Essays on Inequality VI – A Tale of Two Economies

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It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us . . .   (Book 1, Chapter 1)

Repression is the only lasting philosophy. The dark deference of fear and slavery, my friend, will keep the dogs obedient to the whip, as long as this roof shuts out the sky.   (Book 2, Chapter 9)

                                         — Charles Dickens, A Tale of Two Cities

It’s not all that difficult to confuse Americans about the economy, or as I like to think of it, “the economies.”  Most mainstream news articles on economic issues talk about recession as an aspect of the business cycle, as in the old days.  Similarly, unemployment is usually discussed quantitatively, not qualitatively, and until recently there has not been much discussion of poverty in America.  Stock market performance has for decades been reported (and touted) as if it is far more relevant to the bottom 99% than it really is.  And until very recently, the inequality of wealth and incomes, and especially the stunning growth of inequality over the last 30 years, has been avoided like the plague.  Indications are that most Americans are only beginning to learn about wealth and income inequality and how it affects them.

An Inequality Overview

In an April 2, 2011 post The 30-Year Growth of Income Inequality, we discussed growing income inequality in detail, pointing out that only people roughly within the top 10% were able to realize any growth in real income over the last 30 years, while the top 1% increased its average income by over 280%.

The inequality of wealth necessarily increased similarly, in fact to an even greater degree.  In 2007, the last year for which such data are available, the top 1% held 33.8% of all American wealth, up from about 20% in 1976.  Significantly, the top 1% held 50.9% of all U.S. holdings of stocks, bonds and mutual funds.  The top 10%, which includes most of what remains of the dwindling middle class, held 90.3% of financial wealth. There was a shocking growth of wealth inequality between 2001 and 2007:

The top 1% held about 33% of total wealth in 2001, an amount rising only to 33.8% in 2007 (reflecting the continuing significant level of real property wealth for the bottom 99% during the housing bubble).  [1]  However, embedded in that statistic is the fact that the top 1% increased its percentage of  financial wealth from 40% to 50.9% between 2001 and 2007.  Meanwhile, the top 10% had increased its percentage of financial wealth from 80% to 90.3%.  These are the important points:

1. Between 2001 and 2007, the bottom 90% of the U.S. population lost one-half of its percentage of total U.S. financial wealth;

2. Between 2001 and 2007 the top 1% increased its proportion of the top 10%’s financial wealth, capturing for itself the majority of the top 10%’s increase in financial wealth;

3. In short, wealth has been rapidly concentrating at the top.

There are no new wealth distribution data available since 2007, but since the 2008 Crash the top 1% has undoubtedly increased its percentage of financial wealth considerably beyond the 50.9% it held in 2007.  Here are some factors:

1. With the housing collapse, the bottom 99% lost about $8 trillion in home values, along with its investment losses in the market crash, so it’s a good bet that its loss of financial wealth was not entirely reversed by the stock market’s 2010 recovery; [2]

2. Bank foreclosures are increasing the real estate holdings of the top 1%, and rental incomes are growing for the landlord class;

3. The wealth accumulation of the top 2.5% of income earners has been enhanced by the continuation of the Bush tax cuts for the wealthy in December 2010.

The Top 1% Breaks Away

With the huge increase in inequality of financial wealth over the last three decades, and especially over the last decade, the already relatively small impact of stock market performance on most American’s incomes has further declined, dramatically.  Main Street’s economic well-being (its jobs, incomes, and wealth) has correspondingly had a declining impact on the stock market and Wall Street performance.  As middle class wealth and incomes decline, and poverty rises, Wall Street relies less and less on American consumers, and we see less and less reflection in stock prices of the recession and the stagnation of the bottom 99%.

It’s been coming for a while, hastening throughout the G.W. Bush years.  We blinked, and suddenly there were two economies.  Now there’s a global economy, the playground of the wealthy top 1%, and the stagnating domestic economy of the bottom 99%.

This splitting up of the American economy into two “virtual” or “effective” economies – and the declining relevance of Main Street and Wall Street to one another – has enormous consequences for the bottom 99%.  It explains the utter indifference we have seen during the Obama Administration of the politicians representing Wall Street and the top 1% to the welfare of the bottom 99%, as well as their unwillingness to invest in jobs in America.

It’s critically important to the wealthy class, if their Reaganomic “trickle-down” policies are going to continue to get traction with voters, to give people in the bottom 99% the impression that the domestic economy the rest of us are living and working in is doing better than it actually is.  They also must do their best to keep the bottom 99% unaware of the huge growth of inequality of wealth and incomes.

Continuing to imagine that the bottom 99% has more financial wealth than it does has the unfortunate psychological effect of exaggerating our impression of our participation in the financial economy of the top 1%.  Thus, the top 1% continues to game the flow of information to create just that exaggerated impression, and it has set some wicked traps for the rest of us.  We see heavy reliance in financial discussions on data for the top 10% or top 20%, which averages down the top 1%’s spectacular gains, while blunting bad news for the bottom 99%.  For example, my latest letter to the editor in Albany’s Times Union pointed out how using the top 20% as a proxy for “the rich” can lead to illogical conclusions about taxing “the rich,” when we’re really talking mainly about taxes on annual incomes of over $1 million (the mean average of the top 1%). [3]

Wall Street also encourages continued buy-in to the dream of financial success.  Banks, investment and insurance companies flood TV with optimistic advertising.   One investment firm, for example, asks “What is your number?”  Bottom 99%ers who cannot use such services themselves can still imagine that many other bottom 99%ers can.  Things might seem okay even when they are not, and we can overlook the bottom 99%’s decline in wealth. But it’s becoming increasingly plain, as the wealth of the bottom 99% evaporates, that the kind of financial planning for retirement that such firms offer is relevant only to a rapidly declining segment of the bottom 99%.

Everyone in the bottom 99%, if they are to defend themselves effectively, must be aware of income and wealth inequality, and of its extraordinary level and rapid growth.

What About the Recession?

A major part of that “image control” is the contention that the Great Recession brought on by the Crash of 2008 has ended.  That claim of course gives us an emotional sense of well-being, and if true it would offer support for the false contention that the policies of the right have not been harmful to bottom 99%But has the recession actually ended, and if so what might that mean?

Yesterday’s (10/10/11) headline article in the Albany Times Union carried this curious title:  “Better times, but no money.”  Huh?  Even more curiously, this summary was included in the byline: “The recession may have ended, but household income has continued to decline.” [4]  But if household income has continued to decline, how could the recession have ended?

That, indeed, appears to be the major point of the author of this article:

In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession ended than it did during the recession itself, new research has found.

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.  The finding helps explain why Americans’ attitudes toward the economy, the country’s direction and its political leaders have continued to sour even as the economy has been growing.  * * *

The full 9.8 percent drop in income from the start of the recession to this June — the most recent month in the study — appears to be the largest in several decades, according to other Census Bureau data. Gordon W. Green Jr., who wrote the report with John F. Coder, called the decline “a significant reduction in the American standard of living.”

The recession’s over, the article notes, but curiously we’re in a continuing “slump.”  Significantly, the study documents an almost 10% drop in median household income since the December 2007 start of the recession, a decline that accelerated after the recession officially ended, and continues today.  The article then strives to explain how that happened:

That reduction occurred even though the unemployment rate fell slightly, to 9.2 percent in June compared with 9.5 percent two years earlier.

Two main forces appear to have held down pay: the number of people outside the labor force — neither working nor looking for work — has risen; and the pay of employed people has failed to keep pace with inflation, as the prices of oil products and many foods have jumped.  During the recession itself, by contrast, wage gains outpaced inflation. 

One reason pay has stagnated is that many people who lost their jobs in the recession — and remained out of work for months — have taken pay cuts in order to be hired again. In a separate study, Henry S. Farber, an economics professor at Princeton, found that people who lost jobs in the recession and later found work again made an average of 17.5 percent less than they had in their old jobs.

“As a labor economist, I do not think the recession has ended,” Farber said. “Job losers are having more trouble than ever before finding full-time jobs.”

In the recession, the average length of time a person who lost a job was unemployed increased to 24.1 weeks in June 2009, from 16.6 weeks in December 2007, according to the federal Bureau of Labor Statistics.

Since the end of the recession that figure has continued to increase, reaching 40.5 weeks in September, the longest in more than 60 years.

As Mr. Wuerker’s wonderful cartoon implies, while the 1% economy is doing fine, the economy of the 99% is not.  Indeed, as they have for 30 years, the incomes of the top 1% are still going up on average while the incomes of everybody else, on average, have declined by almost 10%.  This bar graph pretty much tells the story of the last decade, as well as the last century:

The graph is based on data compiled in an important study by economists Thomas Piketty and Emmanuel Saez.  Authors Avi Feller and Chad Stone observe:

Two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top 1 percent of U.S. households, and that top 1 percent held a larger share of income in 2007 than at any time since 1928, according to an analysis of newly released IRS data by economists Thomas Piketty and Emmanuel Saez.  

During those years, the Piketty-Saez data also show, the inflation-adjusted income of the top 1 percent of households grew more than ten times faster than the income of the bottom 90 percent of households. [5]

From 2002 to 2007, the top 1% has captured 65% of all income growth, so its share of total incomes is increasing rapidly; and its share of wealth is still increasing rapidly, as we have discussed.

Recession or Depression?

The term “recession” is generally defined as a business cycle contraction, a general slowdown in economic activity that does not last too long.  “Two consecutive quarters of decline in real GDP is commonly taken to be a recession.” [6]  A “double-dip” recession entails layoffs and spending cutbacks emerging from a previous downturn, typically, and its definition builds on the conception of a recession as a business cycle phenomenon.  A “depression” is defined as “a severe downturn that lasts several years.” [7]

The Great Recession of the American economy officially began in December 2007 and officially ended in June of 2009.  Although the top 1% and its global financial economy recovered quickly, quite clearly the American economy, the economy of the bottom 99%, never did.


This is truly a tale of two economies.  I don’t think any sense can be made of the situation by discussing composite data and composite ideas about a “growing” economy that can’t recover, that can’t grow jobs, that has seen steady 9% “official” unemployment while the income (GDP) of the bottom 99% has declined by 10% over four years, and that has seen a major increase in poverty.

The top 1% is steadfastly avoiding discussing “depression” and carefully distracting the bottom 99% from the notion that we are even still in a recession.

The article I cite for the definition of “depression” seems to disparage any notion that something less extremely severe than the Great Depression of 1930-1933 should even be considered a depression, and it denies that anything like that could ever happen here again, in light of all the regulatory constraints that have been built into our laws.  (I kid you not, read it: Can you say “Glass-Steagall”?)

In my opinion, the last four years of stagnation, suffering and decline in the American economy of the bottom 99% qualifies it for the official designation “depression.” One thing is for sure, only anti-depression economics will get us out of it now.

But that’s not what Wall Street, the top 1%, and their Global Financial economy has in mind for the bottom 99%.  They relentlessly press the same old tired, Reaganomic legislative program:  Roll back business taxes, and eliminate what they call “job-killing” regulations. [8]  They demand an end to basic environmental protections before they will hire Americans to work at American jobs, which is itself a job-killer.

And they won’t even promise that they will produce any new jobs! “You are asking us to pin down an exact number of jobs,” Republican Rep. Eric Cantor of Virginia, the majority leader, said recently. “Let’s stop overpromising and underperforming, and why don’t we begin to set the sights in a reasonable way?”[9]

Overpromising, indeed.  Tell me, does it appear they have any lingering interest in the America that spawned them, or the American infrastructure, or the American consumer?  Take another look at the graph above.  Over the last 30 years the top 1% has cornered and confiscated America’s GDP, without regard to America’s welfare or the welfare of the American people.  They’ve exported our jobs.  It’s time to stop pretending that the top 1%’s financial economy is connected to the American economy, except to use it as a source of wealth.  Perhaps we should regard Wall Street, as we do the United Nations, as something headquartered here but not really a part of America.

Monseigneur had one truly noble idea of general public business, which was, to let everything go on in its own way; of particular public business, Monseigneur had the other truly noble idea that it must all go his way–tend to his own power and pocket. Of his pleasures, general and particular, Monseigneur had the other truly noble idea, that the world was made for them.  (Book 2, Chapter 7)

Monseigneur (often a most worthy individual gentleman) was a national blessing, gave a chivalrous tone to things, was a polite example of luxurious and shining fife, and a great deal more to equal purpose; nevertheless, Monseigneur as a class had, somehow or other, brought things to this. Strange that Creation, designed expressly for Monseigneur, should be so soon wrung dry and squeezed out! There must be something short-sighted in the eternal arrangements, surely!   (Book 2, Chapter 23)

Charles Dickens, A Tale of Two Cities

JMH – 10/13/11


[1] My most recent source for this chart is Letters and Surveys. See also The Distribution of Wealth in America.  The latest available data on wealth distribution continues to be 2007 data.

[2] For background on the housing bubble, see Growing Wealth, Inequality, and Housing in the United States, by Zhu Xiao Di, Joint Center for Housing Studies, Harvard University, February, 2007

[3] Tax increases part of solution, by J. Michael Harrison, Albany Times Union, October 7, 2011.

[4] Better times, but no money, by Robert Pear, New York Times (Albany Times Union, October 10, 2011)

[5] Top 1 Percent of Americans Reaped Two-Thirds of Income Gains in Last Economic Expansion and Income Concentration in 2007 Was at Highest Level Since 1928, New Analysis Shows, , by Avi Feller and Chad Stone, Center on Budget and Policy Priorities, September 9, 2009

[6] Economic terms,  “GDP” refers to “the market value of all final goods and services produced within a country in a given period” (Wikipedia) and can be measured by summing all income in the period.

[7] What is a Depression?,, U.S. Economy.

[8] Obama: Number, please, by Lisa Mascaro, Tribune Washington Bureau, Albany Times Union, October 11, 2011.

[9] Id.

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