So the new credit system, coming on top of the great burden shift on pensions and health care, has contributed to the unraveling of the American Dream for average Americans and to America’s ever-widening wealth gap.
Rescuing average Americans from the New Economy credit trap will require reversing course—steps such as reimposing ceilings on interest rates and requiring down payments on houses. But the determined efforts of Wall Street banks and congressional Republicans to hamstring the operations of the new U.S. Consumer Financial Protection Bureau shows how hard it will be to do that—unless the middle class demands it.
CHAPTER 8
THE WEALTH GAP
THE ECONOMICS “OF THE 1%, BY THE 1%, FOR THE 1%”
The fact is that income inequality is real—it’s been rising for more than 25 years.
—PRESIDENT GEORGE W. BUSH
By 2004, the richest 1 percent of Americans were earning about $1.35 trillion a year—greater than the total national incomes of France, Italy, or Canada.
—ROBERT FRANK,
Richistan
It is absolutely excessive…. But it’s amazing what you can get used to.
—LARRY ELLISON,
Oracle CEO, on his 454-foot yacht
IN THE FALL OF 2005, Citigroup put out a glossy investment brochure with a boldfaced heading, WELCOME TO THE PLUTONOMY MACHINE, that advised its clients: “There is no ‘average consumer’ in a plutonomy…. Economic growth is powered by and largely consumed by the wealthy few.”
Citigroup was steering savvy investors to exploit America’s growing economic divide by investing in businesses that cater to the luxury consumption of the super-rich in the world’s greatest plutonomy, the United States. As another Citigroup financial brochure put it, “the rich now dominate income, wealth and spending” in America. In fact, Citigroup’s pitch suggested that the world had not seen such an eye-popping concentration of wealth since sixteenth-century Spain or seventeenth-century Holland.
To the magazine Advertising Age, a wealthy American plutocracy was a golden opportunity. It urged ad agencies and marketing gurus to abandon mass marketing to the middle class, and even to the affluent upper middle class, and to concentrate on the hyper-rich. “The top 1% alone control nearly 40% of the wealth,” advised the Ad Age blog. “And while the social and political effects of this inequality may be cause for concern, the accrual of wealth among the very few is of great consequence for marketers, since … a small plutocracy of wealthy elites drives a larger and larger share of total consumer spending and has outsize purchasing influence….”
It was true. Even with the economy in a stall in the summer of 2011, luxury goods were selling well in Manhattan. The New York Times reported that Nordstrom had a waiting list for a Chanel sequined tweed coat retailing at $9,010. Mercedes said July sales of its high-end S-class sedans, which cost $200,000 or more, had jumped nearly 14 percent—its best July sales in five years. Tiffany’s first-quarter sales were up 20 percent to $761 million. Markups in designer clothing and shoes were hot. Higher prices made for hungrier buyers, advised Arnold Aronson, former CEO of Saks. While most of the retail economy was flat, the luxury category recorded its tenth consecutive month of rising sales.
The New Plutocracy
Americans, far more than people in the advanced economies of Europe and Asia, accept and even endorse economic inequality as an integral feature of modern capitalism. Americans believe in material incentives for hard work and talent.
Even so, very few people grasp the dimensions of the economic schism that divides America today. People know that CEOs take home more, but they don’t imagine how much more. In a 2007 nationwide survey, most people estimated the pay of an average big-company CEO at $500,000, when in fact CEOs of companies in the Standard & Poor’s 500 were then averaging $14 million a year.
Although most people underestimated the wealth gap, most Americans thought income inequality had gone too far. Eleven different polls from 1984 to 2007 found that a 60 to 30 percent majority of Americans, including majorities of Republicans and high-income earners, thought that money and wealth in America should be more evenly distributed.
The explosive Jack-and-the-Beanstalk growth of a new economic oligarchy in America took off in the late 1970s, along with the power shift in Washington and the dawn of downsizing in Corporate America. As I mentioned earlier, it spawned the third wave of great private wealth in U.S. history. First came the robber baron era of railroad, oil, and mining fortunes during the Gilded Age, which left average Americans in what historians call “the long depression” of the 1880s and 1890s. Then came the wildly bullish flapper era of the Roaring Twenties that ended with the disaster of Black Monday, the 1929 stock market crash, and the Depression. The new Gilded Age emerged during the Reagan 1980s, when “Go for the Gold” was the official U.S. slogan for the 1984 Los Angeles Olympics and the unofficial mantra for economic Darwinism on Wall Street and in Corporate America that ended in the financial collapse of 2008.
During the past two decades, while the incomes of 90 percent of Americans barely inched forward, America’s super-rich, the top 1 percent, reaped astronomical gains. This small elite garnered half of the nation’s overall economic growth from 1993 to 2008, according to “Striking It Richer,” a detailed study of U.S. tax records by economist Emmanuel Saez of the University of California at Berkeley. The trend hit new peaks in the 2000s, Saez and French economist Thomas Piketty reported. The farther up the wealth pyramid—which looks more like a steeple—the steeper the income gap.
According to the studies of U.S. income tax returns by Piketty and Saez:
• The top 1 percent super-rich, people with incomes over $352,000 a year, made $1.35 trillion in 2007—more money than entire countries like France, Italy, or Canada. As we’ve seen, the top 1 percent garnered two-thirds of the gains of U.S. national income growth from 2002 to 2007, twice as much as the other 99 percent of Americans combined. And this tiny group reaped 93 percent of the nation’s gains in 2010, the first full year of economic recovery after the financial collapse of 2008.
• The top 0.01 percent, comprising just 15,426 families, enjoyed an average income of $9.1 million in 2007. Collectively, they were raking in 6 percent of the nation’s overall income, or six hundred times their share in terms of numbers.
• The seventy-four people at the pinnacle each made $50 million or more in 2009, while recession was squeezing millions of American families. In this economic stratosphere, the average income was $518.8 million—$10 million a week.
• In 2008, the year of financial collapse, half a dozen hedge fund managers each made more than $1 billion: David Tepper of Appaloosa Management, $4 billion; George Soros, $3.3 billion; James Simons of Renaissance Technologies, $2.5 billion; and John Paulson, $2.3 billion. In 2007, Paulson had already made nearly $4 billion by betting against the housing market; in 2010, he made $5 billion more by betting on rising commodity prices and the recovery of America’s big banks, thanks to a taxpayer bailout.
The Geography of Richistan
Translating these astounding numbers into human terms, Wall Street Journal reporter Robert Frank wrote a travelogue to the exotic domain of “Richistan.” In a book by that title, Frank described the world of the wealthy:
• Lower Richistan (7.5 million families), worth $1 million to $10 million, many of them doctors, lawyers, and other professionals.
• Middle Richistan (2 million families), worth $10 million to $100 million, mostly entrepreneurs and small-business owners.
• Upper Richistan (thousands of families with net worth over $100 million), mainly corporate executives, bankers, financial advisers, and Hollywood and sports superstars.
• Billionaireville (the Forbes 400 Richest Americans plus a few more), where net worth of $1 billion is the price of admission.
• The Walton family (with an estimated wealth of $90 billion). At the apex of the wealth pinnacle, other writers have pointed out, are the heirs of Wal-Mart founder
Sam Walton. Epitomizing the extremes of inequality in America today, this one family enjoys wealth equal to all the assets of the entire bottom 40 percent of the U.S. population—120 million people.
In Upper Richistan and Billionaireville, Frank wrote, the super-rich and ultra-rich often compete with each other in conspicuous consumption. Their primary residence costs an average of $16.9 million. Many of these families set up “family offices,” where their personal management staff is dedicated to running their households, paying bills, arranging travel, and handling day-to-day needs. In this group, butlers are back in fashion. According to Frank, super-rich families spend up to $2 million a year on staff, $107,000 for annual spa bills, and up to $182,000 each on watches and $319,000 for cars. For investments, they don’t buy mutual funds; they buy timber, land, oil rigs, and office towers.
In the Billionaireville of thirty-thousand-square-foot mansions, private jets, and elite art collections, Frank reports, “luxury fever” is the norm. The hyper-rich compete with ever more expensive toys, such as Oracle CEO Larry Ellison’s 454-foot yacht, Rising Sun, which is loaded with sports complexes, a cinema, a speedboat, a helicopter pad and a crew of thirty. “It is absolutely excessive. No question about it,” Ellison admitted to a writer for Vanity Fair. “But it’s amazing what you can get used to.”
The outlandishly conspicuous consumption of the super-rich might seem merely a shocking gossip tidbit—except that as economist Robert H. Frank pointed out, when the rich build ever more lavish mansions and bid up the cost of high-end estates, “that shifts the frame of reference for the near rich, and so on down the income ladder.” So the push at the top helped cause housing prices at almost all levels to shoot up above historic norms until the bubble burst in 2007. For middle-class families, even the median new house built in 2007 was 50 percent larger and much more expensive than the median home in 1970, and that put financial pressure on hard-pressed middle-class families to spend more to get homes near good schools.
Did SBTC Cause the Wealth Gap?
The key question is, how did we get into this bind? How did these vast income and wealth disparities develop?
The conventional answer from business leaders, Republican presidents, and conservative economists is that the wealth divide is the unavoidable price of progress. In the lingo of the New Economy, the Two Americas schism was created by SBTC—skill-based technological change.
Speaking on Wall Street in early 2007, President George W. Bush laid out this rationale. “The fact is that income inequality is real—it’s been rising for more than 25 years,” Bush acknowledged. “The reason is clear: We have an economy that increasingly rewards education and skills because of that education.”
But the supposed causal link between technology/education and the wealth gap does not match the facts. As we have seen in Germany and other European countries, which have also experienced SBTC, none has come out with the hyperconcentration of wealth of America. The middle class in several other countries is faring better than the American middle class.
So in today’s global economy, where technology goes worldwide in a nanosecond, technological change cannot explain the disparity between the wealth trends in America and the economics of other leading countries.
Back in the 1970s, America’s top 1 percent of income earners were netting a smaller share of the nation’s riches than the top 1 percent in France, Germany, Switzerland, and Canada. We were economically more democratic than the Europeans. But by 2000, the picture had reversed: America’s ultra-rich had pulled away from the world. In terms of their share of the nation’s economic pie, the U.S. superclass easily outdistanced their peers in Germany, Great Britain, Canada, Australia, France, Japan, and Switzerland. America is now the most unequal society among industrialized countries in the West.
Is It Education? CEOs Outearn Ph.D.s
If educational differences were the key to America’s economic disparities, as we are told, a different set of people would constitute today’s super-rich. Some of the most highly educated people in America, Ph.D. physicists, astroscientists, top heart, brain, and cancer surgeons, and brilliant engineers, earn only a fraction of the astronomical pay of CEOs and Wall Street’s top bankers. Bank traders earn far more than “quants”—the mental geniuses who dream up the derivatives that traders use to make money.
“Those at the top are often highly educated, yes, but so, too, are those just below them who have been left increasingly behind,” write political economists Jacob Hacker of Yale and Paul Pierson of the University of California at Berkeley.
Blue-collar middle-class workers are constantly chided by business for not getting a college education. But contrary to conventional wisdom, getting a B.A. or B.S. is not a ticket to wealth. Some college graduates have done extremely well—but the degree is not what explains that. “Hard as it may be to believe,” Hacker and Pierson report, “a typical entry-level worker (ages 25–34) with a bachelor’s degree or higher earned only $1,000 more for full-time, full-year work in 2006 than did such a worker in 1980 ($45,000 versus $44,000, adjusted for inflation).”
In fact, experts find far greater financial differences among people with the same level of education than between groups with different levels of education. Several economists have reported much larger income disparities among college graduates than between the average income of college graduates and the average income of high school graduates. “To me, the most telling fact is that wages of both college grads and high school grads have gone nowhere for ten years,” reports Larry Mishel, director of the pro-labor Economic Policy Institute in Washington, D.C. “College graduates haven’t done better than high school graduates. I mean, they earn more, but their incomes are not growing faster. In this decade we have seen the slowest demand for college grads in the whole postwar period, and their wages have gone nowhere.”
“The Most Political Law in the World”
Two trends are primarily responsible for today’s hyperconcentration of wealth in America—the collective decisions over time by America’s corporate power elite to take a far bigger share of business earnings for themselves, and the increasingly pro-rich, pro-business policy tilt in Washington since the late 1970s.
The U.S. tax code is where economics and politics intersect most powerfully. “The U.S. tax code is the most political law in the world,” comments Jonathan Blattmachr, a top tax attorney at the blue ribbon Manhattan law firm of Milbank, Tweed, Hadley & McCloy.
The long-term trend of tax cutting since the 1970s has dramatically widened America’s wealth divide. As the tax code has been written, rewritten, and rewritten again since 1978, it has been tilted so heavily in favor of the super-rich that many millionaires and billionaires today actually pay lower tax rates than many people in the middle class. The key driver of this lopsided outcome is the sharp cut in the capital gains tax—from 48 percent in 1978 to 15 percent today. Capital gains go primarily to the people at the top of the economic pyramid. The top 0.1 percent—about 315,000 people out of 315 million Americans—garner roughly half of all capital gains in the United States. Among the ultra-rich, the Forbes 400, the richest four hundred people in the country, capital gains account for 60 percent of their income.
The 15 percent capital gains tax means that the monumental investment gains of the wealthy are now taxed at lower rates than the W-2 withholding rate for many salaried middle-class professionals and middle managers, whose tax rates run up to 35 percent. Hedge fund managers, who make hundreds of millions of dollars per year, are also taxed at that same low 15 percent rate, well below the rate paid by their secretaries, chauffeurs, or butlers.
“If you make money with money, you get taxed at very low rates,” explains billionaire investor Warren Buffett. “If you make money with muscle or hard work or sweat of your brow, you get taxed at rates that move on up…. In a very high percentage of cases, the very rich are paying less in the way of taxes than the people that clean their offices.”
Personally, Buffe
tt admitted that in 2010 he paid the lowest income tax rate of anyone in his office (twenty people)—a 17.4 percent rate on his taxable income of $39.8 million, most of which was capital gains—a much lower rate than his secretary and other aides paid on their W-2 salaries.
To make matters worse, ordinary employees typically pay a higher payroll tax rate—7.65 percent to finance Social Security and Medicare—than corporate CEOs and super-rich investors. Their investment gains are not subject to the payroll tax, and their pay over $106,800 is also exempt. As a result, the super-rich pay as little as 1 to 2 percent of their earned income in payroll taxes, far below the 7.65 percent rate of middle-class Americans.
Superclass Wealth: Trillions in Tax Cuts
A rainbow of across-the-board tax cuts starting in 1978, and especially the massive tax cuts enacted by President Ronald Reagan in 1981 and President George W. Bush in 2001, have produced a pot of gold for the super-rich. That is no accident. Well-organized business lobbies and anti-government tax cut activists have mounted a relentless campaign since the late 1970s to lower tax rates for the wealthy, and they have won a financial bonanza.
Several trillion dollars were added to the wealth of America’s superclass by the Reagan and Bush tax cuts. Starting in 1981, Reagan lowered the top personal income tax rate from 70 to 28 percent, the capital gains rate from 28 to 20 percent, and the corporate tax rate from 46 to 35 percent. Even though Reagan presided over a couple of modest tax increases, the windfall from his tax cuts for America’s wealthiest 1 percent was massive—roughly $1 trillion in the 1980s and another $1 trillion each decade after that. The Forbes 400 Richest Americans, enriched by the Reagan tax cuts, tripled their net worth from 1978 to 1990.
Who Stole the American Dream? Page 12