Abstract
Conley reflects on income inequality in the United States, and how our collective investment in the market likely ensures its perpetuation and growth.
Keywords
The top one percent of Americans reaped 70 percent of income growth during a period of economic expansion, average people became over-leveraged, and stocks soared.
At its most concentrated, that top one percent took in nearly a quarter of the national income. The economy got top heavy, the stock market crashed, and economic depression descended like a worldwide fog.
Sound familiar? Perhaps you’re thinking Lehman Brothers, the Troubled Asset Relief Program (TARP), and the subprime crisis. But I’m talking about 1928-29. While the similarities in the lead up to the Great Depression echo eerily across the century, the aftermath of this crisis is anything but comparable. After the Great Depression, inequality leveled out until 1969; by contrast, since 2008, inequality has only continued its steady rise.
Tea Partiers and left-wingers who opposed TARP might say the reason for this difference is obvious: in 1929 there was no bail out of Wall Street (or the nascent auto industry, for that matter). There wasn’t even deposit insurance. The free market was left to destroy fortunes—ill-gotten or not—”correcting” gross wealth inequalities in the process. No doubt, TARP (and even the FDIC) does play a role in explaining the differences between income inequality in the Great Depression and the Great Recession, but these days there are deeper social forces that powerfully—though subtly—alter the economic landscape and may have made TARP and other pro-Wall Street policies inescapable.
First, the forces driving wage differentials don’t show any signs of abating. Globalization combined with the rising skill-premium of a knowledge economy means there are sure to be more Bill Gates in our future (and that work will continue to get outsourced by their inventions). But the real kicker is that while labor market inequality will likely continue to rise, the interests of workers are increasingly yoked to those of their bosses.
Asset data are sketchy for the 1920s, but economic historians know that, while stock market participation did expand during those boom years, the overall rate was nothing like it is today. Thanks largely to the shift to defined contribution pension plans and the ease of internet investing, half of Americans now have direct or indirect investments in the stock market. The catch is that while many of us are in for a penny, it’s still the super-wealthy who are in for a pound. A study by the St. Louis Federal Reserve Bank found the richest 10 percent own upwards of 85 percent of stocks and other financial assets. So if the rest of us want to save our 401ks, we have to save the status quo for the super-rich, too. Thank heavens Social Security wasn’t privatized (as George W. Bush proposed in 2005), or we’d be even more beholden to the financial industry.
Ditto for the housing market—home equity makes up a greater and greater share of household wealth as we drift down the income ladder. Back in 1930, fewer than half of Americans owned a home; by its peak in the 2000s, the homeownership rate had hit 70 percent. So we’re all invested in real estate values. A sluggish housing market used to at least mean falling rents for those at the bottom of the pyramid, but today, when most of us keep our life savings in the form of housing equity, price drops are devastating. Plus, home ownership reduces workers’ ability to move for better job prospects; thus, limiting bargaining power.
Many scholars, including myself, have argued for the benefits of wider-spread asset ownership as a way to spread opportunity, good financial habits, a future orientation, and ultimately, a greater stake in capitalism and the rule of law. But we must be honest about the fact that an “ownership society” (to use Bush’s term) also means a country in which the economic interests of the wealthy and the non-wealthy are increasingly tied to each other. Populist anger aside, letting robber barons sink would drown the rest of us, too.
Taken together, these trends suggest inequality is a quasi-permanent feature of the economic landscape. While research has yet to establish a causal link between inequality levels and human outcomes, it seems intuitive that there must be some effects of economic polarization. The problem is that while in absolute terms, everyone wants the same things—rising house and stock prices—in relative terms, those in the middle (and bottom) fall further and further behind. In other words, a rising tide lifts all boats, but that same tide causes more and bigger financial waves that risk swamping the dinghies while sparing the ocean liners and oil tankers.
Many on the left wonder why there isn’t more of a backlash against rising inequality. But it’s really not too bewildering—we’re all implicated in the greatest Ponzi scheme ever. How to keep from swindling ourselves is the trick.