Most of Us Will Not Have a Better Life Unless We Turn the Tables on the Super Rich
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The following is an excerpt from 99 to 1: How Wealth Inequality Is Wrecking the World and What We Can Do About It, by Chuck Collins (Berrett-Koehler, 2012).
An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar? It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007—the two years just preceding the biggest downturns. —Robert Reich (b. 1946)
There are many theories about what triggered the 2008 economic meltdown. These explanations focus on bad actors such as the large banks and financial firms, the unregulated “shadow” financial sector, and unethical subprime mortgage pushers.
But there is a missing lens to the story, one that shows how the economic meltdown was caused by excessive income and wealth inequality. The two triggers were consumption by the 99 percent based on borrowing rather than real wage growth, and reckless financial speculation by the 1 percent.
Ingredient 1: Consumption Based on Borrowing, Not Real Wage Growth
Real wages for the bottom 80 percent of households have remained relatively stagnant since the late 1970s. People survived these stagnant wages by working more hours, bringing more family members into the paid labor force, and borrowing more, thanks to easy access to credit. This put enormous stresses on many working families as they got caught on a work-consume-borrow treadmill. But for many, this was the only way to attain or maintain a middle-class standard of living.
Most households stopped being able to save. In 1980, the savings rate—the share of people’s income saved after expenses—was 11 percent. By 2007, the U.S. savings rate had plummeted to less than 2 percent, meaning people were earning only slightly more than they were spending.
Did things appear different? With a median income of roughly $50,000, many people in the United States were living with little surplus. That said, the parking lots at the mall and the Applebee’s restaurant were full. The rising middle class bought new cars, teenagers got smartphones, and families took expensive vacations. These feats of consumption were not a reflection of rising wages. In some cases, increased spending was the result of two or three incomes. But most purchasing was made possible by families taking on more debt. Consumer debt—both credit card and home equity loans—escalated during the decade prior to 2008. The total amount of credit card debt exploded, thanks in part to aggressive “debt pushing.” In 2006, there were 6 billion credit card solicitations sent out.The majority of home financing was for second mortgages, not new home acquisitions. Access to easy credit was the drug that enabled millions to live beyond their means.
Exploding consumer debt was worsened by a shift in the culture, as extensive borrowing became more socially sanctioned. The debt pushers contributed to this, advertising cheap credit and peddling home equity loans as the new normal.
Overwork and debt masked the reality of falling and stagnant wages. If you and your neighbors could still acquire a flat-screen TV and take a Caribbean vacation, then it was hard to feel constrained. But these trends were fundamentally unstable. Underlying these indicators was a growing credit card and housing mortgage bubble. Think of the sound track from the movie Jaws as a shark creeps up on the unsuspecting swimmer.
The entire economy was humming, but it wasn’t based on healthy wage growth and shared prosperity. The consumption engine driving the economic boom between 2000 and 2008 was based on borrowing, not real wage increases.