Growth in Inequality of Wealth: After 2007

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After 2007 came the Crash.  The Wall Street Journal on March 13, 2009 reported that the Fed found household net worth had fallen by $11 trillion in the first year after the crash. (Usfirstgov shows a $12 trillion decline over the first two years after the crash.)  As noted, recovery from the recession is not complete.  Investment values have risen, which is significant to middle class in the top 20%, so some of that wealth has been restored.  We believe there has been permanent damage to the wealth of the middle class and the entire lower 99%.  It’s important that:

(1) Much of the sudden decline in total wealth following the crash is attributable to the collapse of the housing market, those losses have largely fallen on the bottom 99%, and the housing market has yet to recover;

(2) Wall Street and the global corporations, the source of prosperity for the top 1%, have received bailout relief (TARP) and have continued to be profitable.

It is important that wealth keeps transferring to the top as it has over the entire past 30 years.   Housing prices are not likely to grow back the real estate “wealth” that was reflected by homeowners before the Crash, certainly not as reflected in the “bubble,” because incomes and wealth in the bottom 99% are being kept low.  So long as the United States continues to edge deeper into recession, it does not appear the financially strapped bottom 99% will recover its lost real property wealth.

The “middle-class squeeze”:

           The middle class has been “squeezed” in the last decade between higher mortgage and other debt costs and declining incomes.  Savings were spent down and debt increased (a direct loss of net worth, that is, wealth).  As explained by Edward N. Wolff:

“Nowhere is the middle-class squeeze more vividly demonstrated than in their rising debt. [T]he ratio of debt-to-net-worth of the middle three wealth quintiles rose from 37 percent in 1983 to 46 percent in 2001 and then jumped to 61 percent in 2007. Correspondingly, their debt-to-income rose from 67 percent in 1983 to 100 percent in 2001 and then zoomed up to 157 percent in 2007!”

What this represents is a huge loss of wealth, as incomes were insufficient to cover living costs, which were increasing.  Wolff continues:

“This new debt took two major forms.  First, because housing prices went up over these years, families were able to borrow against the now-enhanced value of their homes by refinancing their mortgages and by taking out home equity loans (lines of credit secured by their home). In fact, mortgage debt on owner-occupied housing (principal residence only) climbed from 29 percent in 1983 to 47 percent in 2007, and home equity as a share of total assets actually fell from 44 to 35 percent over these years. Second, because of their increased availability, families ran up huge debt on their credit cards.

“Where did the borrowing go? Some have asserted that it went to invest in stocks. However, if this were the case, then stocks as a share of total assets would have increased over this period, which it did not (it fell from 13 to 7 percent between 2001 and 2007). Moreover, it did not go into other assets. In fact, the rise in housing prices almost fully explains the increase in the net worth of the middle class from 2001 to 2007.” [1]

What Wolff shows is that the middle class has been losing wealth.  People had to borrow to keep up with rising real estate costs in and inflation in consumer prices because their incomes were not growing.  As explained before, all nearly growth of incomes and wealth was accumulating at the top, because of the operation of lower taxes on the rich, and higher corporate profits, the two major aspects of Reaganomics and unfettered capitalism.

When the housing markets crashed, the middle class lost the only asset component of wealth, as Wolff explained, it had accumulated over the previous seven years.  Loss of household net worth was reflected in both lower asset value and higher debt, and with the collapse of the housing market, the debt did not magically disappear.

The wealth lost through higher debt reflects transfers of wealth to the top 1%.  Real estate losses are not wealth transfers when home ownership does not chnge hands.  However, some additional wealth is captured by wealthy entrepreneurs, with foreclosures and increases in rental income from of houses that are no longer owner-occupied.

Estimating the accelerating wealth inequality.

There are two major factors working against the bottom 99%:  First, the underlying engine driving wealth inequality (taxes under a 70% rate for the very rich) remains in effect, so the top 1% continues to take wealth from the bottom 99% through the normal operation of the economy.  This effect can be quantified.

Based on its computer simulation, Macroeconomic Advisers predicts the tax cuts for the rich will have a combined 2011-2012 budgetary effect (the difference between the 35% and 40% tax rate) of $124 billion. [3] The actual cost to the bottom 99% is seven times that, the difference in revenues between the 35% rate and the “equilibrium” 70% rate.  (Again, that’s the rate at which inequality of wealth and incomes was stable.)  That’s another $868 billion the bottom 99% is losing over these two years, following a similar amount in 2009-2010.

Through the provisions of the December 2010 tax compromise, President Obama countered this drain to some extent. Macroeconomic Advisers identified taxpayer stimulus items in the bill totaling $634 billion, and including those raised its model’s growth projections from 3.7 % to 4.3% in 2011-12. [4] These stimulus provisions last only through 2012.

Second, multiplier effects are seriously impacting the economy.  The effects of the recession are being inappropriately aggravated by state budget cuts around the country, and by the $38 billion reduction in the President’s proposed budget. Millions of people are losing their jobs, and in many states like Michigan, Ohio and Wisconsin, “savings” pulled from the local communities are being directly transferred to corporations and the wealthy.

The transfer of wealth from the bottom 99% to the top 1% seems to be reaching a fever pitch, as it extends from the normal operation of the dysfunctional economy to the abnormal functioning of government.  We would not be surprised if the bottom 99% loses another $1 trillion from multiplier effects by 2012.

Conservatively, we estimate that the top 1% has gained at least $10 trillion to since 1979 through the operation of Reaganomics policies.

As identified in a separate post, about $8.8 trillion was gained by the top 1% through the operation of the economy and federal deficit spending over the first 30 years of the Reagan Revolution, up to 2007, and we believe they have gained at least another $1.2 trillion of wealth since then.

The collapse of real estate wealth following years after the Crash, and the expansion of debt over the last ten years have also reduced the wealth of the bottom 99%.   We estimate that more than $5 trillion of wealth has been lost by the bottom 99% since collapse of the housing market. (See Bloomberg forecast of December 2007, CNN Money report on new low in home prices in February 2011.)

In short, not only has the top 1% gained some $10 trillion from the bottom 99% while it ran up federal debt to increase its wealth and its percentage of total wealth, the consequences of squeezing wealth (and growth of wealth) out of the economy of the bottom 99%, along with Wall Street speculation, has been collapse of the value of most people’s main assets, their homes.  While the richest 1% have bankrupted America to gain $10 trillion, the other 99% has also lost more than $5 trillion of its real estate wealth.

Not surprisingly, the United States is falling into a depression, just as it did in similar circumstances of wealth and income inequality in 1929.  We see growing effects of that every day, as American moves toward economic collapse.  Colleges and Universities are shedding faculty and courses, elementary schools are slashing thousands jobs, and many are closing.  High schools are forced to cut back or shut down, and some have even announced discontinuance of athletic programs.

State and local governments are laying off employees, and cutting back on salaries and benefits.  Affordable health care is increasingly out of reach.   Home foreclosures number in the tens of thousands annually.  Local economies continue to suffer, as restaurants and small entrepreneurs go under.  No part of the underlying economy is untouched.   A continuation of the tax mechanism driving increases in income and wealth inequality will soon have even more disastrous consequences.

There is simply no reason why Americans should have to accept these consequences.
President Obama is putting tax increases for the wealthy on the table for the next round of government drama.  It seems clearer than ever that tax increases for the wealthy must begin immediately; there is no margin for error in the 2012 elections.

JMH – 4/11/11 (revised 6/16/11)

__________

[1] Edward N. Wolff, ” Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007, Levy Economics Institute of Bard College, March 2010, leviinstitute.org., p. 20.

[2] Macroeconomic Advisers, “The Tax Compromise: It’s Complicated,” Macro Musing, Vol. 3, No. 26, December 8, 2010; Macroadvisers, December 9, 2010.

[3] Id.

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4 Responses to Growth in Inequality of Wealth: After 2007

  1. It’s appropriate time to make some plans for the future and it’s time to be happy. I’ve read this post and if I could I desire to suggest you some interesting things or advice. Maybe you can write next articles referring to this article. I wish to read even more things about it!

  2. kalambong says:

    I arrived here thanks to a link from a Slashdot journal and spent some time read your article

    Do not have enough time to digest it all, suffice to say tell you that I’m always confused on the mass hatred towards the so-called “1%”

    Is it sour-grape? Or is it plain laziness?

    • It’s really more about the top 0.01%. It’s the way the economy works when you don’t have adequately progressive taxation and redistribution –
      too much wealth accumulates at the top. My series of posts on “Finding a New Macroeconomics” explains how it all works.

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