the middle class — saw their combined assets drop to 26.6% of national wealth as of June, the lowest in Federal Reserve data going back three decades. For the first time, the super rich had a bigger share, at 27%.
and if you extend that graph back to 1970 the change is all the more dramatic. Back then most of the wealth was held by the middle class rather than the wealthy.
I do wish they’d distinguish among income, wealth, and class rather than muddling them up. I’ll repeat my definition of class. If you earn one standard deviation or more below median income and especially if what you do earn you are paid by the hour, you are lower class. If you earn all the way up to $500,000 per year or even more per year and most of that income is derived from a salary, you are middle class. You may be lower middle class or upper middle class but you are middle class. If you earn $500,000 or more per year and most of that income is derived from the ownership of assets (rents, royalties, or dividends), you are upper class. We do have an upper class in the U. S. but there aren’t very many of them and most of the top 1% of earners aren’t upper class. In other words upper income ≠ upper wealth ≠ upper class. In my second incarnation I lived next door to and went to school with some people who were genuinely upper class.
One might claim that the post-war period was the anomaly and we are returning to the norm except for one thing: it doesn’t explain the sharp difference since 2000. I believe that can mostly be explained by quantitative easing and its attendant asset inflation.
Rather than go into a discussion of the sources of income and wealth, I’ll just make another claim. I don’t believe that the United States can continue as a liberal democracy if the concentration of wealth illustrated by the graph at the top of the page continues. I can’t prove it but I do believe it.
There seems to be a belief abroad in the land that the tax system can be used to change that distribution. All I can say is prove it. Show me one period of more than a few years during which the tax system resulted in wealth being more evenly divided in the United States. Show me that for any multi-ethnic, multi-racial, multi-confessional country. I think that you will find that it is unheard of but what is extremely common is being able to use the tax system to redistribute from one group of well-to-do people to another group of well-to-do people.
I believe that the change in the distribution of wealth has been created by policies and can be reversed by undoing those policies. It’s like the old Henny Youngman joke. “Doctor, it hurts when I do this. Then don’t do that.”
I think there is also a n ethical component at work here. As I think you have noted capitalism as a theory has rested largely upon the assumption of ethical behavior on the part of the capitalists. If that doesnt happen then you would either need intervention on the part of the capitalists themselves or government. Since for a large part of the population, especially among the wealthy capitalists, all government intervention is bad there is constant push and pull for and against intervention.
So, I think that in the past our wealthy we go through periods where it is more or less OK to be super, super wealthy, knowing that it is disruptive. We went through an era where it was not OK in the 40s-60s but the tis int he past. Media glorifies the ultra rich (celebrity culture) and there is only a half hearted attempt to do anything about it. Maybe because those same people own most of the media? Nam very negative about this. I dont see a good way to get out of this loop. The wealthy control our politics and our media at such levels I dont se it changing.
Steve
Wealth is power. The 1% control the politics. They own the “system.” They can, do, and will prevent any reforms that diminish their power.
Peter Turchin, the historian at UConn and expatriate Russian, believes that all politics is competition among the elites for power and wealth. Revolutions and civil wars are extreme forms of elite competition.
If you have the time and are comfortable with or even like economics and demographics, he is well worth reading.
In anticipation of an expected criticism, most of the top 1% of earners are not Michael Jordans or Tigers Woodses. They are not prodigies. Some are but most aren’t. Millions are making high incomes because of government subsidies of one sort or another.
Occupational licensing, intellectual property, other regulatory barriers to entry, regulatory costs that apply to companies operating in the U. S. but not those operating elsewhere, asset inflation that results from quantitative easing, and direct government payments are not the working of the market. I don’t advocate eliminating them; I advocate controlling how much income can be derived from them. Additionally, I believe in tariffs that operate like Pigouvian taxes on goods entering the U. S. from countries that don’t have or don’t enforce environmental, labor, etc. regulations like those we have here.
Capitalism in some respects resembles a pyramid scheme, and it’s likely that it has to in order to harness the benefits of specialization and scale.
I’m aware that at times I can come off as bitter. chalk it up to fatigue.
Attitude is the answer, if you find yourself poor, you are challenged to work harder, spend and play less or not at all. Take pride in walking away from the purchase, packing your own lunch.
Do without those services that are keeping you poor, actively seek better employment or opportunities.
Complaining may feel good but the returns are pitiful and it drives a wedge between you and those people you can benefit by knowing.
There is substantial empirical evidence that supports that. The people happiest with their jobs are not necessarily those who have the best jobs or the highest pay but those who derive the most happiness from the jobs they have.
“It’s the Modern Monetary System (MMS), stupid.”
Because the MMS is debt based, increasing debt will increase the money supply. The increased money supply is not additional dollars flowing through the economy. The increased money supply is additional wealth flowing to the debt owners, and since it takes money to lend money, the debt owners are mostly the existing wealthy.
In capitalist terms, increasing the national debt by $3.5 trillion is the US issuing new stock. Those buying the initial offering are people who have enough money to purchase these newly minted shares, and with inflation, their investment increases.
When LBJ removed the gold cover, it resulted in a massive expansion of the welfare system and the wealth held by the wealthy. It is amusing that many of the people decrying wealth inequality fully support the welfare state, and the people decrying the welfare state fully support wealth inequality.
Here is a primer: Who Really Killed the Gold Standard? It is not very long or technical, but the graph link is dead.
Said another way, generating $1 of GDP added 26c to wealth inequality before fiat money, but today, generating $1 of GDP adds $3.70 to wealth inequality. So, increasing GDP will increase wealth inequality faster than GDP, and taxes cannot fix it.
@Dave Schuler
I totally agree with your first comment, and the second paragraph is the reason we do not have “free-market capitalism”. Furthermore, widespread innovation is not possible, and this will severely limit the benefits of automation.
The Android OS was almost “strangled in the crib”, and Google was a multi-billion dollar company.
I’m sure that’s so, Tasty, but there’s not a damn thing I can do about it.
Google tells me that the Top 1% in terms of wealth have around $10 million in assets (for the US) and the Top 1% for income is around $750k/year.
That’s the average wage for those in the top 1% of earners, Andy. The lowest is around $545,000/year and, distribution being what it is, there are a lot more around $545,000/year than there are at $750K/year or above.
“… most of the top 1% of earners are not Michael Jordans or Tigers Woodses.”
Of course not. But there are 1.7MM individuals with net worths above $11MM, the statistical definition. Since the twenties there have been Hollywood stars, crooners etc, but the growth in the entertainment industries has been truly extraordinary. Sports stars, coaches and agents. The media who cover the events. Movie stars, TV, music…… Just about anyone with 5 years in pro baseball, or in the top 75 on the PGA tour with 5 years under their belt probably qualifies. It is not hard at all to believe 100,000, or 5% come from in and around the entertainment industries. (You can play definitional games and say that agents, producers etc are businessmen, but it comes back to entertainment as content.) And this presents a philosophical issue. People who are not millionaires willingly pay their money for this entertainment. So should we do anything about it?
Then we have the professions: there are plenty of high octane medical professionals, partner level lawyers, investment bankers or accountants etc who qualify.
But the vast majority are small to medium sized business owners. Not the very few billionaire types in the hyped in media. I know. I traffic in this area. And by the way, there are far more entertainers than there are Jeff Bezos’s. Its the modest sized business owners. What should we do about it?
“Millions are making high incomes because of government subsidies of one sort or another.”
I think this is overstated, but its a key problem. Many in the medical profession, a third party payor system fit this. So do, say, university administrators who benefit from govt backed student loans. How about tax lawyers?
Its really big business – those who can afford the lobbyists – or those who socialize their losses.
“I advocate controlling how much income can be derived from them.”
How? And who decides? Its an impossible task. Steve gets it entirely wrong when he says capitalism is predicated on ethical behavior. Its based in naked self interest, competition and the free will for parties to contract to corral motives and their fates. He doesn’t say it, but I suspect he thinks socialism or heavy government intervention will set things straight. That’s just laughable. We need less regulatory capture, less monopoly, less subsidy less………
It’s politically impossible.
You really need to read Adam Smith. I think it would be a revelation for you.
Tasty –
The issuers of debt in QE are the Treasury and the Fed’s member banks, not wealthy people. It flows to the economy through increased and cheaper bank lending, or financing government spending.
It flows to asset prices such as equities through yield chase and increased economic activity- you can’t make jack in fixed income securities. So people bid up equities. Activity = profits = equity value.
It flows through to the housing market, another major asset, as most people buy to a monthly payment goal. That is, lower mortgage rates.
It screws retirees because they cannot earn a yield on an age appropriate portfolio asset mix. It screws retirees and lower income individuals when the inevitable inflation erodes purchasing power.
The securities issued by Fed banks and the Treasury don’t really bear any resemblance to shares of stock.
And note the number of sectors heavily dependent on government: pharmaceuticals (intellectual property, barriers to entry, and funding of healthcare), entertainment (intellectual property), banking (barriers to entry, direct funding), information technology (intellectual property, lax enforcement of antitrust), healthcare (funding, occupational licensing), agriculture (funding), etc. It covers most of the economy.
@Drew
Money is created through minting gold, silver, copper, etc. or through lending. When the government borrows $3.5 trillion, it ultimately gets onto private sector bank balance sheets, and those balance sheets are owned by the capitol investors.
In essence, the Fed’s balance sheet is an amalgamation of all balance sheets of its members, including the local 1st Savings and Loan. It is how the Modern Monetary System (MMS) works, and it is how it must work.
While you understand that those balance sheets are capitalized by a fraction of the total, most people think loans are created from deposits or money borrowed from other sources, but in fact, the loans are created “from thin air”.
While you and I can debate the minutiae of banking in the MMS, most people will continue to believe that the $3.5 trillion spending bill will help alleviate income inequality and that “taxing the rich” will make up the difference.
Money is more valuable closer to its origination point, and it loses value through the subsequent leveraging. Its value is further eroded by the asset inflation you describe. Since most people understand IPO’s, I use issuing stock as an example of this principle. It is not perfect, but it is close enough.
I am not trying to be mean, but like your golfing references, nobody understands the technical aspects of banking, business operation, tax code, etc. I would suggest you simplify as much as possible. With $30 trillion in government debt and income/wealth inequality increasing, you will soon be selling pencils on the corner or in a re-education camp.
@Grey Shambler
I am trying to get people to understand that the wealth gap cannot be decreased through government borrowing. It exacerbates the problem, and it means that the income of the rich will increase faster than it can be decreased through taxes. Again, it exacerbates the problem.
The first step towards fixing income/wealth inequality is to stop using government dollars to increase the inequality. Contrary to what he may think, I do not want to see my PE Investor friend in a re-education camp.
If it takes $750,000 to make it into the top 1% then even some of my two doctor couples wont make it into the top 1%. None of my docs who are not married to doc would make it. I would guess maybe 10-20 docs in my network would make it.
No, I dont think socialism is a good idea. I dont know what you mean by heavy regulation. I suspect it means any regulation at all is too much. What i have constantly said is that we way over-regulate small businesses, we misrelate big businesses (partially because we let their lobbyists write their regulations) and it isn’t possible to regulate the banks enough, which should also include a lot fo the finance sector.
Unlike Dave who thinks people at the bottom of the 1% group wield lots of power which distorts our economy I am more concerned about the top 0.1%. Just one or two billionaires can finance a POTUS campaign, control big chunks of media, finance think tanks, etc. Drew believes Soros controls everything so you would think he could be open to that idea, except it doesnt apply to conservatives.
Steve
I would just add that wealth can be a tricky thing, at least for normal people. Supposedly I have $200k more in wealth than two years ago thanks to the housing price boom here. The property tax assessor certainly seems to think so.
Over the long term, what I worry a lot about is how much of our national wealth is tied to the financial system. One place where I agree strongly with Drew is that the current system basically forces long-term savings into equities and other riskier assets to chase yields. Whether one is a regular person with a defined-benefit pension or a 401k, the reality is that the future benefits appear to depend almost entirely on growth in equities. We, as a society, seem to have too many of our eggs in one basket which in turn drives a lot of political pressure to ensure that basket doesn’t tip over and spill, which actually makes the basket less stable.
In short far too much.