The Smart Money: The rich get richer ...

Posted Tuesday, September 17, 2013 in Analysis

The Smart Money: The rich get richer ...

by Gina Hamilton

And you know how the rest of it goes. So when a new report came out last week confirming what everyone already knows, there were few people professing shock or surprise.

A new study by economists Emmanuel Saez and Thomas Piketty, demonstrated clearly that the top 10 percent of Americans took home more than half of the country's wealth through the recession.

Even after the recession, we remain in a “Gilded Age”, where income is as concentrated as it was in the 1920s. And of course, we know how that story ended. The Great Depression wiped out everyone's wealth, rich and poor alike.

Of course, even in the loss of wealth in the 1930s, there was a major difference between losing one's household staff or having to cut back on entertaining, and watching one's children cry from hunger or die from a treatable disease because one couldn't afford a doctor's fees or medicine.

Many of the regulations put into place in the 1930s served to keep the economy on a more or less even keel for nearly 50 years. Banks were kept from being both speculative organizations, like brokerage firms, while also being commercial banks that handled consumer transactions such as savings, checking, and mortgages. This law, known as the Glass-Steagall Act, ended some of the worst practices of banks, and kept them from, essentially, gambling with consumers' money.

(However, in the 90s, Glass-Steagall was rescinded, and financial services and commodity markets were 'modernized'. Now, the same bank that provides you with your checking account and savings account can also invest your hard-earned dollars and maybe lose it for you, too. They can also sell you insurance on items for which they hold the note … such as your house, your car, and your business. They can buy credit default swaps, betting that your mortgage will fail. Does that seem like a bit of a conflict of interest? Well, it is.)

Banks would say that we have a choice. We can simply choose not to do business with them.

But try financing a house, or a business, or even a car, without a checking account or a mortgage. Most people can't do it. They might have been able to save up for a house or a car when the average price of a new car was $2,500 and the average cost of a new house was $21,000, as it was in 1965. The average yearly household income in 1965 was about $4,700. Today, the home price is $152,000, the average new car price is $25,000, and the average household income is $50,000.

Which on its face, sounds not all that different from what was happening in 1965, but keep in mind that it takes two people working (at least) full-time to get that income today. Which means that the average four-person family has other expenses that were never factored into the 1965 household – day care, after school care, a cleaning person, perhaps.

Americans are working harder, too, at least at the lower-end of the wage scale. Businesses are making do with fewer workers, stressing out the workers who are left behind, and if they are salaried, forcing them to work longer hours to keep their jobs. So while wages decline for the average American, productivity counter-intuitively soars. From 1973 until now, productivity has increased by 254 percent, while workers' pay has remained almost unchanged at 113 percent. Before that, workers' pay increased with their productivity.

Someone is benefitting from the increased productivity, even if the workers haven't. Those on the upper end of the wage scale have seen their wages rise, even during the recession.

In the U.S. the ratio between the salaries of Fortune-500 CEOs and the average salary of someone working in the same company was 231 times as high. That's not the case in the rest of the world; most countries' CEO salaries hover between 11 times and 20 times higher than the average worker. But CEOs aren't the only ones 'winning' the “class war”.

The top 10 percent took home more than half the nation's wealth; the top 1 percent took 20 percent. Richer households also earned more from the bounce in the stock market than did their poorer counterparts. The new data shows that the top 1 percent of earners experienced a sharp drop in income during the recession, of about 36 percent, and a nearly equal rebound during the recovery of roughly 31 percent. The incomes of the other 99 percent plunged nearly 12 percent in the recession and have barely grown — a 0.4 percent uptick — since then. Thus, the 1 percent has captured about 95 percent of the income gains since the recession ended.

And as the tax burden has shifted away from the wealthy to a more 'equitable' burden with fewer and more compressed tax brackets, the middle class and the poor get to help finance tax breaks for the upper 10 percent, too.

But at long last, the sleeping giant that is the middle class is finally beginning to wake up to wage and tax inequity. Next week: A look at a new economic populist movement.

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