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September 14, 2017


As Piketty in his blockbuster book Capital in the Twenty-First Century notes, “There are many among upper income groups in the United States (including some economists) who believe that the U.S. economy is working “fairly well and, in particular, that it rewards talent and merit accurately and precisely,” which he characterizes as “a very comprehensible human reaction.” Whether our economy is working well, in my opinion, depends upon whom you ask. I agree that in terms of returns to the rich that the economy is performing well but I disagree that such criterion is the appropriate measurement.

Per Piketty, from 1970 to 2010, the top decile’s share of the national income can be broken down into three groups: the richest one percent, the next four percent, and the bottom five percent. The bulk of the growth in inequality came from the one percent (those making more than $352,000 in the year 2010) who during such period gathered in almost three-fourths of the increase, of which roughly half went to the 0.1 percent (those making more than $1.5 million a year). I am always decrying the share of the national income paid to the poor and middle class as unfair and inequitable, as it is, but it appears that there is unfair distribution of the national income among those in the upper decile as well.

Let’s get more specific: There are always “shocks” to the economy such as wars, burst bubbles and the like, but history shows that such financial crises such as that started by the Lehman Brothers collapse, the internet bubble and Bush’s Great Recession are not in themselves causes of structural inequality. We go up and down and then average the results to find out what happened and is happening, but structural inequality continues apace through good times and bad. It is interesting to note in this connection that the share of the upper decile peaked twice in the past century, once in 1928 on the eve of the 1929 crash and the Great Depression, and again in 2007 on the eve of the crash in 2007 and Bush’s Great Recession. See any connection, as when the greedy become super greedy and criminal in their pursuit of the buck? (See millions of foreclosures, mortgage fraud, bailouts etc.)

I often blog that the lack of purchasing power is a major cause of our economy’s stagnation and that such lack of demand as the final arbiter of economic growth means that we are treading water and going nowhere, citing policies leading to wage inequality and thus to tepid demand, and Piketty takes it a step further with conclusions drawn from his incontestable research. He writes: “In my view, there is absolutely no doubt that the increase in inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes of the United States, which inevitably made it more likely that modest households would take on debt” (credit card debt is currently the highest in history) “especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.” Piketty could not be more right in his diagnosis.

His incontestable research shows that there has been a considerable transfer of the national income amounting to fifteen points from the poorest ninety percent to the richest ten percent since 1980, and more specifically, that from 1977 to 2007, we find that the richest ten percent appropriated three-quarters of the growth, and that the richest one percent alone absorbed nearly sixty percent of the total increase if U.S. national income for the period while the ninety percent had less than one half of one percent of such growth. Piketty finally notes in this connection that “whatever one thinks about the fundamental legitimacy of income inequality, the numbers deserve close scrutiny and that it is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.” Amen!

He is right to a fault and his prediction of the day of a non-functioning economy may be nearing. Even if we admit to a structural inequality built into capitalistic economies, there is room for fairness and equality in distributing the income and wealth of such economies among all the actors rather than handing our income and wealth over almost exclusively to the financial sector as though the ninety percent of us did not exist. I think we may be approaching a point of no return with our failure to share the fruits of our economy, especially with a Republican Congress intent on exacerbating such failure with their proposals of still further tax cuts for the already superrich and other measures which will only make matters worse, but perhaps making the day of reckoning with its attendant chaos nearer.

Lately there have been reports of average wage increases on the order of 3.2 percent. That is not a proper measurement of reality since average wages include Warren Buffett and Bill Gates, among others. The proper measurement is the median, which hasn’t moved for some four decades, and even if it has nudged upward lately, it would have moved up from a slave wage base and has a lot of catching up to do. And demand? It has inched up a bit lately but has largely been financed not with wage increases but with record credit card borrowing on the other side of the ledger. My conclusion? Unless we have substantial increases in wages, from minimum wages to living wages, we again risk recession or worse, including a deflationary spiral and the possibility of civil commotion.     GERALD       E



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