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Wednesday, August 18, 2010

How Inequality is Strangling the Nation
--- National Wealth and Income Distribution, and the need for a Government Work Program

Examining Edward Wolff's Wealth Report, March 2010

Extreme inequality is counter-productive.
Forty percent of U.S. households hold on average $2,200 in savings while the economy generates over $47,000 per capita per year in 2007, and the wealthiest 1 percent of households garner more income than the bottom 60 percent. These are the principal findings of a study of wealth and income distribution by Edward Wolff, eminent scholar of wealth distribution.

Social inequality at an extreme is destructive and unproductive. It squanders human potential and diminishes the quality of life for all as the recent book The Spirit Level argues. This essay draws on the recent March 2010 study by Edward Wolff that illuminates quantitatively the extent of U.S. inequality 1983 to 2009. I then propose a solution in the Conclusion, a path out of inequality towards greater productivity and social justice. One in three U.S. workers today is either out of work, has dropped out of the workforce, is working part-time when he wants full-time, or is working for poverty level wages. This is wasteful. Extreme inequality is counter-productive.


In March, 2010, Edward N. Wolff released an updated report on household wealth and income in America. Wolff, the author of Top Heavy, and professor at N.Y.U. and researcher for the Levy Economics Institute, is a widely respected scholar of the economics of wealth distribution.

In a report such as Wolff’s the abundance of numbers and numerical relationships are central, but the overall effect is daunting and overwhelming at times. My report of Wolff’s report is also excessively numerical, and I am afraid that readers are apt to lose the main picture of the “forest” for all the “trees”. I think that if the reader can hold any three data points from Wolff’s report they should be:

1) The average household savings of the bottom 40 percent of American households is $2,200 --- this in an economy that generated over $47,000 per capita per year in 2007. 2) The top one percent of U.S. households owns more than 90 percent of households at the bottom of the wealth scale, and 3) earned in 2007 more income than 60 percent of households at the bottom of the earnings scale. 4) The fourth data point that I think is very important to consider comes from another study, by Emmanuel Saez, (See Striking It Richer, Update July 2010)professor of economics at U.C. Berkeley, who found that from 1942 to 1982 the top ten percent of households never received more than 35 percent of the national income, while in 2007 their portion had grown to 49.7 percent of it. The distribution of both income and wealth have not always been so skewed in favor of the wealthy; when the fruits of the economy have been more fairly spread around, i.e., 1940 to 1980, the economy worked far better for all income sectors --- the poor, the middle income earners and the very topmost earners. 5) --- the Conclusion --- Politically we can change this distribution trend.

Once the reader begins to stall in his comprehension due to an overload of too many numbers, I recommend that he or she skip down to the Conclusion. It will be better for his overall comprehension.

I am venturing a report of Edward Wolff's paper "Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze --- An Update to 2007", published March 2010 by the Levy Economics Institute of Bard College, titled Working Paper 589; available at In addition, Wolff summarizes the changes in wealth and income in the U.S. between 2007 and 2009 in his report on page 33. I have placed in quotations his report, and added my own commentary.

Concerning disappearing wealth between 2007 and 2009, on page 33:

"According to my estimates, while mean [average] wealth (in 2007 dollars) fell by 17.3 percent between 2007 and 2009 to $443,600, median [middle or typical household] wealth plunged by an astounding 36.1 percent to $65,400 (about the same level as in 1992!)."

This indicates that the total wealth of the nation's households plunged from $64 trillion to $53 trillion, an $11 trillion drop or 17% in two years. That means, of course, one in six dollars of savings disappeared in two years! This is why the word "meltdown" is used to describe the financial institutions’ --- banks’, hedge funds’, insurance companies’ --- implosion.
Though Wolff said that median household (or the middle household out of 116 million, or household #58 million in a bottom to top scale, often called the ‘typical’ household) wealth was at the level of 1992, $65,400, a drop from $102,000 in 2007, he might also have said that the median wealth was 6% lower than the 1983 level of $69,500. The middle household, #58 million, in 2009 had about $4,000 less savings 26 years after 1983, in spite of the economy’s expansion of 115 percent.

During the 2007 to 2009 period,
"The [wealth] share of the top 1 percent advanced from 34.6 to 37.1 percent, that of the top 5 percent from 61.8 to 65 percent, and that of the top quintile [20 percent of households] from 85 to 87.7 percent, while that of the second quintile fell from 10.9 to 10 percent, that of the middle quintile from 4 to 3.1 percent and that of the bottom two quintiles from 0.2 to -0.8 percent. There was also a large expansion in the share of households with zero or negative net worth, from 18.6 to 24.1 percent."

Another way to state this is, the bottom 80 percent of households own about 12.3 percent of all the nation’s wealth, or savings. Or that 60 percent own only 2.3 percent.

The households with zero or negative worth grew to 24.1 percent, a big jump from 18.6 percent, and by extrapolation from earlier reports by Wolff, the portion of households with less than $5,000 in savings probably today, in 2010, approximates 33.1 percent, and those with less than $10,000 amount to nearly 40 percent of the U.S. population, though this data is not shown in the report. That is, 40 percent of the U.S. population lives in households with less than $10,000 in savings, and 33 percent live in households with less than $5,000, and one in four Americans live in households with no savings. This is why one in four children in the U.S. now eat food bought by food stamps, December 2009, because in order to qualify for food stamps one can have no more than $200 in assets.

In 1983 15.5 percent of households, as opposed to 24.1 percent today, had zero or negative net worth. From 1983 to 2007 median household annual income grew from $43,500 to $50,200. (page 35). But, of that growth, 76 percent happened between 1983 to 1989. Household median income growth has been virtually flat since 1989.

"Moreover, the average wealth of the poorest 40 percent declined by 63 percent between 1983 and 2007 and, by 2007, had fallen to only $2,200.”

If the poorest 40 percent had on average $2,200 in 2007, how much did they have in 2009 after the meltdown? Wolff offers no estimation. (page 36)

“All in all, the greatest gains in wealth and income were enjoyed by the upper 20 percent, particularly the top 1 percent, of the respective distributions. Between 1983 and 2007, the top 1 percent received 35 percent of the total growth in net worth, 43 percent of the total growth in non-home wealth, and 44 percent of the total increase in income. The figures for the top 20 percent are 89 percent, 94 percent, and 87 percent, respectively.”

Restated: 11 percent of savings’ growth went to the lower 80 percent of households, 1983 to 2007. This is while the net worth of all households, on average, increased by 64 percent, 1983 to 2009.

“The biggest story for the early and mid-2000s is the sharply rising debt-to-income ratio, reaching its highest level in almost 25 years, at 119 percent in 2007. [Up from 68 percent in 1983, page 48] Also the debt-equity ratio (ratio of debt-to-net-worth) was way up, from 14.3 percent in 2001 to 18.1 percent in 2007."

Combining the data on page 44 (to 2007) with the data on page 33 (to 2009), the trends show that during the period 1983 to 2009 the median household wealth shrunk by 6 percent from $69,500 to $65,400. In the same period the average mean wealth of all households grew by 64 percent, from $270,000 to $443,600. The income growth (not wealth) between 1983 to 2007 (not 2009) shows that median income grew by 15.5% while average mean income growth grew by 27.9%. This can be restated: the average income grew 80% faster than the median (middle) income. And as stated above, over three quarters of the median household income growth, 1983 to 2007, occurred between 1983 and 1989. So, while median income virtually stayed flat, 1989 to 2007, the average income grew by around 80 percent. This is the evidence of stagnant wages and income in a growing economy. And while wages were stagnant, the net asset worth of the median household declined 6 percent, 1983 to 2009.

The majority of American families have been left out. In 2007 the top one percent of households earned more income (21.3 percent of the national total income) than the bottom 60 percent (who earned only 20.7 percent in 2007) (see page 45). The top one percent, owning 37.1 percent of all assets, owns more wealth than the bottom 90 percent of U.S. households. Again, the bottom 40 percent of households own less than $2,200 on average. For every one dollar in savings among the lower 40 percent of households (or 48 million households or 120 million citizens out of 309 million total population), the top one percent holds $9,000 in savings. ($18.5 million divided by $2,200)


This imbalance of wealth and income bodes ill for economic recovery. This is why I, and others (see previous essays here), argue for a 1939 style government sponsored work program that would directly hire the un- and underemployed, at least 17% of the workforce or 26 million workers, in work paying between $14 to $18 an hour over a period of five years or more to shift the income and wealth distribution of the nation. This is what the nation did between 1939 and 1946.

Capitalism flourished after WWII because aggregate demand was restored. Wealth distribution had become more balanced by 1949. Between 1929 and 1949 the the top one percent of households' portion of the nation's wealth decreased from 44 to 27 percent (See, indicating more savings and more purchasing power to the middle class. Idle and unproductive wealth in the 1940s was invested in war bonds, this transferred into workers' paychecks, and then into workers' savings accounts --- a transfer of wealth. In 1939, ten years into the Great Depression, unemployment held stubbornly at 19 percent. That rate dropped steadily for four years due to government jobs creation in the war industries. Finally, during 1943,
1944 and 1945 the unemployment rate sank below 2 percent. Concurrently national household savings exceeded household debt creation for the only time on record, 1913 to 2010. For instance, in 1944 the average family savings was $12,807, and debt creation was $7,475. This in contrast to 2007 when savings was $449 and debt creation was $121,650 (according to The Debt Trap, New York Times interactive article; link to "series index" and then to "Interactive, The American Way of Debt" by Amy Schoenfeld and Matthew Bloch. --- when you get to the page, look at the bottom right for
"series index" and clicking that will pull up a row of images, look for the third to the left,
click that and you'll see the chronological portrait of debt creation vs. savings). During much of this seven year period, 1939 to 1946, consumer goods were not in production. For instance, "between 1943 and 1945, the American automobile industry produced exactly thirty-seven automobiles," according to John Steele Gordon (An Empire of Wealth, page 357). With the rationing of thirteen commodities and the wholesale conversion of industry to wartime production, a wartime austerity hit the American family. Mostly war armaments and equipment were produced, and because young men were away at war, household debt creation was suspended for the duration of the war.Full employment -- that is, everyone working -- and nothing to buy built the bank account savings of American families. In 1946 the nation was prepared and ready to spend. Even though the national debt hung over 120 percent of GDP, gradually the economy grew through the national debt and it was reduced to 35 percent of GDP by 1965, where it held for 15 years until the Reagan era. After WWII the popular labor union mentality was strong, aggregate demand was restored, and importantly

the 90 percent income tax on only the topmost incomes held the tide on inequality. The economy was prepared for a 30 year unprecedented run. The real incomes of all American families -- poor, middle, and upper income -- all doubled in real terms during the 1947 to 1973 period. The economy grew and all families shared the growth, unlike the past 30 years.

Today the nation still has an immense amount of important work to do such as child care and educational services, highway repair and infrastructure construction, green energy conversion projects that run the gamut. The imperative of allocating capital and resources only into profit creating enterprises is strangling the nation. The inequality that has been the hallmark of the past three decades has crippled aggregate demand, so that purchasers and consumers have not enough purchasing power to revive corporate expansion which would drive, and historically has driven, economic growth. Capitalism must harmonize its competing cross purposes; the national surplus (annual profits) must be distributed to both consumers and owners of corporations. Without consumer purchasing that powers corporate expansion, jobs will not be created, incomes will languish, and purchasing power will be absent. As the King, Yul Bryner in The King and I, said: “Et cetera, et cetera.” It’s a downward spiral.

Politically we must demand a shift in our practices and thinking.

On August 14, 2010, Robert Reich, former Secretary of Labor, published an article outlining the same strategy. (See “Forget a Double Dip. We’re Still in One Long Big Dipper.” See Marshall Auerback's essay "The Real Lesson from the Great Depression -- Fiscal Policy Works" at New Deal 2.0 where
he states, "the Roosevelt administration reduced unemployment from 25 per cent in 1933 to 9.6% per cent in 1936", and claims,
"It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock. So much for the notion that government jobs are not “real jobs”, as we hear persistently from critics of the New Deal!"Furthermore, the web pages Drive for Decent Work -- Full Employment Now and have many federal jobs creation proposals to peruse.

August 17, 2010