Roth’s theory in a nutshell: the poorest 80% of our population “economically returns their wealth in annual spending three or four times faster” than our richest 20%. Thus, the greater the share of wealth that goes to the bottom 80%, the greater the spending in the economy, the more dynamic the economy becomes, the greater the resulting prosperity – for everyone.
Economic theories are only worth our time when they can help us predict what the future will bring – or might – bring us. Roth has tested how useful his “speed of wealth” theory can be against the history of our past three decades. It begins with two concrete figures from 1989: the wealth of the richest 20% and that of the poorest 80%. Then he “extrapolates” with the formulas of his “speed of wealth” theory “to predict levels of wealth, spending and actions wealth and spending, thirty years later.
The levels Roth predicts from his formulas turn out to be “nearly identical” to the levels our deeply unequal US economy in real life has produced over the past three decades.
Roth doesn’t stop there. He added “counterfactuals” to his modeling: What would have happened between 1989 and 2019, he asks, if the nation had redistributed to the bottom 80% a modest percentage of the top 20% of wealth? If we had taken this wealth-sharing course, its calculation conclusions, the US economy would in fact have generated After total wealth over the past 30 years, no less.
Suppose that redistribution has shifted annually to the poorest 80%, or 1.5% of the wealth of the richest 20%. In this case, Roth details, “total consumer spending for 2019 – a pretty good index or proxy for GDP – would have been 52% higher.” During the 30 years 1989 to 2019, he continues, most of the new wealth created would have gone to the poorest 80%, but the richest 20% would also have seen their collective fortunes grow.
Roth’s modeling has its limits. His work, he admits, does not differentiate between the richest among the richest 20% and the rest of the well-to-do in this bracket. The fortunes of our super rich will continue to grow in absolute terms, Roth suspects, until we implement much higher payout rates.
“In the absence of fairly extreme redistribution, the rich continue to get richer as the economy grows,” says Roth. “But with the right redistribution to counter the pervasive tendency to concentrate the economy’s crippling wealth, everyone thrives, too.”
By the middle of the 20th century, we had this “proper redistribution” in the United States, largely thanks to income rates that soared to just over 90% on incomes above $ 400,000, or about 4 million dollars in today’s dollars. During these years, the share of the nation’s wealth that the nation’s super rich held has diminished, but amount of their wealth has increased.
What happened next? The rich have put huge portions of their still ample fortune to work politically. They rigged the country’s economic rules in their favor. They turned the IRS bite into a snack. They broke the backs of the American unions and began to appropriate more and more of the new wealth generated by the economy. The resulting “prosperity” never reverberated. We have found ourselves in a new golden age.
What redistribution do we need to see before we can avoid the future golden ages? In exact terms, we just don’t know yet. But economists like Steve Roth bring us closer to some answers.
Sam Pizzigati co-directs Inequality.org. His latest books include The arguments in favor of a maximum salary and The rich don’t always win: the forgotten triumph over the plutocracy that created the American middle class, 1900-1970. Follow him on @Too_Much_Online.