Why Bad Things Happen to Unequal People

Sam Pizzigati

Just in: new data on our staggering income gap. Just emerging: a better understanding why such gaps make economic calamities inevitable.

Years ago, in the mid 20th century, no one in the United States spent much time talking about rising income inequality, for the simple reason that inequality wasn’t rising. But that all began to change in the 1970s, and, by the mid 1980s, independent economists were sounding a rising income inequality alarm.

Conservative analysts, almost ever since, have been advising us to pay that alarm no attention. Anyone who takes the time to take into account all the government benefits that poorer households receive, these analysts have argued, would see we have no inequality problem worth worrying about.

Researchers at the Congressional Budget Office, over recent years, have actually been doing exactly what apologists for our unequal economic order have advised. In their ongoing income calculations, these researchers have been taking government benefits into account, everything from Medicaid to food stamps.

The CBO researchers, to understand how much income U.S. households have at their disposal, have also been factoring into their data a variety of other income intake and outgo streams — the value of employer-provided health insurance, for instance, and the dollars households pay in federal taxes.

The CBO researchers now have comprehensive annual income data sets that go back to 1979. Last month, they updated their data with figures from 2007. The main take-away from the new numbers: We most definitely do have an inequality problem worth worrying about.

Since 1979, the latest CBO stats show, America’s most affluent 1 percent of households have more than doubled their share of the nation’s after-tax income, to 17.1 percent. The actual average after-tax incomes of the top 1 percent have, over that same span, nearly quadrupled after taking inflation into account, from $346,600 in 1979 to $1,319,700 in 2007.

The new CBO’s data most remarkable contrast of all: In 1979, America’s statistical middle class — that is, the 20 percent of households in the exact middle of the nation’s income distribution — took home well over twice as much income, after taxes, as the households in the top 1 percent.

In 2007, our top 1 percent took home after taxes, as a new Center on Budget and Policy Priorities analysis notes, more than the entire statistical middle class.

IRS stats, as crunched by economist Emmanuel Saez, let us track the U.S. income distribution picture back even further in time, to the World War I era. These numbers put the new CBO stats in an even more striking perspective.

In 2007, the data indicate, America’s top 1 percent took in their highest share of the nation’s income since 1928, the year before the epic 1929 Wall Street crash sent the nation spinning into Great Depression.

The year after 2007, we might want to keep in mind, saw a Wall Street crash that sent the nation spinning into Great Recession.

Notice any pattern here?

In 1928, we have a ridiculously high concentration of wealth at the nation’s economic summit. One year later, economic meltdown. In 2007, another ridiculously high concentration of wealth. One year later, another meltdown.

Coincidence? Or direct cause and effect? Or, to put the matter more broadly, does intense income inequality trigger economic calamity?

CBO income figures

High-profile economists and journalists are starting to ask that question. Last week brought intriguing attempts at an answer from Nobel Prize-winning economist Paul Krugman and the Washington Post economic analyst Ezra Klein.

Krugman began his discussion by acknowledging that, before 2008, he saw no “clear reason why high inequality should lead to macroeconomic crisis.” Now he sees plenty of potential links.

One might be political. The same political tilt to the right that ends up slashing taxes on the rich — and concentrating income at the top — also minimizes government regulation of the financial sector and ends up leaving economies vulnerable to sudden breakdowns.

But the link may also be more classically economic. In an increasingly unequal society, with more and more wealth amassing in the pockets of a precious few rich, average consumers simply don’t have the means to make the purchases that can keep an economy humming. Economic collapse becomes inevitable.

Other economists, notes Krugman, see inequality’s reflection less in this underconsumption and more in overconsumption. Their argument: In an increasingly unequal society, the rich spend more because they have more. This rising spending by the rich raises a society’s consumption bar.

With this bar rising, middle class families feel themselves under pressure to spend more, too — or else come across as unsuccessful. To do that spending, these average families find themselves saving less and borrowing more. A credit bubble builds and eventually pops. Crisis ensues.

The Washington Post’s Ezra Klein adds still another causal agent into the mix. In a deeply unequal society, he notes, rich people certainly do spend more. But even after spending more, they still have huge piles of cash that need investing.

And the more piles out there, Klein adds, the higher the demand for high-yield investment vehicles — and the higher the potential rewards “for people who can invent new investment vehicles with high yields.”

signupThe result? Amid severe income inequality, says Klein, societies get “explosive innovations in weird financial instruments that look good for a while because the risk is underpriced but end up making the system more fragile when their risks come clear and everyone flees.”

So how, in the end, does inequality send economies crashing? Take your pick from these varied explanations. Or take them all. They all drive home the same basic message. We play with fire when we let income concentrate. Eventually, people who live in staggeringly unequal societies will always get burned.

Sam Pizzigati edits Too Much, the online newsletter on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Too Much appears weekly. Read the current issue or sign up to receive Too Much in your email inbox.