Excessive: when 1% ≥ 23.5% of wealth

“We're in a Recession Because the Rich Are Raking in an Absurd Portion of the Wealth

Our economy can't thrive when the richest 1% get an ever larger share of the nation's income and wealth, and everyone else's share shrinks.

July 7, 2010  |  

Wall Street's banditry was the proximate cause of the Great Recession, not its underlying cause. Even if the Street is better controlled in the future (and I have my doubts), the structural reason for the Great Recession still haunts America. That reason is America's surging inequality.

Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation's total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America's total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928—with 23.5 percent of the total.

Each of America's two biggest economic crashes occurred in the year immediately following these twin peaks—in 1929 and 2008. This is no mere coincidence. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don't have enough purchasing power to buy what the economy is capable of producing. America's median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class can boost its purchasing power is to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn't pay their bills, and banks couldn't collect.

China, Germany and Japan have surely contributed to the problem by failing to buy as much from us as we buy from them. But to believe that our continuing economic crisis stems mainly from the trade imbalance—we buy too much and save too little, while they do the reverse—is to miss the biggest imbalance of all. The problem isn't that typical Americans have spent beyond their means. It's that their means haven't kept up with what the growing economy could and should have been able to provide them.

A second parallel links 1929 with 2008: when earnings accumulate at the top, people at the top invest their wealth in whatever assets seem most likely to attract other big investors. This causes the prices of certain assets.””