The Incredible Rise Of The Top One Percent Will Soar Post COVID-19
Path-breaking research at the RAND Institute – a normally staid think tank — shows the distribution of the wealth of our nation. The distribution of Gross Domestic Product (GDP) over the last 45 years has been transferred from the bottom and middle-class to the very rich mainly because profits and managerial salaries grew faster than workers’ wages. The distribution of post and pre-tax income was not that different, which surprised me because tax policy has favored the highest income families recently.
Rand mathematician, Carter C. Price, and economist, Kathryn Edwards, show the dominant cause of the bottom 90% getting less of GDP over time, while the share to the top 5% has doubled, is the balance of power between labor and capital has shifted to capital (that is how you can read between the lines in the RAND paper conclusion on page 39).
Nearly $50 trillion – or around $2.5 trillion per year (in 2018 dollars), has been redistributed from the bottom 90% of income earners to the top 1% since the mid-1970s. If wages had not been distributed to profits, a median prime-age full time worker earning $50,000 annually in 2020 would instead be earning $92,000-$103,000, had earnings kept pace with inflation and GDP.
Pattern Of Unequal Growth
According to the RAND Report, in the 1975-1979, 1980-1990, and 1991-2000 business cycles, the U.S. “settled into a pattern of unequal growth” —the income for the bottom four quintiles grew the slowest and income – consisting of earnings to some extent but mostly, interest, dividends, profit sharing, and capital gains— to the top 5 percent grew the fastest. Additionally, earnings of rich and high income households grew faster than GDP and inflation.
I recommend the RAND report because as an economist doing research in the area of wealth inequality because it goes the extra mile, as do well-known economists Thomas Piketty and Emmauel Saez and others to identify the holdings of the very well-paid and to make this data easy to understand by offering a measure, I call it their “realized income index,” that goes beyond a Gini coefficient and income shares to take into account that how a person’s income should have grown if it kept up with inflation and GDP. For example: many Americans have low income so that in 2018 the median was only $36,000 (up from $26,000 in 1975). If the median had grown with inflation-adjusted GDP, the median income should be 60% higher – or $57,000. Where did that $21,000 go? To the top income holders. For example, those in the top 1% had a average income of $1,160,000 in 2018. If their income had merely kept up with inflation-adjusted GDP it would have almost a half a million less, $549,000. “The average income growth for the top one percent was substantially higher, at more than 300 percent of the real per capita GDP rate” (see page 10).
Among the 50% of all working men who earn below the median, racial earnings gaps have closed substantially. So have gender earnings gaps. But the incomes of most white men — even college educated white men — have not kept with inflation or GDP, because the minority of owners at the top have garnered larger shares. The RAND authors account for the drastic increase in more educated women and nonwhite people working over time.
Inequality Will Get Worse Post Vaccine
The ominous signs the economic recovery may be K-shaped —meaning up for the higher income individuals who own stock and down for those with lower incomes— is taking shape. Most Americans have no real stake in the stock market. In Spring, while GDP plunged and unemployment fell mainly on lower income workers, the financial markets soared to new heights. Even Federal Reserve Chair Jerome Powell felt compelled to point out the growing inequality. As the Fed noted in May, 40% of those earning under $40,000 will lose their jobs in the COVID-19 recession.
And since the top 10% own over 84 percent of the total value of stocks, and the highest income workers were much more likely to keep their jobs, inequality grew. U.S. billionaires’ wealth grew by more than $400 billion in the Spring. For example, as the demand for online shopping and economic news exploded Amazon and Washington Post owner Jeff Bezos’ grow over 30%.
And that is a trend long in making because of the fall in labor share.
The results of the RAND study make sense given labor share of GDP has fallen over time (see McKinsey and Thomas Piketty’s best-selling book). The underlying structures of society have not increased workers’ bargaining power, especially with the decline in unions.
What is notable is the underlying structure of the Post-Vaccine Economy will also not increase worker’s ability to get labor’s share of growth. The wealthy are always more likely to win in recessions. During recessions, wealth and income inequality grows. Winners in all recessions are the people who have wealth — especially if financial markets are strong, the wealthy keep their jobs and hours, are able to work from home, and can use their excess cash and wealth buy what struggling owners decide to sell for cash: lower-priced small business, lower-priced stocks and bonds, and perhaps even a lower-priced house or two. The COVID-19 recession will cause more wealth, income, and health inequality.
As an uber one percent-er, Ray Dalio, wrote that extreme inequality may mean an uprising in America. The RAND Report dovetails Dalio’s 2018 warning which shows capitalism has evolved in such a way that the majority of Americans have gotten much less than those at the top. Dalio wrote American capitalism has created, “widening income/wealth/opportunity gaps that pose existential threats to the United States because these gaps are bringing about damaging domestic and international conflicts and weakening America’s condition.” We know Post-Vaccine America will bring even more wealth, income, and health inequality.