The 1% is Hogging so much of our Income that it’s Holding the Economy Back

(By Anthony W. Orlando)

Over the past few years, I have encountered a lot of myths about the so-called “One Percent.” Now that my book Letter to the One Percent has been published, I’d like to share one of the most pernicious myths with you.

We all know that inequality has been rising and the average American household has been suffering. There is a myth that says all this suffering is necessary, that extreme inequality is the by-product of a rapidly growing economy—or worse, that it’s a good thing because it motivates everyone to work hard and climb the long ladder to the One Percent.

Even a brief glance at the historical record reveals just how perverted this hypothesis is.

For one thing, the economy has not been growing rapidly since inequality started climbing. From 1950 to 1980, “real gross domestic product (GDP)”—the output of the economy, adjusted for inflation—grew by 3.8 percent per year. From 1980 to 2010, it grew by 2.7 percent per year. (Since then, it’s been even worse.)

So income inequality hasn’t been “growth-enhancing” at all. In fact, just the opposite.

The United States isn’t alone in this experience. Economists at the International Monetary Fund recently compiled the most comprehensive data set to date: 140 countries over 6 decades. They consistently found that countries with less inequality experienced stronger, more sustained economic growth and fewer, less severe recessions.

It’s been widely publicized, for example, that Europe has suffered from higher unemployment than the United States in recent years. Many Americans falsely believe that Europe is more equal than the U.S., but a new data set compiled by the economist James Galbraith and the University of Texas Inequality Project shows inequality between countries and regions across Europe for the first time—and they find that Europe has had higher inequality than us since the 1970s. It’s only within specific countries that inequality is lower than the U.S., and guess what: Those countries tend to have lower unemployment than us.

The reason is quite simple: Those workers are also consumers. When the 99 Percent earn more, they spend more, and the One Percent can produce more and earn more themselves.

“In this sense,” says the wealthy entrepreneur Nick Hanauer, “an ordinary middle-class consumer is far more of a job creator than a capitalist like me. […] Anyone who’s ever run a business knows that hiring more people is a capitalist’s course of last resort, something we do only when increasing customer demand requires it.”

Or, as the late economist Michal Kalecki used to say, “The workers spend what they get and the capitalists get what they spend.” What he meant by that was that the rich can afford to save more of their income—and, indeed, we find that the One Percent continue to save 15 to 25 percent, while the saving rate of the 99 Percent has plummeted close to zero. If too much money goes to the One Percent and not enough to the 99 Percent, the economy will save more and more and spend less and less, until there isn’t enough consumer demand to justify increasing production and investment. Thus, the economy will slow down.

For awhile, the 99 Percent were able to make up for lower incomes by saving less and borrowing more, and for awhile, the economy indulged them with rising asset prices—first in the stock market, then the housing market—and falling interest rates. But this was not sustainable. Eventually, interest rates hit zero, households spent all their savings, incomes couldn’t keep up with debt payments, and asset prices stopped rising. Hence, the Great Recession.

The only real solution is to pay them higher wages.

“If the typical American family still got today the same share of income they earned in 1980, they would earn about 25 percent more and have an astounding $13,000 more a year.

Here’s how Hanauer frames it: “If the typical American family still got today the same share of income they earned in 1980, they would earn about 25 percent more and have an astounding $13,000 more a year. Where would the economy be if that were the case?”

When those workers earn more, they also invest in health and education, making them more productive. They’re also less likely to go out on strike, resulting in less uncertainty and more investment. Higher wages also force companies to invest more in advanced technologies that reduce costs, increasing productivity and global competitiveness.

More equal societies also don’t have to waste resources on what the economist Samuel Bowles calls “guard labor,” employing people to keep the lower classes in line. Bowles estimates that one in four Americans are working as guard labor, everything from factory supervisors to police officers.

And our government is more likely to invest in public resources that we all need to be productive—infrastructure, research and development, safety and quality standards—if all Americans feel that they’re “in it together” and not separated by class, and thus they’ll all benefit from the investments.

But the effect that strikes at the heart of the American Dream is the way that inequality makes people in the 99 Percent feel that they’ll never succeed, no matter how hard they work. The theory that extreme inequality is motivational, it turns out, is completely backward.

The divergence between the One Percent and the 99 Percent is clearly at odds with the America we want to live in.

Anthony W. Orlando is a Lecturer in the College of Business and Economics at California State University, Los Angeles. This op-ed is an excerpt from his new book Letter to the One Percent, published this month by Lulu Press, Inc. To learn more, visit www. LetterToTheOnePercent. com.

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27 Responses

  1. Alex

    @joe90kane Selfish b’stards! If only they could make do with 0.5%, we’d all be better off in the very long run! Honest.

  2. John Ballard

    It’s not about the accumulated net worth, Jeremy. The problem is that the wealthiest people STILL accumulate more NEW wealth, skimming it from income of the rest of the population, many of whom not only have little or nothing in the way of net worth, but in accounting terms actually have negative net worth.

    This is not about redistributing net worth. It’s about redistributing NEWLY CREATED wealth. Our economy has become something like an all you can eat buffet with big people with heavy appetites eating everything that comes from the kitchen faster than others can get any more than a few scraps.

    link to hootsnewplace.blogspot.com

  3. “Those workers are also consumers”.

    And herein rests the real problem. Arguments and discussions such as the one above are always tied, it seems to me, with growth and consumption; but inherent in that consumption is resource depletion and environmental degradation. Hence we face a truly horrible conundrum: how do we create prosperity, or even, at the very least, meet minimal requirements that support freedom, health, and the pursuit of happiness, and at the same time live in a way that keeps the planet livable and life sustainable?

    Even liberal columnists such as Paul Krugman rarely connect the dots; hence plenty of columns about stimulating growth tied to consumption, even as he rolls his eyes at climate change deniers. But with a couple of billion more humans looming in the population math, coupled with income inequality, environmental free-fall, and a largely tech-addled and entertainment-addicted public, I don’t see an exit strategy for us, and certainly no frank discussions about the paradigm shift required if we are to survive as a species. Income equality may, unfortunately, soon become the least of our troubles.

    Any commenter could respond to this with arguments about the green economy and green energy as a tool for growth – but that assumes the political will to implement it, and folks – near as I can tell we ain’ts gots it!

    As Juan put it succinctly in his post on May 25, 2005: Sometimes you are just screwed.

    • Very succinctly put. I agree to some extent that there does seem to be conflict between environmental sustainability and economic equality – particularly if our only solution to the latter is a form of redistribution of wealth.

      Surely, in our current model, the super-wealthy pose the greatest potential threat to environmental sustainability. I don’t know what the ideal solutions to these problems are, but complacency to economic disparity is certainly not in the best interest of sustainability.

  4. Very true John. Those in the know would have very little getting their hands on newly created money. A perfect example would be current quantitative easing – all sucked up by the mega rich. The machinery remains in place for the richest of us to continue doing what they do, and these articles, and my whining, likely makes little difference. Guess the 99% have to focus on finding intrinsic wealth.

  5. What’s missing from this article is the crucial role government can play in reducing excessive wealth and income inequality. The life of patents and the tax rate on capital gains are not laws of nature. Consider:
    Question: True or False: Rising income inequality is simply the result of impersonal economic forces that have affected the US and the rest of the advanced world.

    Answer: False. “The sharp rightward shift in U.S. politics is unique among advanced countries; Thatcherite Britain, the closest comparison, was at most a pale reflection. The [impersonal] forces of technological change and globalization, by contrast, affect everyone. If the rise in inequality has political roots, the United States should stand out; if it’s mainly due to impersonal market forces, trends in equality should have been similar across the advanced world. And the fact is that the increase in U.S. inequality has no counterpoint anywhere else in the advanced world. During the Thatcher years Britain experienced a sharp rise in income disparities, but not nearly as large as the rise [in the U.S.]…, and inequality has risen modestly if at all in continental Europe and Japan.”
    “[T]he forces of technological change and globalization have affected every advanced country: Europe has applied information technology almost as rapidly as we have, cheap clothing in Europe is just as likely to be made in China as is cheap clothing in America….In terms of institutions and norms, however, things are very different among advanced nations: In Europe, for example, unions remain strong, and old norms condemning very high pay and emphasizing the entitlements of workers haven’t faded away….There is…a…case for believing that institutions and norms, rather than technology or globalization, are the big sources of rising inequality in the United States.”
    link to detailedpoliticalquizzes.wordpress.com

  6. Jeremy Spoon

    That is not a correct way of looking at it. The second that you attempt to start redistributed “newly created” wealth is the second that wealth that would have been created gets destroyed. Incentives telling someone that most of the wealth that you create through a new good or service is going to be takin away through taxation is just going to make someone not risk their saved capital at all. It’s astounding to me that people can, after so many examples of societies either staying poor or turning poor because of an emphasis on redistribution, can honestly think that “better growth” comes from high taxation and redistribution. In the long run that is 100% always wrong. It’s just so simple too. Think about if you were playing blackjack and the house rules stated that if you win, 60-90% of your winnings go to the rest of the table. I’m pretty sure you would not be risking any of your money under those rules.

    • This is just typical Fox News/Randian blather, which completely ignores facts presented in the article, We have had much higher tax rates in the past, which are correlated with higher job rates and economic growth. Let’s say you’re Steve Jobs/Bill Gates. You think they stopped for a second to say “hey man, these tax rates are too high, we shouldn’t start our company”? Of course not, they’re not idiots.

      • The article completely fails to mention how much the top wage earners pay in taxes. How can the article purport to be factual if it doesn’t bring this up. Btw the top 20% pay 70% of taxes. The bottom 50% pay nothing at all. These are HUGE factors to the economy and upward mobility and yet nothing is mentioned.

        • Uhg! If the rich pay taxes that is because they benefit from the infrastructure to which the rest of us, indeed, all of us, contribute. The top 1% pay 30.8% of their income on taxes. The lowest 20% pay 16% of their income on taxes, not none as you erroneously assert. Moreover, a billionaire who pays 50%, hell, 70, 80, 90% on taxes faces zero hardship; someone who earns 33k a year and pays 16% on taxes will likely face considerable burden.

          Moreover I find your argument vague. What do you mean, huge factors to the economy and upward mobility? Just what are you implying?

          But it really doesn’t matter: anyone who argues for the power structure in this country at this point suffers from a pretty serious case of Stockholm Syndrome – either that, or is a hack who benefits from our disastrous “system”.

    • At present we have a system that redistributes wealth upwards, an artificially constructed invention that removes wealth from workers and channels it to capital owners. The assumption that taxation and redistribution is the only alternative to this system is a straw man. There are other ways to curb the rent-seeking in the economy without resorting to simply taking income and redistributing it. And that is assuming that redistribution is automatically a bad thing, which is far from convincing in itself.

  7. Jeremy Spoon

    Also – You are under the assumption that people are in the lower income brackets tend to stay there and that the only way that they will get access to any real wealth is by a central planner taking it away from a higher bracket group and giving it to them. In reality, most people in the lower income brackets don’t stay there for long. The same is true for higher income earners as well, generally their earnings fluctuate and they drop out of the top earnings brackets all the time.

    • You are delusional. Upward mobility is now greater in Europe than in the United States and reduced tax rates on the rich are producing a wealthy aristocracy that goes easily across generations. Your points were more true in the 1950s. Even then, minorities were largely exempted from those processes.

  8. You touched on it tangentially, but it bears re-inforcing that the rich spend money on things that are an economic dead end. The middle class is more likely to spend their money on things which increase efficiency or are innovative, which is where the real economic engine is. We are starving that engine.

  9. I read recently that in 1970 the top one percent of Germans got 11% of the income and the top 1% of Americans got 9% of the income. By 2010 the top 1% of Germans still got 11% of the income and the top 1% of Americans got 20% of the income. I do not know what the Germans are doing that the Americans are not doing but it looks to me like the American 1% has gotten away with murder for the past 40 years.
    But this question over looks something that I consider even more important. That is the idea that is constantly pitched by so many economists that GDP should always be increasing and that it can always be increasing. Such optimism is entirely unsuportable. The world will sooner or later and most like sooner run out of many of the important raw material to sustain the industrial living standards of Europe and the USA.
    The worlds corporations are acting like 8 or 9 or 10 billion people can live like the people in Iowa or Bavaria.
    Since this is not possible and since I thin that the resources sources of this planet have to be fairly shared I think that it is neccessary for Americans to be FORCED to lower thier living standards. Sadly many in the USA and Europe do not agree with me. They think that the rest of the world should FORCED to support the 1% and those other 19% that collaborate with the 1% to ensure their survival.

    • Germans have short elections and restrictions on advertising and campaign finance, so their politicians haven’t been bought out by the rich and ordered to radically change the tax structure. In other words, the US is just far more corrupt.

      • An important distinction between most European governments and U.S. government is the simple fact that European governments are more representative of their populations that are U.S. Governments. They have more political parties and are more inclusive than the two-party system in the U.S. Proportional representation and “choice” voting provide voters with alternatives if a political party fails to deliver on its promises. In the U.S., it’s vote for the lesser of two evils, waster your vote, of don’t vote at all.

  10. John Ballard

    No insult intended, but I’m not “under any assumptions.” My belief (and it is, actually, a *belief* which is probably the heart of our disagreement — more about that later) that the wage/income gap is causing the American economy to stagnate when it should be doing much better, is based on a lifetime of experience, working in food service management, the final 27 years before retirement with the same company, followed by five additional years as an hourly subordinate in a health care setting in order to have insurance until my wife and I got to Medicare. Though I was in management, earning far more than any of my employees (for a few years paying more in taxes than any of them were even earning) who were mainly the working poor. Some who were working second jobs or needed quick income between jobs on the way to better ones, but the core staff were not those transitional ones that upper management calls “turnover.” I learned in the early years that the “turnover” theme was more a tool used by upper management to beat up on unit and mid-level managers. But the company mail included “new employee” data — a precise index to turnover, since new employees are replacing those who are quit or discharged — for every unit for all to see.

    When I put someone to work washing dishes, cleaning tables or serving on the cafeteria line I had no expectation that they were making a career choice, nor should they be. Those jobs were paid the lowest and are not appropriate for anyone except the “working poor.” It was understood that anyone who wanted to earn more needed to get a higher-paying job. That meant they could either find one at another employer, or train and wait for one to become available where they/I were working. Everyone knew that cooks made more than dishwashers, that cashiers earned more than line attendants, etc. But in order to get those jobs three obstacles had to be overcome:
    1. There had to be an opening (job available)
    2. The candidate had to have the skills to do the job.
    3. A replacement must be available for the job the promoted person left open.

    (That last item is never mentioned, and I never had any problem filling a job opening. But in many organizations that an be a real obstacle to upward mobility.) But movement up the company ladder was very slow. It was not too challenging to train as a baker or a cook, but the incremental income improvement always meant a less flexible schedule, more responsibilities and worst of all, a longer wait til the next step. A cook or baker might wait several years to become an assistant head baker or assistant chef. And then the wait might approach a decade or more until people in those jobs reached retirement — which was far more common than their leaving for another job.

    Bear in mind that even those at these more desirable jobs were still not paid a lot of money. They earned jusst barely over the federal poverty level, if that in some cases. Those who could afford the company’s group health insurance were few and far between. In most cases the only employees with health insurance were covered by their spouses’ policies at other companies or were management level or above in ours.

    I’m being more specific than needed, perhaps, to underscore the fact that I know well what life is like for teh working poor. I have a deep respect for those who do their jobs, no matter how poorly paid they may be, with dignity and reliability. And I cringe every time I hear people speak condescendingly about “fast food” or ” hamburger flippers.” People who speak like that reveal a level of mean-spirited ignorance that really pushes my button.

    So please do not make the mistake of presuming that I come close to agreeing “that people are in the lower income brackets tend to stay there and that the only way that they will get access to any real wealth is by a central planner taking it away from a higher bracket group and giving it to them.” My experience does not bear that out in any way. What you say next is accurate, that “most people in the lower income brackets don’t stay there for long.” But it does not follow that most of the people working in those jobs are on their way to better jobs. Those who left almost certainly did, but those who remained — the ones on whom the business depends — did not. When I had to schedule two or more weeks vacation for more than half the staff because they had been employed five years or more, that means that all those others who left, presumably for better jobs, only represent a minority of the jobs available. “Turnover” creates an illusion (and possibly false assumption) of upward mobility that is non-existent for more than half the staff.

    I have no way of knowing who you are or what your background it, Jeremy. And I hope you don’t think I am being disrespectful when I say that at this late date in life I don’t like being told my opinions are based on false assumptions instead of a lifetime of experience.

    Now about “beliefs,” another conclusion I have made in life is that belief systems may govern our lives more than we like to admit. Whether it be religion, political affiliation, philosophical background or whatever — it is really tough to shake off any belief running counter to evidence. Or rather, it is hard to accept evidence that grates against our belief systems. That’s the basis of much of human conflict, from the Scopes “monkey trial” of the early part of the last century to the sectarian/confessional conflicts infecting the world over today. We see it clearly looking further back in history — amazed that people once hanged witches or waged wars over church doctrine in the Middle Ages — but we have a hard time imagining that personal belief systems have such a strong power today. We all like to think of ourselves as rational thinkers, open to new ideas, products of the age of science and discovery. How can we possibly be wrong about anything important.

    And yet we look around and see serious conflict in all directions.

    I don’t know about you, but I was spoon-fed a lot of wrong stuff growing up. And even more as I got older. Being from the South I was taught racial prejudice, for example, as being more than just a way of life. It was based on scripture, and there was plenty of evidence not only in the Bible but in the way those black people lived and acted in real life to support that belief. But I was wrong. Terribly wrong And it was not easy to abandon those beliefs. The same applied to other beliefs, but I think you can get the point.

    It’s likely that you and I will need to agree to disagree. But before we got to that place, I wanted to do as much as possible to let you know that there may be room for you to consider another point of view. I find it incredulous that anyone can watch those videos and see the same statistics that I do and come away with opposite conclusions. Our two grasps of the meaning of “redistribution” — yours and mine — are diametrically opposite. And I am at a loss to find words to help you know how disturbing that is to me.

  11. Jeremy, can you explain to me how someone can not risk their saved capital? You think of any scenario of what someone does with their capital and I will explain to you the risks involved with that choice.
    Furthermore your scenario about people being afraid to risk their capital rests the judgement that it (the capital) belongs to them in the first place. It is certianly not your fault that you have done that the idea that what you can get belongs to you is a value that is extremely imbeded in American culture, especially conservative culture. (Which made me think of a really funny one liner about conservative and their guns. I will not write it here or Juan will have a fit but I will write it somewhere else someday.)

    Emmi, I am glad that you made that point too.
    When I wrote my first comments none of the comments above mine were visable on my screen. Had I seen what had been written I would not have needed to write what I did write in my first comments.

  12. We must return to the tax system which takes a larger share of the 1%’s income. The rationale is that they earn so much as a result of the investment of government and the 99% in infrastructure and subsidies which they take major advantage of.

  13. An Alternative to Capitalism (since we cannot legislate morality)

    Several decades ago, Margaret Thatcher claimed: “There is no alternative”. She was referring to capitalism. Today, this negative attitude still persists.

    I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to my essay titled: “Home of the Brave?” which was published by the Athenaeum Library of Philosophy:

    link to evans-experientialism.freewebspace.com

    John Steinsvold

    Perhaps in time the so-called dark ages will be thought of as including our own.
    –Georg C. Lichtenberg

  14. Congratulations for making the clear case that extreme inequality is NOT good for the economy at all, just the opposite. I liked the way you turned the supposed “incentives” feature of inequality on its head. It has been very frustrating listening to economists talking about inequality and sluggish growth without connecting the dots. Even Paul Krugman just can’t accept the economic argument against inequality, resorting to social and political arguments instead. Larry Summers at the IMF Research Conference a couple of months ago surmised that we might be mired in “secular stagnation,” but he didn’t connect the dots. My son Sam and I tried to systematize the argument two years ago in our initial post on our blog inequality2012.blogspot.com, and I suspect a lot of economists young and old know something is terribly out-of-whack in the macro-economy of the early 21st Century. But they don’t seem to be able to put their finger on the central economic nexus: sluggish-growth-resulting-from-extreme-inequality. Keep up your excellent work. I look forward to reading your whole “Letter.”

  15. posed “incentives” feature of inequality on its head. It has been very frustrating listening to economists talking about inequality and sluggish growth without connecting the dots. Even Paul Krugman just can’t accept the economic argument against inequality, resorting to social and political arguments instead. Larry Summers at the IMF Research C

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