The New Gilded Age (updated)
Blessed are the poor in spirit: for theirs is the kingdom of heaven.
Blessed are they that mourn: for they shall be comforted.
Blessed are the meek: for they shall inherit the earth.
Blessed are they which do hunger and thirst after righteousness: for they shall be filled.
—the Sermon on the Mount, Matthew 5:9
Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That’s how it goes
—Leonard Cohen, Everybody Knows
My subject today is the grotesque wealth & income inequality that exists in the United States. I have dubbed our times the new Gilded Age, which was Mark Twain’s name for the post-Civil War period when “the rich wore diamonds and many others wore rags.” I could also have called it the “last” Gilded Age because our slowly disappearing Middle Class will never exist again as it once did. Never before in human history have so many people shared in a society’s wealth as Americans did in the decades just after World War II.
In the 1960s, Lyndon Johnson put forward his Great Society program to eliminate poverty in the United States. That laudable goal seemed doable back then—everything seemed doable back then, before Vietnam and the oil shocks of the 1970s got in the way. Now, some forty-five years later, the natural order of things has reasserted itself, where a relative few have most of the wealth as the rest struggle to eke out some kind of living.
Before I unleash a flood of graphs and charts which demonstrates the income & wealth inequality problem beyond any reasonable doubt, I would like to relate a revealing story I heard on NPR Sunday as I was preparing to write this piece.
Liane Hansen brought in Roben Farzad of Business Week to talk about how rich Americans hide their money in Swiss bank accounts to avoid taxation, and to talk about “the markets” in general. Here’s how the last part of their conversation went—
HANSEN: Let’s talk a little bit about the markets this week. Did you see dark clouds or a silver lining?
Mr. FARZAD: Well, the market, however monolithic we want to look at this thing, is at a year high. I mean, this has been a spectacular run if you think about it. I saw a stat somewhere that over the span of time where the economy hemorrhaged two million jobs, the market’s gained 50 percent. That’s unprecedented. And this is the best, I think, six- or seven-month run since 1938. So, it shows you how far we’ve come from a perception standpoint. Back in March, people really thought that we were on the brink of absolute abysmal calamity. And what’s noteworthy is that riskier asset classes have outperformed the safe and stable security. So, that flies in the face of this whole reckoning argument, that we’ve been so chastened, that people are going to be husbanding cash under their mattresses for the foreseeable future. So, at least that’s promising but maybe we’ve gotten a tad ahead of ourselves.
HANSEN: There were new numbers from the Mortgage Bankers Association this week. More than 13 percent of American homeowners with a mortgage have either fallen behind on payments or are already in foreclosure. What effect is this having on the U.S. economy as a whole?
Mr. FARZAD: It’s a significant overhang going forward. We as an economy really binged on housing, really had this - almost this real estate new paradigm fetish, and I don’t think that kind of excess inventory is going to be worked off in a year or two. We have several other shoes to drop in terms of delinquencies. There is a certain level of amnesty right now between the banks and delinquent borrowers, for them not to foreclose, for them to maybe seek out remediation. And you’re going to see a lot of these things fail over the next year or two. The question is how much has the market already priced that in.
The market was pricing in, once again, calamity just a few months ago, and now it seems that things aren’t going to be as horrific as expected. So, it remains to be seen.
[My note: What is really happening is that there has been a "dramatic" decrease in cure rates for delinquent mortgage loans.
Delinquency cure rates refer to the percentage of delinquent loans returning to a current payment status each month. Cure rates have declined from an average of 45% during 2000-2006 to the currently level of 6.6%. ...
A spectacular run. The best six- or seven-month run since 1938. And so forth. To be sure, a few poor schmucks (over 13% of American homeowners in this case) are very likely to lose the roofs over their heads, but not to worry—the market already priced in an abysmal calamity back in March. To be sure, some things remain to be seen, but it seems like things aren’t going to be as horrific as expected. Except if you’re in foreclosure, of course, and about to lose your house.
[Update: I have exchanged email with Roben Farzad, who has told me that NPR edited the interview in such a way as to distort his take on things. If so, then much of the fault lies with how NPR presents the economic news. I'm quite sure such editing often distorts reality in predictable ways. Nonetheless, Farzad said what he said, and he actually agrees in large part with my interpretation of the interview. I edited the text to reflect all this.]
Do you ever get the sense that you’re drowning in a toxic sea of lies and distortions, and there’s nothing you can do about it?
Who is profiting from the stock market run-up Roben Farzad describes as a spectacular run? Let me quote from A Detailed Look at the Stratified Consumer, an excellent guide to reality from the essential blog Zero Hedge that I will be referencing later on.
The main reason for this disproportionate loss of wealth [in the Lower and Middle Classes] has to do with the asset portfolio of the various consumer strata. A sobering observation is that while 90% of the population holds 50% or more of its assets in residential real estate, the Upper Class only has 25% of its assets in housing, holding the bulk of its assets in financial instruments and other business equity [stocks]. This leads to two conclusions: while average house prices are still dropping countrywide, with some regions like the northeast, and the NY metro area in particular, still looking at roughly 40% in home net worth losses, 90% of the population will be feeling the impact of an economy still gripped in a recession for a long time due to the bulk of its assets deflating. The other observation is that only 10% of the population has truly benefited from the 50% market rise from the market’s lows: those better known as the Upper Class.
The ongoing “absolute abysmal calamity” Farzad refers to has now been mostly confined to the Lower and Middle classes—90% of the population—whose main source of wealth used to be the appreciating value of their house. Crisis contained!
So who are these “people” that Farzad tells us are flocking toward risky assets, the ones who are not going to be husbanding cash under their mattresses? The consumer price index (CPI-U) shows a decrease of 2.1% over the last 12 months, mostly due to lower energy costs. Energy prices decrease because there is less demand for it. There is less demand for energy because economic activity of all sorts has diminished.
Many fewer consumers are spending money. Retailers are in serious trouble. Sears sales are down 8.6%. Dillards is down 13%. Macy’s is down 9.5%. J.C. Penney is down 9.5%. The Gap is down 8%. And so on. The retail numbers, along with the CPI-U and many other economic indicators, seem to show that people are indeed stashing cash under their mattresses—if they’ve got any cash left, that is. See 34% of workers have one week or less of savings.
When Farzad talks about what “people” are doing in this NPR interview, he is not referring to the hoi polloi, the 90% of us in the Lower and Middle Classes. He’s talking about Business Week’s constituency, the Super Rich or the Merely Rich. Although the New York Times seems very concerned that the Rise of The Super Rich Has Hit A Sobering Wall, things are starting to look up for them just as Farzad says—
The possibility that the stock market will quickly recover from its collapse, as it did earlier this decade, is perhaps the biggest uncertainty about the financial condition of the wealthy. Since March, the Standard & Poor’s 500-stock index has risen 49 percent.
Yet Wall Street still has a long way to go before reaching its previous peaks. The S.& P. 500 remains 35 percent below its 2007 high. Aggregate compensation for the financial sector fell 14 percent from 2007 to 2008, according to the Securities Industry and Financial Markets Association — far less than profits or revenue fell, but a decline nonetheless…
Without a financial bubble, there will simply be less money available for Wall Street to pay itself or for corporate chief executives to pay themselves. Some companies — like Goldman Sachs and JP Morgan Chase, which face less competition now and have been helped by the government’s attempts to prop up credit markets — will still hand out enormous paychecks. Over all, though, there will be fewer such checks, analysts say. Roger Freeman, an analyst at Barclays Capital, said he thought that overall Wall Street compensation would, at most, increase moderately over the next couple of years.
Praise the Lord, the very-well-off are being made whole again as the S & P rises 49% during a time when the economy lost 2 million jobs. Better still, Goldman Sachs (aka. the giant vampire squid) roams the putrid seas again free of any possible risk or regulation. The sea monster’s particular specialty is ripping off ordinary investors—what schlubs they are!—via high-frequency computer trading. Low stock prices? A slump in bonus compensation in the finance industry? Problems getting solved!
Why does typical economics reporting confuse our collective fortunes with those of the wealthy? Figure 1 shows the history of income concentration in the United States.
Figure 1 — This graph is taken from the New York Times (cited above). Since 1983, the share of the income in the United States of the richest 1% rose from 10% of the total to 24% of the total. The share of income for the bottom 90%—bottom 90%? when did 90% of the population become the bottom?—fell to 50% from ~67% during this same period.
As John Kenneth Galbraith was fond of pointing out, human memory is short. Business Week’s Roben Farzad was born in 1976. He graduated from Princeton in 1998. This talented young man has never been a working adult in a world in which great wealth inequality did not exist. Liane Hansen has no such excuse. But this disparity was not normal in past, as Figure 1 makes obvious. The novelist Upton Sinclair pointed out another difficulty that all mainstream media reporters face in this regard: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” I shall give the last word to Marshall McLuhan regarding how standard economic reporting upholds the status quo—
- “We don’t know who discovered water,” Marshall McLuhan would say, “but we know it wasn’t a fish.”
I do not mean to single out Farzad or NPR for special treatment—stories like the one I deconstructed above are everywhere1. It is just unfortunate for Farzad that I happened to be listening to NPR Sunday as I was preparing this report. Now that we’ve got a proper perspective on the wealth & income disparity in the United States, let’s look at some disturbing graphs and charts.
The “Myth” of the Over-leveraged Consumer
One of the sources for Zero Hedge’s report on the stratified consumer was Bank of America’s The Myth of the Overlevered Consumer (L.A. Times’ Money & Company blog, August 14, 2009).
The well-heeled might be able to save the U.S. economy from a long period of dismally weak consumer spending—if only we don’t jack up their taxes.
That’s one conclusion to draw from a new Bank of America Merrill Lynch report this week, “The Myth of the Overlevered Consumer.”
The report hammers home what you might already suspect: The consumer debt problem in the economy really is a debt problem for the middle class. The need to work off a chunk of that debt will sap middle-class families’ spending power for perhaps years to come.
By contrast, the upper 10% of income earners face a much smaller debt burden relative to income and net worth.
Bank of America has reached—one hopes without great difficulty—an incisive conclusion: relatively speaking, the wealthiest Americans have little debt compared to the rest of us! Surely it is upon such startling insights that great empires have been built.
The captions to Figures 2 through 6 tell the story of wealth inequality in the United States. All the graphs & charts are from Zero Hedge’s Stratified Consumer report except for Figure 6. Figure 3 explains why Bank of American/Merrill Lynch believes they have exposed the “myth” of the over-leveraged consumer.
Figure 2 — As of 2001, the wealthiest 10% of Americans accounted for 42% of total consumption in the United States. Taken together, the top 20% of American wage-earners accounted for an astonishing 55% of total consumption. The graph and others below are based partly on the Survey of Consumer Finances and the Bank of America Merrill Lynch report.
Figure 3 — The Middle Class financed their spending with debt, especially after 2001 during the Housing Bubble.The “myth” of the over-leveraged consumer is that it is only the Middle Class (50% of the population) that is mired in debt. The Lower Class normally don’t have access to credit or don’t own homes or both. The Upper Class don’t need to borrow to finance their spending because they hold most of the wealth (see Figure 5). Because the Upper Class, which accounts for 42% of spending, is not over-leveraged, Bank of American Merrill Lynch concludes that the Upper Class alone can fuel an economic recovery.
Figure 4 — The desperate Middle Class used their homes as ATM machines by either 1) taking out home equity loans or 2) refinancing and extracting equity as cash. Activity peaked in 2005-2006 (left panel). People assumed house prices would never go down. A Ponzi Scheme in real estate requiring a constant infusion of new home buyers supported soaring house prices which led to equity extraction and speculation in real estate. A bubble in real estate should not be mistaken for a real economy, a lesson we hope newly appointed Fed Chairman Ben Bernanke has now finally learned.
Figure 5 — Comparing the disposable income (left) and net worth (right) of the rich versus everybody else. In 2001, the top 10 received 40% of the disposable income and held an amazing 57% of aggregate net worth. Zero Hedge says: “This is an impressive conclusion: on a lowest common denominator, the Net Worth variance between the 10% of the population that make up the wealthy and the 50% that comprise the middle class is over 8x! No wonder the aspirational consumer was the most vibrant retail category at the peak of the bubble: if the middle class can not accumulate 8x the net worth it needs to migrate into the top decile, it can at least dress like it. Unfortunately, it did these purchases on credit and is now paying for it (or not).” See my article The Incredible Shrinking Boomer Economy to learn why the Middle Class Boomer Consumer’s spendthrift days are over.
Figure 6 — This is an updated graph from U.C. Berkeley professor Emmanuel Saez, who has been tracking income inequality for many years.The top 10% wage earners now receive 50% of income in the United States. This percentage is slightly higher than the previous 20th century high in 1928 just before the stock market crash of 1929 and the Great Depression.
The great “insight” of the Bank of America report is that the wealthy “should have ample spending power to help fuel an economic recovery.” From the banks’ point of view, this take on things has the twin virtues of being self-serving while also preserving the status quo in which the rich have most of the wealth while the rest of us have relatively little. There is little hope that the status quo will change. Professor Saez talks about the future of income concentration in the United States—
The economic landscape has obviously changed dramatically since 2007 which marks the peak of Bush expansion. We know from National Account statistics that real incomes per family will fall in 2008 and 2009. Evidence from past recessions suggests that, in general, the top percentile income share falls during recessions, as business profits, realized capital gains, and stock option exercises fall faster than average income. Therefore, the most likely outcome is that income concentration will fall in 2008 and 2009. Based on the US historical record, falls in income concentration due to recessions are temporary unless drastic policy changes, such as financial regulation or significantly more progressive taxation, are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration till the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration.
I’ve argued on several occasions that large policy shifts, such as those Saez mentions that might redistribute income and wealth in the United States, are very unlikely (see my The Decline of the American Empire, for example). Barack Obama has been compared to Herbert Hoover. The likeness between the two is apt. Obama’s go-slow, ineffectual approach to pressing problems in Finance accommodates the current oligarchs.
The President’s current inaction stands in stark contrast with the progressive policies of Franklin Roosevelt during the Great Depression (see Figure 1 or Figure 6). It is fair to say that wealth inequality in the United States will get worse before it gets better, if it ever does get better. I think this very unlikely.
Grotesque income and wealth disparity also has potentially strong effects on future energy consumption in the United States. The income elasticity of oil demand is usually measured as just below unity (e.g. 0.92), which means that oil demand rises almost as rapidly as income. Although income is falling for everyone during the Great Recession, the income share of the top 10% wage earners will only increase in the future if Saez is correct, which he surely is. In 2007, that share stood at 50%. But if total income does not grow at at least the rate at which income expands for the wealthy, the real income of the “bottom 90%” will shrink.
Thus we might expect energy (oil) demand to fall if income declines in the “bottom 90%” (all other things being equal). I further assume that the richest 10% of the population will not use much more energy than they already do. Falling incomes would thus imply “peak demand” for oil in the United States.This conclusion is bolstered when we consider that the days of easy credit are over (e.g. people will not be paying for gasoline with credit cards).
The status of the housing market, which gave a phantom boost to Middle Class net worth during the bubble, remains uncertain. Calculated Risk, whose knowledge about the residential real estate markets is second to none, doesn’t believe the housing bottom is in yet. If he is right, the Middle Class stands to lose even more of their net worth in the next year or two.
Simon Johnson had this to say about wealth & income equality in The Two-Track Economy—
The traditional U.S. recession remedy is: move to another, more prosperous part of the country. But nowhere is exactly booming at present. And how do you move if you can’t sell your house?
The overall numbers on outcomes by groups can get complicated (here’s a partial guide), but the simple version is: the top 10% of people are going to do fine, the middle of the income distribution have been hard hit by over-borrowing, and poorer people will continue to struggle with unstable jobs and low wages.
Can the richest people spend enough to power a recovery in overall GDP? Perhaps, but is that really the kind of economy you want to live in?
No, Simon, that’s not the kind of economy I want to live in. I assume many of you feel the same way. Do we really have any choice about it? The Powers That Be take the self-serving position that astonishing wealth inequality is normal, and even somehow desirable. Mainstream media reports that say the “economy” is doing better because of a bear market bubble in the S & P 500 are little more than updates on the status of the rich. The elites—the “haves”— say things are getting better, but to the average man on the street—the “have nots”—it feels more like a depression.
Bank of America is bullish on the economy because, wonder of wonders, the rich are still rich. Thus they conclude that the wealthy will provide the spending impetus that will pull us out of recession. Conveniently, the Bank of America view does not require any change to the way wealth & income are distributed in the United States.
I feel like A Man Without A Country. It’s sad, really, to watch this once great country go to pot so a relative few can prosper.
Contact the author at firstname.lastname@example.org
1. If you want to know how the other 90% of the people are doing in this country, you need to read various websites, including (in no particular order, not comprehensive)—
- Calculated Risk
- The Big Picture
- Baseline Scenario
- Zero Hedge
- Global Economic Trend Analysis
- Tech Ticker
- Naked Capitalism
What do you think? Leave a comment below.
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