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Wed

01

Apr

2009

In Rude Health - The rich take the crisis in stride
Wednesday, 01 April 2009 08:59
by Robert Larson

While the new president prepares to take on our set of fiery economic crises, the problem of inequality is being forgotten as a key element of our circumstance, alongside the somewhat more prominent issues of deregulation and debt. Now I know we’re all busy investing in canned goods and small arms ammunition, but it’s especially important to recognize the role played by the growing gap between the elites and the rest of us. The gap has been widening for thirty years, and so have the rich.

This month the OECD, the organization of the developed nations, issued a report indicating “Rich households in America have been leaving both middle and poorer income groups behind. This has happened in many countries but nowhere has this trend been so stark as in the United States.” In these parts, the wealthiest 10% was the richest in the OECD; and our poorest 10% was the poorest.1

In another embarrassing American landmark, several cities in the U.S. have reached levels of inequality comparable to developing world metropolises. Cities of great wealth, like New York and Washington, compare with Buenos Aires and Nairobi in their lopsided income distributions. In particular, New York City cracked the top ten list of the world’s most unequal cities, unheard of for the developed world.2

A recent study of American tax data over the twentieth century concludes that the share of total U.S. income going to the top 10% of American households has gone from about a third in the 1970s, to half of pre-tax income today. And over the period 1993 to 2006, the income of the top 1% of households increased by an annual rate of 5.7%, while the income of the lower 99% grew by only 1.1% over the same period.3

It’s not just numbers on paper—the well-heeled are going to town, from seven hundred dollar cigars to fifteen hundred dollar facelifts to ten million dollar personal helicopters.4 Even as the retail chains for the working and middle class decline (except for Wal-Mart), stores with upper-class clientele are another story. While spending by individual wealthy families is somewhat down, and analysts have found “the idea that the high-end luxury market is immune to the economic cycle is a myth,”5 there is a silver lining: “luxury brands continue to benefit from a sustained increase in the number of wealthy consumers, particularly in countries like Brazil, Russia, India, and China.”

Indeed, the world now supports more wealthy families than ever before. According to a report compiled by financial analysts and described by the Financial Times, “The ranks of the world’s rich swelled to eight million during 2007 as the wealthy proved immune to the strains across global economies in the latter half of the year.”7 These “high net worth individuals,” defined as having one million dollars of investable capital (excluding their primary residence), make up a full 1% of the U.S. population, and are given prominence in the “plutonomy model.” This economic model is based on extreme wealth concentration, to the point that only the activities of the highest echelons of the society can significantly shift the economy. The report cited in the Times suggests that “the plutonomy model retained its strength through 2007 and is in rude health.” The report concludes that 2007 saw a 4.5% increase in the number of the “truly rich,” even as they “shrug off the credit crunch.”


The rich have been affected by the credit crisis, of course, since their ownership of financial assets it so disproportionate. But the “smart money” saw the disasters coming: “the wealthy have responded to the turmoil in the markets by scaling back their exposure to property and hedge funds in favor of safer investments,” according to a report prepared by Merrill Lynch.8 And this was in June, well before the implosion of banks deep in property-backed instruments this fall. The wealthy cut back on property trusts and hedge funds, and committed more to cash and other liquid deposits, big moves from the “more than ten million people on the planet with financial assets worth more than $1 million.” This is not to speak of the “ultra-rich—those with $30 million or more to invest,” who grew even more rapidly than the mere millionaires.

It is these “ultra-rich,” the multi-millionaires and billionaires, who have redefined affluence and conspicuous consumption. One notorious preserve for upper-class consumption is contemporary art, where recently the consensus among the prestigious art dealers is that “while there is some uncertainty in the middle of the contemporary art market, the top end is holding strong.”9 A recent high-profile art auction included “a stainless steel cabinet of industrial diamonds,” which went for £5.2 million to a Russian bidder.

Besides art, the most over-the-top ruling-class toy is of course the superyacht. These massive state-of-the-art private islands run into tens of millions of dollars, plus about a tenth of the purchase price in maitanance and fuel cost annually. No mere recession is going to put the yacht brokers out of business, “an elite group who matchmake the super-rich with what is regarded as the ultimate luxury.”10 But it’s not all easy being the ruling class: When your yacht is 300 feet long, “One thing money cannot always buy is space at the marina.”11 Grab the tissues, the suffering goes on. The shortage is aggravated by the lack of suitable new harbor locations, which must have “all the infrastructure needed to attract the big boats, including easy access by air, possibly a nearby airstrip that can handle private jets or helicopters and the potential to become a chic destination in its own right,” as the elite press laments.

But for the lower 90% of us, things aren’t so damn chic. August of 2008 was “the 10th consecutive month that the weekly average salary had failed to keep pace with inflation” according to the Labor Department.12 This fits with the longer trend over the last several decades, where America’s low inflation rate has kept up with our weak wage growth. Apart from the late nineties stock-bubble period, “inflation-adjusted wages stagnated or rose glacially” in the American economy.13 The large majority of Americans have been working more and more hours over recent decades just to maintain constant purchasing power.14 The recent chapters of the story of America have been about making do with less.

Much less. The infant mortality rate of the United States is tied with Poland, higher than 28 other nations, including Cuba and Hungary, as well as Western Europe and industrialized Asia.15 This is despite the fact that “the United States devotes a far greater share of its national wealth to health care than other countries.” Twice as much, in fact. The giant chasm in our American fortunes shapes our lives to a significant extent—including whether or not we get to live them.

The wealth gap, unsurprisingly, is unpopular. “Public opinion across Europe, Asia and the US is strikingly consistent in considering that the gap between rich and poor is too wide and that the wealthy should pay more taxes. Income inequality has emerged as a highly contentious political issue in many countries as the latest wave of globalization has created a ‘superclass’ of rich people.”16 This is from the Financial Times, which is not exactly a commie paper. The FT’s survey found large majorities around the world thought inequality had gone too far—87 percent in Germany, 80 percent in China, and even 78 percent in the US, “traditionally seen as more tolerant of income inequality.” In spite of McCain’s railing against “redistribution,” Americans may be more interested in moves toward equalizing wealth than is currently realized.

With the opening presented by a new Democratic administration, expectations are high for some policy moves to redress this and other economic injustices. But only constituent pressures, probably requiring a real popular movement, will bring enough force to the Democrats to move the country back toward the progressive taxation that was modest even before Bush took an axe to it. More than political reform, an American popular movement ought to ask why our economic system is driven to create the unequal class society we live in, and if we could find a better one. This kind of work is hard, especially for an overworked people like ourselves, but could be motivated by keeping an eye on the “superclass” and its “rude health” in our sick times.

Rob Larson is Assistant Professor of Economics at Ivy Tech Community College in Bloomington, Indiana. He draws the socialist comic strip Free Will at freewillcomic.com
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