Redistribution of Income Revisited

In my blog The Redistribution of Wealth I made comments about the redistribution of wealth taking place in America, not as a result of taxes or liberal/socialist policies, but as a result of intentional economic policy which seemed to favor the wealthy to become wealthier.  The article in the Summer 2011 WILSON QUARTERLY, shows that from 1976 to 2007, the top 1% wealthiest Americans went from earning 9% of America’s total income to 24% – a sizable redistribution of income.  The article did note that simultaneously the American economic pie got bigger, so even those lower on the wealth scale benefited from the growing economy, but still the growth in income for the top 1% wealthiest Americans  was increasing very rapidly.

In the comments to that blog, Brian searched the Internet to check those facts and found a very different set of numbers which he listed in his comment.  His numbers look at the distribution of wealth between the top 1% wealthiest Americans and the 99% rest of Americans.  There it is obvious that the wealthiest 1% have historically and consistently owned a disproportionately large percentage of America’s total wealth, but then that is exactly what puts them in the wealthiest 1%!

Dn. Marty in another comment to the blog was able to locate the original article referred to in the WQ and reports the article is talking about income not wealth and so those statistics are quite different from what Brian quotes.  Thus is the world of facts and statistics – it isn’t so much a redistribution of the total wealth but the incomes of the top 1% are increasing at a fairly phenomenal and accelerating rate over the 31 year period from 1976-2007.

I think Dn. Marty’s comments solve the legitimate issue and questions raised by Brian.  The two sets of numbers are apples and oranges:  wealth vs. income.

The numbers Brian provided from 1922 to 2007 caught my attention in another way, which is more related to the original point I wanted to make: we see that the top 1% wealthiest Americans controlled a portion of America’s wealth ranging from a low point of 19.9% in 1976 up to a high of 44.2% in 1929.   I know I’ve read from several sources that in terms of American economics, the economy is strongest when a greater number of people share the wealth – this makes sense in an economy driven by consumer spending.  If only the elite few have a lot of disposable income, there won’t be much consumer spending.  When many/most people have income to spend – the economy benefits, and merchants and manufacturers are kept busy and prosperous.

So the numbers quoted by Brian  show (in my mind at least) a kind of Freakonomics thing about the economy.

In 1929, the top 1% wealthiest Americans possessed 44.2% of Americas wealth.  That is the all time high on the chart.   What happened in 1929?   The Great Depression.   The concentration of wealth in the hands of the few was bad for the economy as a whole.

In those same statistics, in 1976, the wealthiest 1% of Americans owned only 19.9% of Americas wealth, the lowest on the chart given.   This occurs in the years right before America went on an unabated 25 year period of economic growth; this was an unprecedented period of growth for the country.

But this growth was accompanied by the wealthiest 1% gaining possession over an ever increasing portion of America’s total wealth, peaking between 1995-1998 at just over 38% of America’s wealth.  In that same time period (1976-2007) the share of the nation’s income of the wealthiest 1% increased from 9-24%.    And then we come to 2007 when the wealthiest 1% controlled just over 34% of the nation’s wealth (and those numbers were on a annual upward trend) AND now earned 24% of the nation’s income.  Result again?  The Great Recession of the 21st Century.

There are so many factors that enter into this picture, many events outside the U.S., but still the notion that the economy does benefit when wealth is shared by a greater number of individuals seems to be in these statistics.   From 1976 to 1995, the top 1% wealthiest Americans doubled their  share of America’s wealth from 19% to 38%.  Remember the pie also got bigger so many people lower on the scale also owned “more” but relative to the whole pie, the bottom 99% had a much smaller share of the larger pie to divide up. (see also my blog American Ingenuity and Re-inventing of Government).

It is something to think about – a freakish co-incidence or Freakonomics?  When the total of America’s wealth or income gets concentrated in the top 1% of wealthiest Americans to the tune of 34-45%, is that a good predictor that the country is in for another great recession/depression?

If it is, then the question becomes, since the economy is totally human made, and we can recognize the warning signs that the economy is reaching a point where a great recession/depression is imminent, should we form policies that prevent this scenario from ever arising by insuring that wealth and income are spread over a greater portion of the population?

America became immensely wealthier through the years, but even that gargantuan increase in wealth/capital could not prevent the economic collapse/disaster which hit the country over the past few years.   Could better economic policies have helped by recognizing the signs that the system was getting out of balance?

The economy is a human made product.  Are there not ways that humans can help regulate it so that it better serves us all?   I know today government regulation has a bad name, but the economy is not mother nature, it is completely human made and responds to and is  shaped by human speculation, human fears, lack of confidence, human error, human greed, political gridlock, and world events.  And while many don’t trust government to do any better with the economy than investors or Wall Street or the banking industry, government of, by and for the people is a potential force to check other forces we’ve created.