Wayne O'Leary

The Bifurcated Economy

Under American-style capitalism, some things never change. A system that literally takes from the poor and middle class to give to the rich is continuing on its merry way unrestrained and largely undisturbed.

Evan Osnos, writing in The New Yorker on the proliferation of superyachts among the world’s financial elites (“The Floating World,” 7/25/22), notes that in 1990, the US had 65 billionaires, a number that by 2022 had increased better than tenfold to over 700. During the same period, he points out, the median hourly wage among ordinary Americans rose just 20%, or well under 1% per year.

One of Osnos’ seagoing billionaires is Amazon’s Jeff Bezos, who had the effrontery earlier this year to demand the port city of Rotterdam dismantle a bridge to allow unrestricted passage for his own hulking superyacht. Bezos, a poster child for his class, also made contemporaneous news for dismissing any role his firm may play in boosting inflation and for his defense of low corporate taxes, denying companies like his own pay too little on their profits. Amazon, it turns out, took in $36 billion in 2021, yet paid only $2 billion in US federal taxes, a 6% rate; that’s a third the rate its workers routinely pay, which is fine with Bezos.

Bezos is not atypical among America’s one percenters. In June, the Institute for Policy Studies reported that annual CEO pay at the nation’s leading corporations jumped 31% in 2021 to an average of $10.6 million; that was double the rate of increase (17%) for workers at those companies (including Amazon), whose average median income was $24,000. Significantly, median wages at a third of the companies surveyed did not even keep pace with inflation. Despite rising profits and an expanding economy characterized by substantial job growth, the pay gap between chief executives and their employees widened rather than narrowed over the past year. The Economic Policy Institute (EPI) says that, based on its research, corporate CEOs now make 400 times what typical workers make.

This has become the perennial story of the unbalanced US economy, expressed most dramatically by who really owns the country. In May 2021, the New York Times revealed the following breakdown of the nation’s stock ownership: The wealthiest 1% of Americans owned 51% of directly owned stock, the wealthiest 10% owned 92%, and the bottom 50% owned no directly held stock at all. So much for the celebrated “ownership society.”

These figures are reinforced by statistics provided by Karen Petrou, managing partner of Federal Financial Analytics, and published in the Times in July 2021. The Petrou data, covering the past three decades, puts the lie to any notion that broad-based benefits have resulted from the economic-stimulus program followed for years by the Federal Reserve Board. In the process, it highlights the new national record for economic inequality established along the way.

At the beginning of 2021, the data shows, the richest 1% of Americans held 32% of the nation’s wealth, the most since such record keeping began in 1989; the bottom 50%, meanwhile, controlled barely 2% of national wealth. Since the start of the pandemic three years ago, the bottom half has gained a superficially impressive $700 billion in wealth, but that pales next to the combined gains of the top 1%, which totalled a stunning $10 trillion.

Those results, the Petrou report stresses, are the ultimate product of years of Fed stimulus policy (reversed only very recently) focused on ultra-low interest rates and so-called quantitative easing, that is, the Fed purchase of financial assets, such as bonds, to create monetary liquidity, stimulate business activity, and (especially) make borrowing easier.

The central bank’s trickle-down approach was premised on a belief, dating from the early 2000s, that pumping up the financial markets would encourage the wealthy to spend, and the more they spent (and invested), the more economic benefits would seep down by osmosis to the lower orders. It’s the same old philosophy, updated with a computerized and digitized vocabulary, that prevailed in the Gilded Age and the Roaring Twenties, and has largely dominated the years following the financial crash and Great Recession.

The Petrou analysis makes an impressive case that the Fed’s flat or negative interest-rate policy, supposedly the economy’s salvation, did little more over time than widen inequality. For example, the top 1% of income earners realized a combined $20 trillion wealth gain from 2008 (the start of zero interest rates) to mid-2021, while the bottom 50% gained at most $3 trillion.

Other measures show a similar disparity. Gains from the value of corporate equities and mutual funds, for instance, rose over 2,000% for the one percenters from 1990 to 2020 compared to under 1,000% for the bottom half of earners. And the value of real-estate holdings went up 500% for the one percenters between 1998 and 2021 versus less than 200% for the bottom half of the population.

The situation has played out no better for those Americans who chose to save rather than play the market or flip houses. Heavy investors gained an estimated 250% more after inflation during the flat-interest period 2007-21, when stock prices approximately doubled, than did conscientious savers; the latter actually lost money (factoring in inflation) during the Fed’s interest-rate holiday that just ended. Ben Franklin’s reputed aphorism notwithstanding, a penny saved is not a penny earned when Jerome Powell’s Fed calls the shots.

The “cheap-debt” policy long pursued by the Fed, which among other things encouraged US companies to use low interest to fund investor profits instead of new plants or equipment, finally ended this past March. Unfortunately, the horse had by then left the barn, leaving inequality embedded in the system. Now, the Fed has gone to the opposite extreme, ratcheting up rates to (hopefully) lower rampant inflation and leaving renewed economic recovery to the political class.

In the meantime, we’re left with a bifurcated (or two-part) economy, with the haves, the minority who benefited from the Fed-created “prosperity” of recent times, able to negotiate the new world of high inflation and the majority have-nots who didn’t struggling to survive. As a recent New York Times investigation by Jeanna Smialek and Ben Casselman (8/8/22) makes clear, that minority is not only thriving, it’s actually contributing to continuing inflation by stimulating demand. The top two-fifths of American households (the rich and upper-middle class) presently account for 60% of consumer spending, and the bottom two-fifths only 22%.

Just call it another gift from the Federal Reserve.

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, November 15, 2022

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