How American Income Inequality Hit Levels Not Seen Since The Depression

WASHINGTON (Reuters, By Emily Kaiser) - In 2007, when the world was on the brink of financial crisis, U.S. income inequality hit its highest mark since 1928, just before the Great Depression.

Coincidence? Maybe not.

Economists are only beginning to study the parallels between the 1920s and the most recent decade to try to understand why both periods ended in financial disaster. Their early findings suggest inequality may not directly cause crises, but it can be a contributing factor.

This raises a host of social, economic and political questions. Should public policy aim to reduce inequality, and if so by what means? Does concentrated wealth at the top of the income spectrum generate asset bubbles, or vice versa? Could raising taxes or interest rates ward off financial meltdowns?

Americans are generally not bothered by inequality because they believe with hard work, they, too, can strike it rich. Government policies aimed at spreading the wealth rarely get much support. (Remember 2008, when then-candidate Barack Obama's campaign-trail comment about redistributing the wealth catapulted "Joe the Plumber" into media stardom?)

"It is usually only left-leaning rich people that care about inequality in the U.S.," said Carol Graham, a senior fellow at the Brookings Institution think tank who studies the economics of happiness.

Those attitudes may be subtly shifting, although it is unclear that this is anything more than just a temporary knee-jerk reaction to the latest bout of turmoil.

Public opinion polls show voters mixed on whether to back higher taxes on the wealthiest households, as President Obama has proposed. The issue is so contentious that Congress put off its decision until after the November 2 midterm elections.

Resentment toward Wall Street is simmering as bankers' paychecks swell to pre-crisis levels while unemployment remains more than twice as high as it was in 2007. Some politicians have been voted out of office simply because they supported the $700 billion bank bailout enacted in 2008.

Yet there is nowhere near majority backing for the sort of progressive New Deal policies passed during the Great Depression, which helped narrow the wealth gap and keep it contained until it resumed widening in the 1970s.

This time around, the wealth disparity narrowed in 2008 because rich households took a heavier hit from the financial crisis, but Census Bureau data shows it turned around immediately. In 2009, inequality was at the highest level since Census began tracking household income in 1967.

America has one of the largest wealth gaps among advanced economies. Based on an inequality measure known as the Gini coefficient, the United States ranks on a par with developing countries such as Ivory Coast, Jamaica and Malaysia, according to the CIA World Factbook.

TRACKING THE DIVIDE

Emmanuel Saez, a University of California, Berkeley, economist who was awarded a 2010 MacArthur Foundation "genius" grant for his work on income inequality, said recession-induced income declines for the super-rich tend to be fleeting unless there are "drastic" regulatory and tax policy changes.

His research with co-author Thomas Piketty shows the top 1 percentile of households took home 23.5 percent of income in 2007, the largest share since 1928, but that slipped back to 20.9 percent in 2008. (Unlike Census, Saez relies on IRS tax data, which is released with a two-year lag, so he does not yet have figures for 2009.)

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Comments

[PeachesinBoston]

05:40 PM on 11/23/2010

Also, in my research (& with the help of my Econ professor), I found that Obama has had THE most successful tax plan to date. Bush gave stimulus checks but people sat on them. Too scared to put them back into the economy because of hardship, etc. It was a political ploy as many know American people want instant gratification in all things. 'SHOW ME THE MONEY'...& Bush ate it up & showed us right? But along comes Obama & people were outraged that he didn't put a check in our hands. He lowered payroll taxes. Not many noticed & because they didn't...guess what happened. It went back into the economy because people spend won't they don't 'feel'. We are better off economically today than we were a year ago but so many pundits & empty air blowers won't recognize that. We need a cohesive...collaborative plan to whip this country back into shape. The greedy rich won't let it happen. Democrats & GOPs alike.

[PeachesinBoston]

05:35 PM on 11/23/2010

What bothers me is that we have not learned anything from the Reagan era. Even his economic advisors are coming forward to warn us what a catastrophe it would be to give ANYONE a tax break...including the middle class. While it is true that you are not to raise taxes in a recession...it is also true that the richest avoiding taxes will keep us in our 'borrowing slump'. It amazes me that people really believe this 'trickle down effect'. The richest have most of their wealth tied up in stocks, etc. Since capital gains are taxed lightly...what are they REALLY paying? Businesses & rich people hoard money. No jobs are created & many are frozen due to economic doubt. This is the pattern for more than 3 years now. Why are we still even discussing it?

[ProgressiveVoice]

07:47 AM on 11/08/2010

Let's not forget, it is only "wealth redistribution" when talking about increased taxes on the wealthy. As wealth has been redistributed upstream, from the working poor up through the upper middle classes to the uber-wealthy, these 30 years past, it's been called "trickle-down", "freeing up capital for investments" and stimulus when the economy is slow.

Redistributing wealth today, to reduce the amount of capital hanging out looking for trouble, to hedge our collective bet on a correlation between income inequality and recession, is only taking back what was "redistributed" to the wealthy by Reaganomics..

[rog1112]

11:20 AM on 11/05/2010

We didn't get here over night. It didn't take 2 years nor 10. It's a direction that creates a downward spiral away from a more perfect union. It distorts the very fabric of our constitution.

Too little regulation; too little taxation; too little government-- may be just as bad as too much.

There is nothing wrong with being rich if one gives back to what gave them the platform to have earned it. That creates balance; more perfect union.

There is nothing wrong with having a moderate income if one has the opportunity to choose from options. Education creates opportunity and the ability to see options. A great education creates great opportunities. Starving our nation's ability to provide it's citizens the greatest education has led us to this inequity.

The least educated public can be led to do believe untruths and even to actively disadvantage themselves.

And that is where we are...

[Jeremy McMillan]

08:38 PM on 10/26/2010

US Gini is 0.607.. Countries in Africa have better income equality.

"Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar, new data from the Social Security Administration show. Total wages, median wages, and average wages all declined, but at the very top, salaries grew more than fivefold...These 74 people made as much as the 19 million lowest-paid people in America, who constitute one in every eight workers.--David Cay Johnston: Scary New Wage Data"

At some point the concentration of wealth ceases to be just an economic issue and starts becoming political. When you have to do business with an 800 pound gorilla, you just don't expect "mutually beneficial" deals that make you feel like your slice of the pie is growing. That erodes trust, thus the economy. The ultrarich and corporations have destroyed our once vibrant economy.

http://thinkbait.aphor.net/2010/10/why-us-economy-will-be-in-toilet-for.html

[oilfield]

11:58 PM on 10/26/2010

so the top folks kept every 34th person unemployed?

[rog1112]

10:47 AM on 11/05/2010

It's called downsizing a company simply for a profit, outsourcing jobs to China/India/S. America/anywhere but here, deregulating financial institutions, tax havens for the wealthiest a la lobbyists, starve safety nets for our poorest, create more ill prepared workers, lessen union power, then downsize a company simply for profit, outsource jobs to China/India/S. America/anywhere but here, deregulate financial institutions, tax havens for the wealthiest a la lobbyists, starve safety nets for our poorest,...

[tacevad]

02:36 PM on 10/26/2010

August 30th, 1935, Revenue Act (Wealth Tax Act ) passed.

* Increased the surtax rate on individual incomes over $50,000, the estate tax on individual estates over $40,000 and graduated steeply taxes on individual incomes over $1 million until the rate was 75% in excess of $5 million.
* Decreased the small corporation tax rate to 12% while increasing the corporate tax, on incomes above $15,000 to 15%.
* Some excess profits over 10% were taxed at a 6% rate and in excess of 15% at a 12% rate.

1944 , Individual Income Tax Act passed, raises the individual maximum rate to 94 percent.

[Bronxdude]

01:23 PM on 10/26/2010

Contrary to Limbaugh and Beck, democrats don’t want to redistribute wealth; instead, what they want is federal tax equity. In America, wealth (the value of everything someone owns, minus what they owe) is highly concentrated in a relatively few hands. As of 2008, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%. Between 1983 and 2008, due in large part to republican tax cuts for the wealthy and republican union busting, of all the financial wealth created by the American economy in that 25-year-period, 47% of it went to the top 1%. A whopping 94% went to the top 20%, which of course means that the bottom 80% received only 6% of all the financial wealth generated in the United States during the '80s, '90s, and early 2000s. Wealth is concentrated in the top 2%, but the tax burden is concentrated in the bottom 98%. What if everyone paid their fair share of taxes?

[oilfield]

11:59 PM on 10/26/2010

there is nothing that will change in the concentration of wealth unless the government started to seize assets.

[stevendedalus3]

12:58 PM on 10/26/2010

I wrote this in the 90s--nothing has changed:
It is time to put away the mythical, arcane models of the economists who have lost the first principle of economics. They pursue cryptic parameters of capital in itself without dissertation on the core dynamics of labor. They have helped build the hierarchy of modern capitalism to perpetuate the monstrous fraud that its marketplace is a natural flow of rational and benign design of its own making.
Capital, to have any reason for being, must generate labor and thereby surplus value.Today's economist — a dinosaur of 19th and 20th Century — is the first to look at the TV camera without blinking an eye to speak of the ‘93 recovery without referring to the necessity of Congress meeting the deadline to extend unemployment insurance to the tune of $5 billion. He speaks of downsizing as a good without investigating the horrendous ripple effect of lost jobs. He is opposed to any kind of stimulus package, lest it "overheats" the ostensible recovery without considering the essential job-creation of the package. He causes panic among bondholders when unemployment falls. He ignominiously views labor as a mere spoke in the wheel of capital by failing to understand that it is labor that created the capital for industry to purchase future labor. He is the enemy of labor and thus caused the sinful "economics" of the past Reagan-Bush years...

[jgourlay]

03:34 PM on 10/26/2010

I disagree with you strongly on a lot of things. But one part of your post I agree with you strongly: modern economists have lost first principles, have lost all touch with first principles.

With regard to capitalism, they have forgotten that capitalism is not a system. It is a non-system. It is what happens when the state does not interfere in the relations between people.

What we have now is something....but it's not capitalism.

[stevendedalus3]

03:26 PM on 10/27/2010

Granted,it is not a system per se because it is a random free for all of goods and services for endless degrees of consumption. However, capitalism does havs a systemic oligarchy bent on unlimited profit for its own sake and thus perceives government and labor its enemies.

[edgySF]

12:54 PM on 10/26/2010

I agree with the points in the article that a wide gap between rich & the rest "undermines democracy" and "heightens social tension."

I see it when I go on long jogs. Poor neighborhoods are open up to speeding cars & are close to polluted factories, dumps & retention ponds. Rich neighborhoods are gated, with Hummers and alarm systems signs in their drive ways.

What if instead of investing in a Hummer or security system, that money went into helping their less fortunate fellow Americans get food, education, & housing? Then maybe the rich wouldn't be so afraid of getting robbed. Because the poor would be comfortable. But the rich seem to prefer to spend their money on their own protection rather than investing in people.

I wonder who tends to be more spiritual: rich or poor people? Who tends to be more ethical or compassionate? Hm.

[jgourlay]

03:41 PM on 10/26/2010

What if in instead of standing on the street corner slinging crack and mugging people, the less fortunate would be willing to come into the rich neighborhood and do some work? Or would be willing to do that work without also stealing half the tools in your garage? Or without using the work as a opportunity to case the neighborhood, following up that night by breaking into 2/3 of the cars on the street where the work was done? Or using the work (as a roofer in this case) to snap pics of the neighbors sunbathing teen daughter and posting those online? These are all real cases in my neighborhood where the criminals once caught were found to be workmen recruited in efforts to help the homeless and those with criminal records find honest work.

People who have both the means, and the will, to try and help the less fortunate very often end up getting slapped in many ways both gross and subtle. At no time is this more true than when they try to give them an opportunity to help themselves. That, apparently, is the ultimate insult.

[MelvinWest]

12:52 PM on 10/26/2010

In case you haven't noticed, the world has gone mad! The world economy has collapsed; man is now organization man; we are bombarded by right-wing propaganda continuously; it's almost impossible to find a man who deserves to be called a man; and most of you reading this blog haven't the slightest clue what I'm talking about. When I look at the average American man or woman of today, I honestly feel as though I need to vomit. So many who are so willing to serve their master. Notions of morality, ethics and compassion are anachronisms. Where have all of the good men and women gone? When was the last time you saw someone question authority based on principle? Maybe it's my imagination, but I believe there was a time when men walked the earth.

The American economy was once the envy of the world, but the structure of this economy has been systematically dismantled over the course of the past thirty years. A large middle class with plenty of discretionary income is a prerequisite for a healthy economy. When I watch these talking heads on CNBC talk about the invisible hand and the power of free markets, I'm generally not sure whether they're stupid or just greedy. But, in general, I believe they're both stupid and greedy. Sometimes, the invisible hand is invisible because it's not there. Ignorance, greed, dogma are the root causes of America's decline.

[jgourlay]

03:50 PM on 10/26/2010

Where have all the real men gone? Listen buddy, when a 7 year old can't bring a lego "gun" to school without getting expelled, man-hood is doomed. If you want real men, you have to let boys be boys, you have to respect venture and reward "machismo" in all its glorious forms.

If you can't get drunk, have a fight, hurl bawdy insults at the office, and enjoy the company of loose women without it ending up on in the news, what's the point of being manly? Suck all the fun (read: sexism, intolerance, aggression, foolishness, danger, 'things that go bang', and plain old inconsideration) out of a man's life and you offer him no reason (NO REASON)...I say again N.O..R.E.A.S.O.N. to do anything other than move to the suburbs and watch TV.

Nothing more hilarious, or PATHETIC, than watching a slender, fit, progressive man walking down the block with his dog and then bending down with a bag over his hand to pick up the crap. Sensible? yes. Proper? yes. Will you ever get that man to take a risk or do anything worthwhile? Hell no. And it was society that did that to him, starting when he was boy and damn-near-put-in-jail for fondling a class mate at age 12. Not to say the punishment didn't fit the crime, but the punishments did make the men you see today.

[jodieez]

11:59 AM on 10/26/2010

Inequality is at the heart of all revolutions. The rich not only get richer but politically stronger and then they demand more monetary concessions from the poor and middle class thus making them richer and the rest of us poorer.

These let them eat cake folks are the same people that triggered the french revoloution.

[James M Connor]

01:12 AM on 10/26/2010

The larger the government, the greater the income inequality.

[tacevad]

02:39 PM on 10/26/2010

that explains what happened 20 of the last 30 years.

[BravoMP]

03:07 PM on 10/25/2010

Sorry holyghostie there are millionaire corporatists on both sides of the aisle. There are few I would trust. The ones I happen to trust and not necessarily agree with everything they say are Dennis Kucinich, Ron Paul and Alan Grayson. I don't trust President Obama, Barney Frank and Chris Dodd. I don't trust any of the senators and representatives that didn't vote for an audit of the Federal Reserve. You want this problem to be fixed? Start there. Why does the Federal Government have to borrow to create currency? Why do banks have the ability to create money at a 9:1 ratio, out of thin air? Easy money, easy credit, a heated economy and then financial collapse. The scenario plays over and over again in history. With this cycle the richest get extremely richer , the wealthy by and large get richer, the middle class gets poorer, and in our society the poor get poorer and start requiring "state" scraps just to survive. I won't vote for the Republicans, but I feel betrayed by the Democrats. Why are we subjected to this, vote for the better of 2 evils. It makes me sick!!

[mrspiffy]

12:00 PM on 10/25/2010

Good analysis.
http://yieldpig.blogspot.com/

[muck-raker]

09:27 AM on 10/25/2010

Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.” – Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time.
http://www.themoneymasters.com/