Plutonomy, Part Two: Wealth gap not new, but getting bigger

September 7th, 2010 by Mike Hinshaw

[EDITOR'S NOTE: This is the second of a two-part installment about the wealth-gap economy. Part One is here.]

An AOL Daily Finance article Aug. 14 proposes that the U.S. economy has already become a plutonomy.

“Two generations ago, ‘two Americas’ referred to the sharp divide between prospering Americans and those mired in poverty, stagnation and prejudice, a gulf addressed by Michael Harrington in his influential book, The Other America: Poverty in the United States,” writes Charles Hugh Smith in “Why Growth May Still Leave 95% of Americans Behind.”

“With the advent of social programs such as Medicare, Medicaid, food stamps and housing subsidies, much of the grinding rural and urban poverty described in the book has been alleviated.

“But the gap between the super-rich, the wealthy and ‘the rest of us’ has widened, forming what is in essence two Americas — the top 5% and the bottom 95%. And this is creating a situation where economic growth, as measured by GDP, may increasingly mean that 95% of Americans are still not doing better financially.”

Stocks rally even as unemployment ratchets up

For recent evidence look no further than the market’s reaction to the August jobs numbers. This from a Sept. 3 CNBC stock blog: “Stocks were sharply higher Friday after the government reported August non-farm payrolls fell much less than expected.”

That’s right–the private sector added 67,000 jobs, but overall we still lost more than were created, and the “official unemployment rate” ticked UP to 9.6 per cent. Total unemployment remains at nearly 17 per cent. Furthermore, as the Kansas City Business Journal says, “Idled workers who haven’t actively been seeking work aren’t counted among the unemployed.

“It’s estimated that 16.7 percent of Americans want to work but don’t have a job.

“The net gain of 67,000 on private business payrolls couldn’t make up for 114,000 temporary Census Bureau jobs that ended in August. Also, state and local governments cut about 10,000 workers. Manufacturing employment declined by 27,000 jobs.”

Nevertheless, the news wasn’t as bad as Wall Street feared, so the  “August numbers . . . pushed up stock gauges on Friday,” according to a Sept. 3 piece in The New York Times, which also reported that “Optimists were taking their good news where they could. By the end of the day, the Standard & Poor’s 500-stock index was up 1.32 percent, continuing a rally that began in the middle of the week. Market reaction to the jobs data on Friday was tempered somewhat by a report that said growth in the services sector had slowed in August.”

CEOs make out as layoffs increase

A recent report from the Institute for Policy Studies has been making headlines, too–this  from the Kansas City Star:

CEO compensation totaled $598 million at the 50 companies that laid off the most workers

“The nation’s biggest job-cutting companies paid their top executives an average of $12 million last year, according to a report released today.

“The 50 U.S. chief executives who laid off the most employees between November 2008 and April 2010 eliminated a total of 531,363 jobs, according to the Institute for Policy Studies, a research group that works for social justice and against wealth concentration.

“In ‘CEO Pay and the Great Recession,’ the institute said the $598 million in combined pay for the 50 executives would have paid one month’s worth of average-sized unemployment benefits for each of the laid-off workers.”

And for anyone confused by headlines about CEOs having it rough, too, this is from the institute, itself:

“Month after month, the headlines have pounded home a remarkably consistent message: Corporate executives, here in the Great Recession, are suffering, too.

“Corporate executives, in reality, are not suffering at all. Their pay, to be sure, dipped on average in 2009 from 2008 levels, just as their pay in 2008, the first Great Recession year, dipped somewhat from 2007. But executive pay overall remains far above inflationadjusted levels of years past. In fact, after adjusting for inflation, CEO pay in 2009 more than doubled the CEO pay average for the decade of the 1990s, more than quadrupled the CEO pay average for the 1980s, and ran approximately eight times the CEO average for all the decades of the mid-20th century.

“American workers, by contrast, are taking home less in real weekly wages than they took home in the 1970s. Back in those years, precious few top executives made over 30 times what their workers made. In 2009, we calculate in the 17th annual Executive Excess, CEOs of major U.S. corporations averaged 263 times the average compensation of American workers. CEOs are clearly not hurting.”

Reagan’s budget director chimes in

Moreover, anyone who thinks these data are some sort of liberal claptrap or anti-capitalist propaganda should take a gander at David Stockman’s op-ed piece in the July 31 NY Times. Yes, that Stockman, former director of President Reagan’s Office of Management and Budget. Here’s an excerpt:

“It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.”

“Furthermore,” says the AOL Daily Finance article, “the very rich are pulling away from the merely wealthy. Those earning $10 million or more per year are increasingly wealthier than the 321,000 earning $1 million or more, and those top earners are pulling away from the rest of the top 5% of households by income.

“In the housing and stock market boom years of 2002 and 2007, the incomes of the bottom 99% of households by earnings grew by a meager 1.3% a year in inflation-adjusted terms, while the pockets of the top 1% grew 10% a year.

“Over the past 25 years since 1985, the top 1%’s share of national income has doubled — in 2007, it netted 23% of the nation’s total income. The income of the wealthiest Americans — the top 0.1% — has tripled in that 25 year period. This wafer-thin slice of Americans now earn as much as the bottom 120 million wage earners.”

Greenspan weighs in, too

A crucial factor in this equation concerns the difference between money and capital. Both the working poor and middle-class workers labor for wages, that is, money. The ultra wealthy have the advantage of the clout of capital, that is, the leverage of being able to use finance as a tool to make more money. Hence, the original Citigroup paper referenced Part One, which was aimed at investors aiming at joining in the upper ranks of the Plutonomists. Citing a recent Bloomberg piece on Alan Greenspan, the Daily Finance piece continues, “The extremely wealthy are pulling away because their earnings come from capital, not labor. While wages have stagnated, returns on capital investments and speculations have soared. None other than former Federal Reserve Chairman Alan Greenspan recently described this yawning divide between those in the top slice of the economy who are doing very well and the 95% below them who are struggling.”

(For more information and a terrific slide show, see this ongoing series at Slate.)

As the first two installments at Slate demonstrate, the causes of what Paul Krugman labels the “Great Divergence” are not readily apparent. We will monitor the Slate series and update here with more, if applicable.


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Basics of bankruptcy

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