Grand Chasm

Posted November 15, 2007 in Feature Story

The taxman has made it official. The Internal Revenue Service, by far the largest collector of personal economic data in the nation, said last month that the gap between the richest Americans and everyone else continues to grow. A recent IRS report finds the wealthiest 1% of Americans made 21.2 % of all income in 2005, up from 19% in 2004. This is the highest percentage since World War II, even surpassing the percentages generated during the bull markets of the 1990s. On the other hand, the bottom 50% of Americans, countless millions of us, made 12.8% of the total income in 2005, down from 13.4%. A full 95% of Americans reported less after-tax income in 2005 than they did in 2000. Does anyone need more proof that “trickle down economics” is a polite way of saying you’re being pissed on?

The gap between the rich and the rest of us has been widening for three decades. Working class wages have stagnated and executive salaries have skyrocketed. Some economists and opinion page pundits have even labeled the current run of high rolling a new “gilded age,” a term applied to the decades after the Civil War, a time of industrialization, exploitation of workers and “robber barons” who built estates and flaunted opulence as a form of 19th century bling. A second gilded age, this one powered by investment business, came in the “roaring” 1920s. Simply stated, gilded ages are times when the rich get richer and the poor—along with most everyone else—get poorer, exactly what we’re seeing now.

The inequality gap is something like global warming. Despite overwhelming evidence, there’s still a few cranks out there who doubt its existence, usually those people who have some financial interest in maintaining the status quo. But the real debate over income inequality, as with global warming, is what’s causing it. And here, as with global warming, there’s much denial in face of strong evidence. Is it the rise of technology and globalization? The demise of America’s manufacturing sector? Tax breaks for the rich? Are there purely economic forces at play or does public policy have an effect? In other words—is it a political conspiracy?

The question has two sides: why are the rich are getting richer; why are the majority of us falling behind? “It’s a puzzle,” says Riverside professor of economics Davis Fairris. “The focus is on the high end because it’s so difficult to account for the dramatic gains of the managerial, professional class; not just the CEOs but sports and entertainment figures. But [economists] feel we know a lot more about the lower and middle class.”

Fairris cites a number of reasons, some disputed, why most Americans are falling behind: loss of manufacturing jobs, declining strength of unions, little gain in the minimum wage, immigration of low-skilled workers, the inability of workers to re-educate and retool for the technology sector. “There’s a debate about the role of public policy, but even without definitive studies it’s apparent that it does have an effect when you consider globalization and the significant decline in trade unions since the Reagan administration.”  

The consequences of the current income gap in light of the economy’s seemingly mushrooming complications—rising oil prices, expanding mortgage defaults, the credit crisis, the national debt, the falling value of the dollar—can’t be ignored. America’s well being is at stake and the reality is that tens of millions are already living in a world of diminishing economic returns despite the Bush administration’s claims that the economy is strong.

A host of recent books address aspects of the income gap. Some stake their positions in their titles, such as Jacob Hacker’s The Great Risk Shift: The Assault On American Jobs, Families, Health Care and Retirement and How You Can Fight Back, a call to arms that was largely overlooked when it was released in hardback in the summer of 2006 but should enjoy new life when the paperback is issued in December. We recently read four such books and came away with a few unexpected conclusions: a grudging respect for extreme wealth (depending on how it was made and what it was used for); a concern for those who have been pushed out of poverty; a perspective on the complications of everything—including psychology—that goes into economic theory; and fresh anger at the politics that seeks to protect the wealthy and the expense of the rest of us.

Let’s start at the top. Wall Street Journal reporter Robert Frank’s Richistan: A Journey Through The American Wealth Boom And The Lives Of The New Rich says America’s super wealthy have, in a sense, created their own country. Frank points out that the number of millionaires in the U.S. (those reaching a million dollars) has tripled between 1995 and 2004 giving us some nine million new-age Daddy Warbucks. The number of those worth over $25 million has doubled. There were 13 billionaires in 1985. Now everyone on the Forbes 400 list is a billionaire. Some 600 more don’t have billions enough to rank.

Frank’s focus is on the lifestyles of those in “Upper Richistan” worth over $100 million and the exclusive inhabitants of “Billionaireville” which number over 1,000. These are the guys who, after playing a round of golf at an exclusive club, buy it if they like. Us common folk have no idea how these people live and little chance of ever meeting them.

Among the stories of impulsive art purchases, yachts big enough to host helicopters and guys who made it big selling miniature ceramic villages are real lessons in how wealth is accumulated. Not many generations ago, most wealth was inherited, passed from the great grandchildren of robber barons to their great-great grandchildren. The technology boom has changed that. Entrepreneurs who may have struggled their entire lives to establish a successful business can now build and sell two or three big money makers before they’re 30. Frank calls them “instapreneurs” and they populate the higher riches of Upper Richistan and beyond. All those CEOs pulling down outrageous pay for running Fortune 500 companies seldom make it out of Middle Richistan. Poor them.

All this money has to come from somewhere. We laugh when people tell us how wealth is “created” when what they really mean is that it was taken out of someone else’s pocket. Robert H. Frank, an economist at Cornell University, makes the case in his book Falling Behind: How Rising Inequality Hurts the Middle Class that the concentration of wealth at the top makes life more expensive for those in the middle. A behavioral phenomena he calls “expenditure cascades” has us competing to buy better houses in better neighborhoods, better-equipped cars and even bigger barbecue grills though we can hardly afford them. Frank (no relation to the Wall Street Journal author of Richistan) places his economics in a psychological context, exploring happiness and envy as well as the role of real-situation context in our drive to consume. This is a fascinating book that caused us to think about the punished middle class in new ways.

If the middle class is truly disappearing, what’s pushing it down the drain? Katherine S. Newman and Victor Tan Chen’s The Missing Class: Portraits of the Near Poor In America provides a multitude of answers. The two sociologists followed the fortunes of nine near-poor families in the New York City area over seven years and discovered what it’s like to live on the edge. Bad breaks and innocent mistakes can be catastrophic. Divorce, pregnancy, illness, rent increases and evictions, even minor accidents can easily ruin whatever financial security they’ve obtained. The near poor are particularly vulnerable to inadvisable mortgages, credit tweaks and scams. Like us, these people are no angels. But the fact is that the “missing class,” families making $20,000 to $40,000, can seldom afford full health insurance let alone the American lifestyle. There are 57 million of them (37 million Americans fall beneath the so-called poverty line) and they are living on the brink.

While all these books discuss causes and solutions, none is so politically-minded as economist and New York Times columnist Paul Krugman’s The Conscience of a Liberal. Krugman sees us entering a new gilded age and, going against the accepted thinking, says its due to the rise of “movement conservatives” who have been stewing ever since the passage of Social Security and the New Deal. Beginning with Ronald Reagan, they’ve made an assault on those taxes that make the rich pay a fair share and attacked the policies that help everyday people. They’ve succeeded in enlisting the very people they hope to punish with appeals to racism. Krugman makes convincing arguments and it’s hard not to come away thinking there’s some kind of grand conspiracy to establish an American aristocracy. Can you say Bush family dynasty? 

                 To shrink the gap, Krugman unblushingly suggests higher taxes on the rich of the sort in place during “the great compression” of the 1950s and ’60s. He wants the funds raised to supply the working class with education, health care and public sector jobs that improve infrastructure in a new New Deal of the sort that Franklin Roosevelt implemented during the Great Depression of the 1930s. Cornell economist Frank takes a look at a progressive consumption tax in Falling Behind, one that would not tax income that went to savings but would, at higher and higher rates, tax excessive consumption. As he sees it, anyone making $30,000 after savings, would pay no taxes. “The tax could be as progressive as you would want to make it,” Frank says in a phone call between speaking engagements.” In a sense, it’s the opposite of the infamous tax law that gave a break for businesses that bought Hummers. A more modest purchase would mean less—or no—tax. After hearing Frank discuss it, the billionaire, often progressive-leaning investor Warren Buffet recently came out in favor of such a system.

     Frank says that forces on the income gap have accelerated since the release of Falling Behind. If the U.S. does enter a recession (he won’t make a prediction) he says most everyone would move several “chunks” down the economic ladder. But it won’t make much difference to the rich. “Long term,” he says, “there’ll be no change for those at the top.”


Richistan: A Journey Through The American Wealth Boom and The Lives Of The New Rich by Robert Frank; Crown Publishers, hardback, 278 pages, $24.95


Falling Behind: How Rising Inequality Harms the Middle Class by Robert H. Frank; University OF California Press, paperback, 148 pages, $19.95


The Missing Class: Portraits of the Near Poor in America by Katherine S. Newman and Victor Tan Chen, Foreword by Senator John Edwards; Beacon Press, hardback 258 pages, $24.95


The Conscience Of A Liberal by Paul Krugman; W.W. Norton, hardback, 296 pages, $25.95


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