![The "Occupy Wall Street" demonstrations are a distant memory, but the economic disparities they decried still persist. [Credit: ABC News]](https://i0.wp.com/www.dougsbriefcase.com/blog/wp-content/uploads/2013/07/credit-ABC-News.jpg)
The “Occupy Wall Street” demonstrations are a distant memory, but the economic disparities they decried still persist. [Credit: ABC News]
That the economy still needs fixing at this point in his tenure is a damning admission. It still hasn’t fully recovered from the financial meltdown of 2008 and probably won’t during his presidency. One would think he would avoid calling attention to that fact. Instead, he chose to give the first in a series of economic speeches at Knox College in Galesburg (IL) , the place where he delivered his first public address as a US Senator in 2005.
There is something poignant about the choice. In 2005, the newly-elected Senator already had been tagged by corporate news outlets as a contender to succeed President Bush, a man they reviled. Obama was everything Bush was not – young and well-spoken, a professor of law and community activist, a progressive cast as “post-partisan.” With his approval ratings now close to where his predecessor’s were at this point in his term, you can see how Galesburg might evoke nostalgia for the days when he was a more popular and less polarizing figure.
It also invites a look at how far our economy has fallen and how parlous our government’s fiscal predicament has become in the 8 years since the first Galesburg speech.
| Economic/Fiscal Indicator |
July 2005 |
July 2013 |
| First quarter GDP growth | ||
| Prior year deficit as pct of GDP | ||
| Government debt held by public | ||
| Prior month unemployment rate |
5.0% |
7.6% |
| Prior month workforce participation rate |
66.1% |
63.5% |
| Real median Household Income |
$54,000 |
$51,500 |
In 2005, Senator Obama was imagining himself in the White House. He did not imagine it would be like this. The man who once vowed to “remake the world” now has to launch a months-long campaign just to get Congress to pass bills to raise the government’s borrowing limit and fund its day-to-day operations. Positioning himself for this fall’s showdowns over those prosaic bits of legislation was the principal purpose of this week’s Galesburg speech and its sequels in Jacksonville (FL) and Warrensburg (MO).
The President also is using these speeches to advance his narrative about an economy that remains surprisingly unresponsive more than four years after the recession ended. “We’re not there yet” was perhaps his most memorable line; it’s not my fault, his most insistent message.
Above all, he promised to help the middle class by attacking economic inequality. The proposals he laid out were familiar, small and not up to the task. The widening gap between rich and poor and the erosion of the middle class began long before he took office and has worsened since. It isn’t caused by our tax code, among the world’s most progressive, and won’t be remedied by raising its top rates. Nor will it be cured by stimulus bills, government construction projects, bigger student loan subsidies or other bromides the President has proposed. It defies policymakers in the US, Europe and Japan, where inequalities have widened as monetary interventions have multiplied.
The most striking inequality in highly developed countries isn’t between incomes; it is the rising ratio of wealth to income. University of Paris economists Thomas Piketty and Gabriel Zucman studied those ratios in 8 countries over the course of centuries. Their biggest finding: wealth to income ratios in advanced twenty-first century economies (including ours) have returned to levels similar to those of the 18th-19th centuries.
What is a wealth to income ratio? It measures the amount of wealth – land, homes, investments – that citizens of a country hold and compares it to the total incomes they earn. LeBron James will likely earn more this year than you will earn in a lifetime. That’s income inequality. But he also owns more and bigger houses, more and fancier cars, and has a much bigger investment portfolio than you. That’s a measure of wealth. A country’s wealth to income ratio compares the sum of all the wealth individuals hold to the sum of their wages. Income is the life blood of the middle class; wealth, though distributed broadly (many own their own homes and have some savings), is highly concentrated.
In 2010, aggregate wealth in our country was 4.3 times as large as aggregate income [Databook, table A‑1], for a ratio of 431%; it reached its nadir in 1944 at 276%, just before the growth of the middle class hit full throttle. The contrasts are more striking in Europe. The UK, for example, had a wealth to income ratio of 527% in 2010, compared with 196% in 1948, its lowest point. The authors believe that the ratio for both countries has likely risen since 2010 (p. 18).
The current ratios recall disparities that existed in the 18th and 19th centuries when wealth was primarily denominated in land (and, in the case of the US South, slaves; see Figure 12). In those days, Europe’s nobility and America’s upper classes owned large swaths of land. Today, land counts for just a tiny fraction of wealth. It has been replaced by other forms of wealth, principally investments (Figure 4).
Piketty and Zucman suggest many reasons for this return to earlier times, including the decline in population growth that has occurred in all eight countries they studied. When population growth slows, aggregate income slows with it (p. 20).
Over the course of centuries, Piketty and Zucman found, the ratio of wealth to income has followed a U‑shaped curve: high in the 18th and 19th centuries, sharply declining in the first half of the twentieth century (see Figure 3; the social effects of this decline on the British landed nobility are chronicled in “Downton Abbey”), and rising since to earlier levels. The trend is least pronounced in the US, which avoided the devastation and destruction wrought by two world wars, fought largely on European and Japanese soil (Table 10). The US suffered enormous loss of life during those times, but its cities weren’t bombed and its population wasn’t decimated.
Policymakers don’t talk much about the wealth to income ratio. The President, for example, has a lot to say about income disparities. He generally uses that to argue for higher taxes on “the rich,” insisting that they pay their “fair share.” His policy prescription would, ironically, increase the wealth to income ratio. The authors note that if they had used “disposable income” – the amount people earn, net of taxes and transfer payments – instead of pre-tax income, the wealth to income ratio would be even higher (p. 19).
The growing wealth to income ratio might provide one piece of the puzzle in explaining why our “recovery” from the most recent recession has been so weak, uneven and unkind to the middle class. We’re not creating enough jobs, the primary source of middle class income; two million fewer people were working last month than in early 2008 and the labor force participation rate continues to hover near 30-year lows. Real median income has declined. But we are creating wealth; the Dow and S&P averages earlier this month reached all-time highs.
Those disparities are, at least to some extent, the result of the policy of the Federal Reserve. The Fed has suppressed interest rates and is buying government and mortgage-backed bonds at the rate of $85 billion per month. The theory is that cheap credit will keep banks healthy, enabling them to lend to individuals and small businesses. The biggest banks are healthy; but they’re not lending nearly as much as the Fed’s economists had predicted or hoped. The other benefit is that big corporations will see their stock prices rise and their borrowing costs drop, fueling bigger profits that will, in turn, induce them to hire more people. There is strong evidence that the Fed’s policies have padded corporate profits, but the jobs have yet to materialize. The wealth to income ratio continues to grow.
It’s not supposed to work this way and no one (including me) seems to know why it has. For the Federal Reserve and its sister central banks in Europe, Japan and elsewhere, the solution is to keep doing what they’ve been doing and hope for a different result. Perhaps that result will one day come.
But perhaps the rules of the game are changing in ways that aren’t captured in the computer models that inform monetary policy. Central banks and governments need to consider the possibility that their theories are flawed and that models better matched to current realities are needed. Pikety and Zucman’s work suggests that the world today isn’t the world of 1950; deeper and larger trends are in motion. If they’re right, then maybe it’s worth trying to understand those trends and ascertain their causes. Perhaps policymakers will come to see that their actions have exacerbated the problems they’re trying to solve.
It is ironic that the President who spoke so often about economic inequality will be remembered for an economy in which the gap between Wall Street investors and middle class families widened into a chasm. In trying to revive the middle class, the President who once proclaimed that his presidential nomination marked “the moment when the rise of the oceans began to slow” may be standing against economic tides that he cannot command.
The President and his apologists say it isn’t his fault. They may well be right.
lead by fear and intimidation
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