.1% of America Now Controls 22% of Wealth: The Wealth Gap Has Killed the Middle Class

A new working paper by London School of Economics professors Emmanuel Saez and Gabriel Zucman sheds some very unflattering light on the American wealth gap, which has reached levels unseen since the Roaring ‘20s. The wealth gap has been overtaking the income gap as a popular cultural topic since Thomas Piketty’s splashy Capital in the 21st Century, and Saez and Zucman’s work fills in some crucial blanks to flesh out Piketty’s contentions. Saez and Zucman conclude that the top .1% of America now controls 22% of the aggregate wealth – an especially troubling figure when examined in the context of America’s stubbornly conservative political landscape.

Piketty – who has worked alongside Saez in the past – sealed his rock star status this year with his argument that the megarich hold an increasing share of capital in the Western world. To combat the potentially frightening fallout, Piketty controversially recommends a worldwide progressive tax on wealth instead of income. How exactly this might work has been the topic of much squabbling, nicely boiled down by James Galbraith in Dissent:

In any case, as Piketty admits, this proposal is “utopian.” To begin with, in a world where only a few countries accurately measure high incomes, it would require an entirely new tax base, a worldwide Domesday Book recording an annual measure of everyone’s personal net worth. That is beyond the abilities of even the NSA. And if the proposal is utopian, which is a synonym for futile, then why make it?

That’s where Saez and Zucman come in. Their paper ambitiously takes up the challenge of measuring a century of American wealth, the existing data on which is notably scarce. To do this, the duo had to synthesize information from a variety of sources. They explain their methodology in a post for the Washington Center for Equitable Growth:

We try to measure wealth in another way.  We use comprehensive data on capital income—such as dividends, interest, rents, and business profits—that is reported on individual income tax returns since 1913. We then capitalize this income so that it matches the amount of wealth recorded in the Federal Reserve’s Flow of Funds, the national balance sheets that measure aggregate wealth of U.S. families. In this way we obtain annual estimates of U.S. wealth inequality stretching back a century.

They found that the level of wealth controlled by the top .1% of Americans has followed a “spectacular U-shape evolution.” That is, the hyper-elite held up to 25% of the country’s wealth on the eve of the Great Depression. These resources were then more democratically distributed for four decades – the .1% share was only 7% in 1977 – only to flip back to 1920’s numbers in the ‘80s and beyond.[[{"type":"media","view_mode":"media_large","fid":"593921","attributes":{"alt":"","class":"media-image","height":"342","style":"font-size: 12px;","typeof":"foaf:Image","width":"480"}}]]

While the top .1% got richer, so too did the Bottom 90% get poorer. Saez and Zucman find that the portion of total wealth held by the bulk of America peaked in 1980 at 36%. Today, the bulk of America hangs onto a mere 23%, and the number seems poised to tumble further.[[{"type":"media","view_mode":"media_large","fid":"593920","attributes":{"alt":"","class":"media-image","height":"359","style":"font-size: 12px;","typeof":"foaf:Image","width":"480"}}]]

Unsurprisingly, the majority was also hit far harder by the economic crisis than their monied counterparts, for whom “the Great Recession looks only like a small bump along an upward trajectory.” The shrinking 90%, Saez and Zucman contend, is a result of rising debt, especially from mortgages and student loans.

Their work provides a persuasive counterpoint to the criticism that the soaring .1% owes itself more to the rise of cultural megastars in entertainment and tech than it does to structural trends. The .1% is surely just stocked with the likes of anomalies like Mark Zuckerburg and J.K. Rowling, dissenters allege. (According to Piketty’s own research, these unicorns account for only 30% of the top.) Zucman and Saez add weight to the viewpoint that elite wealth increasingly comes from preexisting wealth, not labor or accomplishments.

As evidence of the staggering American wealth gap mounts, the debate about it will likely shift from its allegedly dubious existence to whether or not it matters enough to be changed. The conservative side of this discussion is likely to be disingenuous – not to mention, depressingly rigged by the ever-strengthening correlation between American capital and political agency.

Take, for example, the Right’s tone-deaf response to Piketty’s Capital in the 21st Century. In an analysis of the conservative critique, Brian Beutler at the New Republic noted that “Conservatives don't like Piketty's policy remedy, and other far-reaching proposals to reduce or curb the growth of inequality. That's in part because they don't agree with his normative premise that massive wealth concentration is undemocratic.” Garrett Jones at Reason went so far as to argue that “the best way to defuse the situation is to teach tolerance for inequality” – which sounds pretty darn close to, ‘just get over it, poors!’

But to deny that the American wealth gap is undemocratic is to deny decades of policies that have colluded not only to concentrate wealth at the top, but to solidify it as the primary means of political influence. Saez and Zucman point out that the reasons for the exploding wealth gap are similar to the oft-documented causes of the more-scrutinized income gap – deregulation at the top, and degraded labor and debt at the bottom. If this weren’t enough to cast serious doubt on the meritocracy invoked by the debunked American Dream, capital is now more inexplicably tied to basic survival than ever before.

When considering the wealth gap, you must also consider political developments like the landmark decision in Citizens United vs. FEC, which famously ruled that political spending by corporations cannot be legally capped. This obviously ensures a serious entanglement of money and politics. And while the Court argued that this spending will be subject to the pressure of shareholders, it would be batty to posit that their interests aren’t aligned. After all, the 1980s ushered in an era of thought that maximizing shareholder value should come at any cost – one source of the very wealth discussed by Saez, Zucman and Piketty. In other words, not only does a Reagan-inspired ideology of deregulation and taxing boost corporations and the people who invest in them, it also gives them free reign over the American political system.

As the ultra-rich have been enriched and empowered, the middle class and poor have weathered an equal and opposite reaction. As globalization and anti-union sentiments push former middle-class positions overseas, higher education has become a practical requirement for basic livelihood, but accessing it comes with a price. Saez and Zucman find that student loans are one of the main sources of debt weighing down the bottom 90%. Perhaps the most clearcut example of poverty barring citizens from civic participation are the rise of voting restrictions that disproportionately affect the poor—often backed by the same Republicans who fight against basic protections of the middle class.

All things considered, it’s no surprise that a recent Princeton study deemed the United States to be an oligarchy instead of a democracy. Their reasons had all to do with the toxic combination of the American wealth gap and pro-corporate politics: "The central point that emerges from our research is that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy," wrote researchers Martin Gilens and Benjamin Page, "while mass-based interest groups and average citizens have little or no independent influence." (Indeed, monied interests seem to be getting their way regardless of the party in power – as noted by The Nation, the Obama-era rich are wealthier than ever.)

So where do we go from here to salvage democracy and avoid calamity? Saez and Zucman have a few ideas:

What should be done to avoid this dystopian future? We need policies that reduce the concentration of wealth, prevent the transformation of self-made wealth into inherited fortunes, and encourage savings among the middle class. First, current preferential tax rates on capital income compared to wage income are hard to defend in light of the rise of wealth inequality and the very high savings rate of the wealthy. Second, estate taxation is the most direct tool to prevent self-made fortunes from becoming inherited wealth—the least justifiable form of inequality in the American meritocratic ideal. Progressive estate and income taxation were the key tools that reduced the concentration of wealth after the Great Depression. The same proven tools are needed again today.

In short, as long as accrued capital continues to overshadow earned income as the determining factor of having and having not, let’s be honest about it and tax what really matters. Only then will Americans have any hope of getting by based on on what they do, rather than who they are.