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The Wealth Gap and the Collapse of the U.S.

The Wealth Gap and the Collapse of the U.S.

By Sober Realist and Pluto August 8, 2009


 A report issued last fall by the Paris-based Organization for Economic Co-operation and Development (OECD) revealed that the United States has the third worst level of income inequality and poverty among the group’s 30 member states. Only Mexico and Turkey ranked higher in those categories.

The OECD report defined those in poverty as households with an income below half of the median national salary. By this definition, 17 percent of the US population is categorized as poor—higher than all the advanced OECD economies and only marginally behind Mexico and Turkey.

The US also ranked among the worst in OECD countries in regard to the length of time people remain “poverty entrapped.” 7% of the US population remain “ persistently poor.” The US also ranks among the worst countries in “inequality of opportunity.”

The current global economic crisis has surely worsened those numbers.

Not since 1929 has the gap between rich and poor been so egregious. Back in 1929, two hundred of the biggest corporations controlled 50% of the nation’s corporate wealth. In 1928, the top 1% of the population had incomes 650% greater that the bottom 10% of Americans. During the early part of the 1900’s, relaxed regulation allowed corporations and investment houses to expand and consolidate into too-big-to fail megaliths. Sound familiar?

According to the Drum Major Institute’s 2006 Injustice Index, the ratio of the average U.S. CEO annual pay to minimum wage worker’s is 821:1 whereas twenty years ago the ratio was 40:1. The richest 0.1% are vanishing off the chart because it would take a bar graph that stretched out of the building to represent them on a societal wealth distribution chart. Below is a chart spanning from 1910 to 2005 which represents the wages in the Financial Sector compared to all other sectors.



What you are seeing is a Wealth Transfer. The first Wealth Transfer happened from about the late 1800’s to 1929 when American workers and consumers were victims of the robber barons --greedy and ruthless businessmen and bankers who amassed incredible wealth by exploiting labor and a lack of government regulation. The first surge on the chart represents a wealth gap where the rich overwhelming took from society and decimated the middle class. The second surge is occurring right now and started around 1980, 30 years in the making and similar to the first Great Wealth Transfer. The second chart shows financial sector profits continuing to rise through June 2009. And this is all happening at a time when hundreds of thousands of Americans are suffering job loss and wage reductions.

Below is a third chart spanning from 1951 to 2005 which shows a correlation between the amount of debt in society and the deregulation of the financial sector. The dip in the middle is when Reagan took office and ushered in a long era of continued corporate tax cutting and “anything goes” corporate capitalism. The black line shows surging profits in the financial sector.



 The next chart overlays government policy and banking regulations across the period from 1910 to 2005. There is a long period of stability from 1950 to 1980 where the middle class flourished, corporate tax rates were at their highest, and wages were fairly spread across society.



 In 1980 the descent of the middle class started with the beginning of deregulation and the corporatization of our government. Latchkey kids became the norm as both parents needed to hold jobs to make ends meat. Cheap fast-food restaurants became the soup kitchens of America. Fifty years after the first Great Depression, the wealth gap began to grow again and strangulate the middle class


Below is a chart which takes a close look at what was happening to tax rates during this period.



 Government policy was to cut taxes for the wealthiest individuals, those who made the most money from exploiting the resources and advantages that America gave them. They gave little back in return. They mainly took, and from their ownership positions, they forced middle class wages down even further. In Doug Henwood’s “After the New Economy” (2003), he exposes that the richest 10% of Americans possess over all the wealth in America and the bottom 50% has almost none of the wealth, but they do have substantial debt. According to a 2006 study by the Center for American Progress, Americans at that time were spending 126.4% of their pay to cover the cost of living. In that same year, investment bank UBS declared that corporations were enjoying the “golden era of profitability” with corporate profits climbing to the highest amount since the 1960’s. Despite double digit increases in productivity levels in the last decade, the American worker’s pay has increased less that 2%. Profit from productivity gains went straight into the pockets of the corporate executives. According to Kevin Murphy of the University of Southern California, the average CEO pay rose 369 times that of the average worker in 2005 while it was 191 times in 1993 and 36 times in 1976 (Krugman, 2002). Paul Krugman (2002), an economist at MIT and regular columnist for The New York Times, reports more troubling statistics stating that in a 29 year period between 1970 and 1999, the average annual salary in America rose ten percent (10%) whereas, during the same period, according to Fortune magazine, the average real annual compensation of the top CEOs in America rose more than 1,000 times the pay of ordinary American workers and, according to a 2001 Congressional Budget Office study, between 1979 and 1997, the after-tax incomes of the top 1 percent of American families rose 157 percent (157%). According to Executive Excess 2007, a study released in August by the Institute for Policy Studies and United for a Fair Economy, the 20 highest-paid fund managers made an average of $657.5 million last year--22,255 times the average annual U.S. salary of $29,500.

Big name firms such as Cerberus Capital Management, The Carlysle Group, The Blackstone Group and Kohlberg, Kravis, Roberts (NYSE:KKR) are taking advantage of a tax loophole today which allows them to declare earnings as capital gains and pay a 15% tax rate instead of the customary 35% rate. The average American is paying a higher percentage tax rate on their income than a hedge fund manager who made a cool billion last year.

A recent study by Standards & Poors shows that for the first time in history, American multinational companies paid more of their income in foreign taxes than in domestic taxes.

Standards & Poors also notes the difficulty in obtaining detailed data due to the usual practice of corporations trying to hide and mask the actual figures on how many jobs are being moved offshore.

The last chart, spanning a century from 1907 to 2007, combines all the information from the charts above and tells the story of the Wealth Gap in America, a terrible economic injustice that happened from 1900 to 1930 – thirty years. The same injustice has clearly repeated itself today. The green graph measures the concentration of wealth in the hands of the few. The pink graph is the tax rate in the highest income bracket.



The US becomes vulnerable to chaos, collapse, and severe contraction when policies are enacted which steer most of a nation’s free wealth into the hands of only a few individuals and investment houses, causing an increase in the wealth gap across the population. The wealth gap is widened generally through deregulation and reducing taxes on the profits from the exploitation of massive wealth by corporations. Investments become concentrated and self-speculative, corrupting the markets. One single economic blow can topple the entire wealth-holding investment class. As a result, the nation’s economy quickly contracts and is pulled toward collapse. Everything from infrastructure growth to the training and well being of the workers is quickly degraded and the nation’s global competitiveness is compromised. Simply raising taxes cannot fix the problem after a nation’s economic foundation has been gutted by greed.

Paul Krugman in his 2006 paper “The Great Wealth Transfer” said the following:

“In the end, the effects of our growing economic inequality go far beyond dollars and cents. This, ultimately, is the most pressing question we face as a society today: Will the United States go down the path that Latin America followed — one that leads to ever-growing disparity in political power as well as in income? The United States doesn't have Third World levels of economic inequality — yet. But it is not hard to foresee, in the current state of our political and economic scene, the outline of a transformation into a permanently unequal society — one that locks in and perpetuates the drastic economic polarization that is already dangerously far advanced.”

America is very much resembling the Developing World Dictatorships that we criticize and decry in the press. The once large middle class is being replaced by a peasant class. As author Alvaro Vargas Llosa said, " really doesn't matter whether the rulers call themselves capitalist or socialist, whether they plunder by concessions and taxation through crony firms or straight-out theft from nationalized industries." Our country currently has what Llosa describes as the five principles of oppression:
-states mercantilism
-privilege & favoritism
-wealth transfer
-political law
These principals of oppression conspire against our economic progress. These are the same repressive practices that have suffocated the growth of underdeveloped countries beyond anything other than mere survival. History has shown that when societies become noxiously unbalanced and disproportionate, they either become economically inefficient, subject to social unrest, or simultaneously both. The banana republics of South and Central America as well as Africa are testimonies to this. A small ruling oligarchy prospers at the expense of the poverty stricken masses. Today we are slipping into an inefficient oligarchy with an increasing risk of civil unrest in the future.


An article by Carl Herman from yesterday, August 14th, touches on two major points I have shown in the above article.
1.) Our country is run by an oligarchy or plutocracy.
2.) The best interests of the American citizens are being trampled on. Indentured servitude is being forced upon MIddle Class America.
Mr Herman from the LA County Nonpartisan Examiner describes it this way:
"The US is a plutocracy, or an oligarchy, but no longer a republic limited by the US Constitution. For example, the so-called bailout is a policy of the wealthy for the wealthy. A policy for the public would have opened hearings for independent analysis of how to best serve the public. The bailout refused hearings under threat from Treasury Secretary Hank Paulson (former CEO of Goldman Sachs) of martial law. A policy for the public would have protected deposits while allowing the banks to reorganize under Chapter 11 bankruptcy law or be nationalized. The bailout gave trillions of our collective dollars back to the banksters. Policy for the public would have criminally investigated the Fed and Congress for allowing bankrupted banks to operate and lie about the assets on their books, as explained by William Black who investigated the S&L crisis for the US government and recorded his experience in his book "The best way to rob a bank is to own one." I recommend his interview by Bill Moyers."
Mr Herman also quotes from the George Washington blog talking about the noxious wealth gap that has formed in America:
Friday, August 14, 2009
No Wonder the Poker Game is Ending: The Wealthiest Have Taken All of the Chips
A new report by University of California, Berkeley economics professor Emmanuel Saez concludes that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression. The paper, which covers data through 2007, points to a staggering, unprecedented disparity in American incomes. On his blog, Nobel prize-winning economist and New York Times columnist Paul Krugman called the numbers "truly amazing."

The report shows that:

  • Income inequality is worse than it has been since at least 1917
  • "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007" 
  • "In the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."

As others have pointed out, the average wage of Americans, adjusting for inflation, is lower than it was in the 1970s. The minimum wage, adjusting for inflation, is lower than it was in the 1950s. See this. On the other hand, billionaires have never had it better.

As I wrote in September:

The economy is like a poker game . . . it is human nature to want to get all of the chips, but - if one person does get all of the chips - the game ends.

In other words, the game of capitalism only continues as long as everyone has some money to play with. If the government and corporations take everyone's money, the game ends.

The fed and Treasury are not giving more chips to those who need them: the American consumer. Instead, they are giving chips to the 800-pound gorillas at the poker table, such as Wall Street investment banks. Indeed, a good chunk of the money used by surviving mammoth players to buy the failing behemoths actually comes from the Fed...

This is not a question of big government versus small government, or republican versus democrat. It is not even a question of Keynes versus Friedman (two influential, competing economic thinkers).

It is a question of focusing any government funding which is made to the majority of poker players - instead of the titans of finance - so that the game can continue. If the hundreds of billions or trillions spent on bailouts had instead been given to ease the burden of consumers, we would have already recovered from the financial crisis.
As Marc Weisbrot writes in the Guardian:
John Schmitt and Nathan Lane showed that the United States is not the nation of small businesses that it is regularly dressed up to be for electoral campaign speeches and editorials. If we look at what percentage of our overall labour force is self-employed, or what percentage of manufacturing workers or high-tech workers are employed in small businesses – well, the US ranks at or near the bottom among high-income countries.

As economist Paul Krugman noted after reading the study: "One more American myth bites the dust."
In other words, the idea that America has more small businesses than other countries is false. More small businesses would be good, as it would mean that more of the "little guys" would have poker chips to play the free market game with.

Similarly, breaking up the big banks would lead to more competition and allow smaller banks to fill the lending needs of individuals and small businesses