Wayne O'Leary

Annals of Inequality: the Market Factor

Is the American economic system rigged against ordinary people? During a decade (2010-19) in which inequality has risen the most for any 10-year period in US history (per Moritz Schularick, a German economist studying this country’s wealth distribution), a decade ending with the richest 1% commanding one-fifth of the nation’s yearly income and more than one-third of its total overall assets, while the bottom 90% remains financially underwater to the tune of a 30% loss in median wealth since the 2008 crash, the answer would appear to be resoundingly in the affirmative.

Symbolically sealing the deal is this charming tidbit of information: As of 2018, the three richest Americans (Amazon’s Jeff Bezos, Microsoft’s Bill Gates, and Berkshire Hathaway’s Warren Buffett) had the same amount of accumulated wealth as the entire poorest half of the US population — 160 million people in all. Bezos had the distinction of becoming America’s first centi-billionaire with individual assets exceeding $100 billion.

Wealth has now become so concentrated at the top that the prestigious “Forbes 400” listing of America’s financial celebrities can accommodate only those with over $2 billion; most recently, 207 disappointed billionaires had to be left out. Meanwhile, the latest Credit Suisse Global Wealth Report (for 2018) placed the nation’s median national household wealth at barely $56,000. Altogether, 17% of Americans were judged by the Organization for Economic Cooperation and Development (OECD) to be “poor” (twice the international average for developed countries), because their incomes were less than half the nationwide median income — in this case, under roughly $30,000 per year.

Clearly, something has changed since the Reaganite supply-siders looked around them in the 1980s and saw “morning again in America,” as they started the ball rolling on their project of upward income redistribution. A generation later, the scene is more like an encroaching twilight spreading across the land after four decades of government of, by and for the corporations and the economic interests they serve.

First came the tax cuts, which created the surplus capital that found its way to Wall Street and into the stock market, forming the basis for the expanding inequality to come. They’ve continued unabated to this day; not without reason was the Trump tax law of 2017, which inflated corporate earnings 22%, widely characterized as a tax act for shareholders.

Equities are owned almost exclusively by those with substantial financial wherewithal. Data provided by NYU economist Edward N. Wolff shows that as of 2016, 84% of the value of all stocks owned by Americans was owned by the wealthiest 10% of households; that figure included the value of all investments in 401(k)s, IRAs, pension plans, trust funds, and mutual funds. Furthermore, nearly 40% of all stock was owned by the top 1%, which the IRS defines as individuals with incomes from $515,000 to infinity — 1.4 million Americans, or roughly one in 230.

In an effort to defend this dubious system, its apologists like to claim it’s democratic on the grounds that about half of Americans technically own some stock, but that belies the fact that their market stake is comparatively miniscule. Generally, it takes the form of a passive retirement-savings vehicle, such as a 401(k), invested in mutual funds or company stock. Between 30% and 40% of active workers maintain 401(k)s, but balances are small, typically averaging $100,000 and often much less.

The real money, of course, goes to the big players in the stock market. Two professors at NYU’s School of Law, Lily Batchelder and David Kamin, calculate that in 2016, families in the top 1% making $53 million or more for the year acquired 70% of it through dividend payments and capital gains on sale of their stock. This would be $37 million in unearned income for those at the starting $53 million level. The next logical question is how that stock became so valuable, and the answer is the one percenters have secret friends in government — the eminent members of the Federal Reserve Board.

For the past generation, the American economy has been performing unevenly; it’s experienced recessions with disturbing regularity, most recently in 1980, 1981, 1990, 2001 and 2007. Employment has fluctuated wildly, reaching periodic lows not seen since the Great Depression, before eventually bouncing back minus decent pay and benefits. Jobs are now impermanent, here today and gone tomorrow. As a result of these dislocations, household debt has increased, the middle class has shrunk, and economic inequality has seemingly become an enduring feature of American life.

But through it all, there’s been one constant, one thing that could be counted upon: an ever-rising stock market. The Dow Jones industrial average, the premier market indicator, went up tenfold between 1980 and 2000; it eclipsed previous highs 14 times between 1987 and 2013. And indices are still climbing, irrespective of economic “fundamentals.” The Dow, the S&P 500, and the Nasdaq have all set records over the course of the Trump administration under the ministrations of Jerome H. Powell, latest in a series of mostly conservative Federal Reserve chairmen dedicated, above all else, to the health and welfare of the investment community.

It’s long been accepted that the Fed officially has a twin mandate under law to maintain stable prices (that is, low inflation) and full employment, especially the former. Unofficially, however, the Fed has a third, self-assumed mandate few acknowledge — the nurturing of a continually rising stock market, which is accomplished these days by ratcheting down interest rates to close to zero to stimulate corporate earnings and encourage stock investment.

Chairman Powell, who freely admits that stock prices are a consideration in Fed decisions, is, like his recent predecessors, a devotee of low interest rates; he’s kept them lower under Trump than they’ve been in 40 years. Rate cuts are a proven way to lift stocks for the benefit of high-income Americans. First, they lower returns on bonds, the other alternative for big investors, thereby pushing money into equities. Second, they make it cheaper for corporations to borrow, boosting economic activity conducive to higher corporate profits and, in turn, inflated stock values.

After daring to raise rates slightly in 2018, Powell reversed himself completely and lowered them three times this year; it was a total capitulation to market demands, and stocks reacted accordingly, surging upward. Said one Wall Street investment manager smugly, “The Fed will do what we want.” The one percenters cheered.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, January 1-15, 2020

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