The magnitude of exploding inequality since the mid-1970s is captured by the following: Between 1979 and 2007, inflation-adjusted income,
including capital gains, increased $4.8 trillion — about $16,000 per
person.
\Of this, 36 percent was captured by the richest 1 percent of
income earners, representing a 232 percent increase in their per capita
income. The richest 10 percent captured 64 percent, almost twice the
amount collected by the 90 percent below. Between 1983 and 2007, total
inflation-adjusted wealth in the U.S. increased by $27 trillion.
If divided equally, every man woman and child would be almost $90,000
richer. But of course it wasn’t divided equally. Almost half of the $27
trillion (49 percent) was claimed by the richest one percent — $11.7
million more for each of their households. The top 10 percent grabbed almost $29 trillion,
or 106 percent, more than the total because the bottom 90 percent
suffered an average decline of just over $16,000 per household as their
indebtedness increased.
This soaring inequality generated three
dynamics that set the conditions for a financial crisis. The first
resulted from limited investment potential in the real economy due to
weak consumer demand as those who consume most or all their incomes
received proportionately much less. Not being capable of spending all
their increased income and wealth, the elite sought profitable
investments increasingly in financial markets, fueling first a stock
market boom, and then after the high tech bubble burst in 2001, a real
estate boom.
As financial markets were flooded with
credit, the profits and size of the financial sector exploded, helping
keep interest rates low and encouraging the creation of new high-risk
credit instruments. This enabled more of the elite’s increased income
and wealth to be recycled as loans to workers. Financial institutions
were so flush with funds that they undertook ever more risky loans, the
most infamous being the predatory subprime mortgages that often were racially targeted.
As the elite became ever richer, those below became ever more indebted
to them. When this debt burden became unsustainable, the financial
system collapsed and was bailed out by taxpayers.
Economists might have stood a better chance of foreseeing the developing
financial crisis had they thrown their nets far wider to catch the
insights that have been harvested by a wide range of so-called heterodox
economists. From the underconsumptionist tradition of Keynes, Kalecki,
and Minsky they could have developed an understanding of how inequality
affects aggregate demand, investment, and financial stability.
From the
institutionalist tradition of Thorstein Veblen they could have learned
how consumption preferences are socially formed by humans who are as
concerned with social status and respectability as with material
well-being. And from the Marxist tradition they could have seen how
economic power translates into political power.
Economists have failed
to grasp the wisdom of one of the foremost students of crises:
“the economist who resorts to only one model is stunted. Economics is a
toolbox from which the economist should select the appropriate tool or
model for a particular problem.”
Read more: How Mainstream Economics Failed To Grasp The Importance Of Inequality
