Caption: America’s wealth gap is bigger than in any economically advanced country in the world, and this inequality will be the downfall of the entire economy. | Photo by Marco Verch / Creative Commons 2.0 License

What happens economically when wealth swings up? Most of us see immoral ugliness wherever wealth is concentrated. Much more is hiding than we need to see.

The runoff flows. The high priests of the American trickle-down temple may still be preaching their gospel – the idea that enriching the rich will end up enriching us all – but fewer and fewer people are taking them seriously. The “facts on the ground” have simply become too compelling to ignore.

Facts like this: Between 1979 and 2019, the Economic Policy Institute reported that last December, the lowest 90% of U.S. paychecks barely increased each year. Indeed, observes EPI, the salaries of the lowest 90% have been “continuously redistributed upwards”. “Frequently,” adds EPI, to the top 1% and 0.1%.

The end result of this relentless upward redistribution? The United States has become the most unequal nation in the developed world. In 2020 alone, the Credit Suisse Research Institute found, America’s cohort of “very high net worth people” – deep pockets worth at least $ 30 million each – grew by 21,313. No other nation has last year won up to 10,000 new ultra-rich.

And it is in the midst of a pandemic that has deprived millions of regular workers of jobs.

This torrent of wealth filling the pockets of America’s richest has left most Americans far behind their counterparts elsewhere in the world. How difficult the delay can be at first to understand. Simple averages can make the United States an economic haven for the average person.

If we divide, for example, the total wealth of the United States by the number of American adults, the “average” American ends up sitting on a personal fortune of $ 505,420. Only one other country in the world, Switzerland, has a higher average personal net worth.

But “averages” can be incredibly misleading, especially when the wealth is intensely concentrated. In a 10-person society where one person owns $ 5 million in wealth and everyone owns nothing, the “average” wealth of the 10 people will be $ 500,000.

Or, as former Labor Secretary Robert Reich joked, if you “average” his height – 4ft 9in – with that of retired NBA star Shaquille O’Neal (7ft 1 inch), you come out at six feet.

Fortunately, we have an arithmetic alternative. We can calculate the wealth of the most typical adult in America, that adult who has more wealth than half of our nation’s adult population and less wealth than the other half. Last year, notes the Credit Suisse Research Institute, the most typical – the median American adult had a net worth of just $ 79,274, far from the adult “average” of US $ 505,420.

In more egalitarian developed countries, the contrast between “average” and “most typical” personal wealth is not nearly so striking. Belgium, for example, has an “average” adult net worth of $ 351,330, well below the US average of $ 505,420. But the most “typical” median Belgian has $ 230,550 in net worth, nearly triple the net worth of the typical American.

Credibility of carnival barkers

Statistics like these have left American ideologues with all the credibility of carnival barkers. The policies these ideologues have pushed so fervently – from tax cuts for the rich to deregulation for the companies they run – have not gone as advertised.

These policies have not enriched everyone. They have concentrated America’s wealth and let politicians who care for the rich look for distractions to keep people of modest means from focusing on that concentration.

This includes deflecting attention from how companies have profited from the coronavirus pandemic by raising CEO salaries while stiffening their workers. A third of what billionaires have earned since 1990 has come during the pandemic.

How to overcome these distractions? Perhaps we should pay a lot more attention to the dynamics of what exactly happens to economies when wealth is concentrated.

Most of us with egalitarian sensibilities don’t tend to do this. We tend to focus on the moral ugliness of America’s concentrated wealth, on the shameful contrast between the millions of families struggling from salary to salary and the life of unnecessary luxury that the wealthiest live in. ‘between us.

We need to see more than this contrast. We need to see the overall economic impact of the inequality that defines us.

Progressive analysts, as economist Steve Roth explains, have done a lot of important work “on the sources and causes of the concentration of wealth and income.” And they’ve done equally impressive research into the social and political consequences when wealth flows en masse to the already wealthy.

But progressives, Roth argues, “have largely failed to ask or answer” perhaps a more fundamental question: what happens economically when wealth is “owned by fewer individuals, families and dynasties? , in increasingly large fortunes?

Roth is now editor of Evonomics, an effort founded in 2015 to showcase the “next evolution in economics” with contributors ranging from former World Bank senior economist Branko Milanovic to Nobel laureate Joseph Stiglitz. In his latest book, Roth directly addresses the question of what happens when wealth is concentrated, drawing on historical data sets on US wealth and consumer spending that only became readily available. these last years.

Roth has extracted from these historical data points an economic measure that he calls the “speed of wealth” and he has developed a model that distorts that measure. The poorest 80% of households in America, according to this model, renew their “wealth in annual spending three or four times faster” than the richest 20%. The importance of these different rates? “More widely distributed wealth,” Roth notes, will mean more spending, which is “the very essence of economic activity” and “itself the ultimate source of wealth accumulation”.

Roth tested his model against the past three decades of real US economic experience, starting with the real wealth of the poorest 20% and 80% of the United States in 1989 and extrapolating forward to predict “wealth levels, spending, and the shares of wealth and spending.” “30 years later.

His model’s predictions for 2019 turned out to closely match what actually happened. Roth’s model predicted total US wealth of $ 114 trillion by the end of the 30-year period. The total real and real wealth for the end of the period: 118 trillion dollars, which gives his model a modest 4% failure after three decades.

Go a little further

Roth takes his research one step further. He uses his model to ask: what would have happened over the past three decades if a certain percentage of the wealth of the top 20% had been “transferred, redistributed” to the bottom 80% each year over the course of those decades?

According to the Roth model, a downward 1.5% annual transfer of the wealth of the richest 20% would have left “everyone much richer, faster”. The higher spending resulting from this downward shift would have generated a 549% increase in overall wealth in the United States. In real life, overall wealth over those 30 years has increased by 421%.

According to Roth’s calculations, most of this additional wealth growth would have affected the poorest 80% of the population, but the wealth of the richest 20% would also have increased. What would not have increased – in Roth’s 1.5% transfer scenario – would have been the share of the richest 20% of the company’s total wealth.

In life as lived for the past 30 years – life under runoff policies favorable to wealthy Republicans – the wealth share of the richest 20% in the United States has increased from 61% to 71%. %.

What about the “richest percentile groups” among the richest 20%? We don’t have the data available at this time, Roth notes, to explain the specific impact on the most financially advantaged United States. The declining annual payout rate, he suspects, would need to be well over 1.5% to prevent the super-rich from “getting richer as the economy grows.”

“But with the right redistribution to counter the pervasive tendency towards the concentration of economically crippling wealth,” Roth adds, “everyone prospers equally.”

Roth’s new paper on wealth is titled “How Downward Redistribution Makes America Richer: An Empirical Model of Spending, Wealth Concentration, and Wealth Accumulation.” This should help spur the kind of solid dialogue and debate we desperately need, the dialogue and debate that our spillover political champions so desperately want to avoid.

Other analysts engage in efforts that complement Roth’s work

They point to the “growing wealth imbalance that could weaken the economy for years to come”. An example: economists Atif Mian of Princeton, Ludwig Straub of Harvard and Amir Sufi of the University of Chicago explored how the concentration of wealth pushes average Americans into a “debt trap.”

“A substantial fraction of household debt in the United States,” the trio reports, “reflects the richest 1% of the wealth distribution lending to the poorest 90%. “

Higher debt levels for average Americans, continue the three analysts, “weigh negatively on aggregate demand,” which undermines the economic health of the country.

Getting out of the “debt trap”? Generating “a sustainable increase in demand”, argue Mian, Straub and Sufi, would require wealth taxes and other “redistributive tax policies”, as well as structural policies “aimed at reducing income inequality”.

Warren and Sanders on board

Several legislators, notably Sens. Elizabeth Warren, D-Mass., And Bernie Sanders, Ind-Vt., Propose and defend these solutions.

Much of the work of economists who now focus on the concentration of wealth opens up new economic horizons. But their basic message – that the concentration of wealth eats away at our economic health and vitality – has been around for some time, as Reich reminds us.

“Years ago, Marriner Eccles, Chairman of the Federal Reserve from 1934 to 1948, explained that the Great Depression happened because the purchasing power of Americans was far less than the economy could produce. », Underlines Reich. “He blamed the growing concentration of wealth at the top.”

Eccles was right. We need to spread the word.

Photo: America’s wealth gap is bigger than in any economically advanced country in the world, and this inequality will be the downfall of the entire economy. | Photo by Marco Verch / Creative Commons 2.0 license


Sam Pizzigati

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