Our economy keeps trying to pull itself away from a double dip recession. Scores of cities across the nation are struggling to deal with the Occupy movement. Our nation is trying to extricate itself from two costly foreign wars. Political discourse has reached an all time low, and polarization an all time high. The only icing this layered cake needs is an election year.
That is an awful lot to take on in the first post on this blog, so I thought we could start with the Occupy Wall Street movement.
What is the source of this rage?
I have seen and heard people that I respect, people of intellect and moral character, condemn the Occupy movement as nothing more than a mob. I want to take a moment to point out that I am neutral on the subject. I can understand the sentiment that labels the movement as counterproductive, fragmented, even misguided. On the other hand, I think I can understand the rage that the movement is tapping in to.
I want to talk about this latter aspect. What is the source of this rage? What is fueling it, what is magnifying it, and why now?
One of the mystifying things about Occupy is of course that it has no leader and no set agenda. The last time that the US experienced this sort of protracted, coordinated (though that may be overstating it) movement was of course the anti war movement of the 1960s and early ’70s. There were many ways that the message was articulated 50 years ago, but they all pretty much revolved around ‘end the war.’ There was little ambiguity about the single thing that every protester most wanted; cease hostilities and get out.
With Occupy, if you asked 100 people, you just might get 100 different answers. The nice thing about this, from a journalistic perspective, is that we can infer what their agenda is. And so I shall infer away.
How small will the top of the pyramid get?
To me, the thing that I hear and feel, and the element of this anger that I can tap into, has to do with the diminishing lack of economic opportunity in America. Simply put, the American Dream that we have woven into the past three generations appears dead, or at least on life support.
Fewer and fewer people believe that if they work hard they will have an opportunity to advance. Fewer and fewer people believe that they can achieve a degree of security for themselves and their families, formerly referred to as the middle class. Bizarrely, there actually seem to be more people who cling to the notion that they can become not just better off, but wildly better off. Perhaps that is a byproduct of the despair that leads to the rage.
Again, I am not endorsing or condoning these feelings. A large part of me says we all need to be more personally responsible, and less concerned with others. But I can certainly understand the feelings that are referenced above.
The economic tension in this country is so palpable you could cut it with a knife.
Generated from http://g-mond.parisschoolofeconomics.eu/topincomes/
But where is this coming from? Is their data to support that despair?
I don’t feel that any data is necessary to support the fact that the average American is currently under severe economic distress. The economic tension in this country is so palpable you could cut it with a knife.
Where the data gets interesting, and perhaps instructive, is in the distribution of wealth over the last 25 years. Starting in 1986, we have seen a dramatic growth in the income of the top few percent of Americans. A staggering percentage of the wealth in our country is now controlled by a diminishing minority, and that is reflected and fueled by their ability to earn a vastly disproportionate amount of income.
As the graph shows, the top .1%, or roughly 300,000 individuals, were earning 8% of the total income in the US in the last year charted (2008). In 25 years, that percentage quadrupled from ~2%.
Now let’s visualize the top 1%, or roughly 3 million Americans. We can see a nearly identical growth curve… though despite the sample being 10 times larger (from the top .1% increased to the top 1%), the total income percentage earned only doubled, to ~18%. So the top 1% of Americans earn 18% of its total annual income, but we can already feel the diminishing effect.
Next let us look at the top 5% of wage earners, and how much of the nations income they earn. If you have to look twice, that is ok. The charts are freakishly similar in their trajectories, just not in their values. As the saying goes, a rising tide raises all ships – the question that is never posed of this truism is of course, does it raise them all enough to float on their own?
Finally the top 10%. We are talking about roughly 30 million folks here.
FYI, in 2008, these folks were earning just under 250k per year, not including capital gains. You can see the growth in monetary terms for this top 10% here. (Graphs generated from “The World Top Income Database” at ParisSchoolofEconomics.us).
What can be gleaned from all of this? Well, interpretation is always dangerous, but when I look at the charts, I think these truths are self evident:
- This is not new, as all of the graphs show, we saw this same gravitational pull of liquidity before the great depression. In 1913 there is a precipitous drop in the percent of total wealth earned by the the uber wealthy, the .1%, and another in ~1940. This corresponds of course to a growth in income for the remainder of America, which created a new broader based prosperity that was dubbed the middle class.
- 1986 marked a watershed year in which income started to again flow in a dramatically disproportionate fashion to a very small base of Americans.
So what happened during the 80’s and 90’s to drive so much of the nations wealth to the existing wealthy? Tax reform enacted under Reagan in 1981 and 1986 had a lot to do with it. Taxes on the wealthy were slashed by almost 300% (this is not a criticism of Reagan era policies in the least – reagan also did a great deal of base broadening by closing numerous tax loopholes).
Of course the increase also corresponds with rising prosperity in America as we shook off the malaise of the 1970’s (yes, there may be a causality here; this article is not meant to judge the reasons why or the overall impact, only to chart the flow of wealth).
Then in the 90’s two immensely impactful pieces of deregulation were cemented as the icing on the cake (again, not a criticism of Clinton era policies). In a nutshell, restrictions put in place on financial institutions during and after the great depression were lifted or reinterpreted. You could easily argue that this ensured that ‘too big to fail’ would come to pass.
1994, Riegle-Neal Interstate Banking and Branching Efficiency Act – This bill eliminated previous restrictions on interstate banking and branching. It passed with broad bipartisan support.
1996, Fed Reinterprets Glass-Steagall – Federal Reserve reinterprets the Glass-Steagall Act several times, eventually allowing bank holding companies to earn up to 25 percent of their revenues in investment banking (source OpenTheGovernment.org)
Finally, the ‘commoditization’ of all manner of speculation became all the rage. Not a lot of people are aware of where and when this began – a fascinating read that is outside the scope of this article. Suffice it to say that the Exxon-Valdez disaster spurred Goldman Sachs to invent a new way to parcel and package liability and debt (insert word ‘toxic’ later) as a broker-able commodity (see an exceptional article on this topic here):
What got the J. P. Morgan team rolling was this thought: instead of swapping bonds or currency or interest rates, why not swap the risk of default? In effect, it could sell the risk that a borrower won’t be able to pay back his debt (source New Yorker article by John Lanchester)
So no real news here. The rich get richer, the poor get poorer. It is so well understood, it is a saying. But what if it is not a cycle, but a progression? Lets think about that for a moment. If the current rate of wealth accumulation continues, how long will it take for all of the wealth to trickle to the top 10%? The top 1%? .1%? Or just the top 1 – one person controlling all of the worlds wealth?
Of course it is impossible for that to happen in reality. The nature of wealth dictates that it cannot exist in a vacuum. There is a limit to how far the polarization of wealth can go before it is reined in. But I ask you, what does that penultimate phase look like? Is it market factors that will reverse that flow naturally? Or is it outrage by everyday citizens who are tired of feeling that they cannot get a break, while they in turn work themselves to the bone only to see breaks given to the existing wealthy? To corporations deemed too big to fail (and made too big by legislative favoritism)?
I took the time to extend the charts shown above in the hypothetical. Of course there are numerous (unsupportable) assumptions made in doing so, but it is instructive to see graphed this way. What I found was that if the current trajectory continues, that by 2040 the top .1% will command over 15% of the nations income. Add capital gains and that number exceeds 20%. Two dollars out of every ten ‘earned’ would go to only 1 in 1000 ‘workers.’
If we make the same assumptions and extend the current trajectory for the top 10%, the numbers are staggering. Fully 70% of every dollar earned in America would go to the top 10% of wage earners by the year 2040.
Capitalism is not meant to create equality. Disparity is the natural result of a capitalist system, and in a just system, that disparity should be celebrated, as it is presumably the result of excellence. But when a system seems to inherently favor the existing wealthy, when taxpayer dollars fund the failures of those that take inordinate risks, it is hardly surprising that the working class should feel the rage that has manifested in the OWS movement.
Consider – between 2008 and 2010, large financial institutions made a net profit of 13 billion dollars solely on the essentially free money they received due to their too big to fail status (Source Bloomberg). Clearly, the deregulation of the financial industries have allowed for, even encouraged, a very unfortunate tilting of the playing field. Can I understand the rage directed at this system? Absolutely. Can’t you?
The first man who, having enclosed a piece of ground, bethought himself of saying This is mine, and found people simple enough to believe him, was the real founder of civil society. From how many crimes, wars and murders, from how many horrors and misfortunes might not anyone have saved mankind, by pulling up the stakes, or filling up the ditch, and crying to his fellows, “Beware of listening to this impostor; you are undone if you once forget that the fruits of the earth belong to us all, and the earth itself to nobody.” ~Jean Jacques Rousseau, A Discourse on the Origin of Inequality