|Crash of '99?
If our booming economy suddenly collapses, the growing
disparity between rich and poor may prove to be a decisive
factor in how hard we fall.
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By Merrill Goozner
Oct. 1, 1999 | WASHINGTON -- When future historians look
over the list of the 400 richest Americans at the close of this
millennium, as compiled by Forbes magazine, they'll see
irrefutable evidence of the dawn of the Information Technology
Four of the five top names on the list are software or hardware
barons -- Bill Gates, Paul Allen, Steve Ballmer and Michael Dell.
Of the 60 people who made the magazine's annual list for the first
time this year, no fewer than 19 earned their fortunes from floating
stock in their Web businesses. Overall, there are now 5 million
millionaires in the United States and 268 billionaires -- including
79 new ones, a 42 percent increase over a year ago -- the
magazine that bills itself as the "Capitalist Tool" informs us. So,
what does this expanding crop of Internet billionaires and
millionaires tell us about the distribution of wealth in America?
Has it, at long last, grown more democratic?
A number of recent studies document that wealth and income are
more concentrated now than any time since the 1920s. In fact,
the fabulous new riches of the Information Age are concentrated
in precious few hands -- and that could spell bad news for those
who dream of a "long boom" or a "36,000 Dow."
While the top 20 percent of the population has seen its share of
the national financial pie expand rapidly over the past two
decades, the rest of the population has failed to benefit, and the
bottom 20 percent has actually been losing ground.
Globally, the growing gap between rich and poor is downright
scandalous. The wealthiest 400 Americans are now collectively
worth over $1 trillion, which is more than the collective net worth
of 1.2 billion Chinese.
The world's richest man, Microsoft's Bill Gates, with $85 billion,
is worth more than all 75 million people living in the Philippines.
Most economists shrug off this data. "Where's the problem?" they
ask. As long as the pie is expanding, there should be enough to
give almost everyone (except the poorest) at least a slightly larger
slice in the future, they argue.
But others are not so sure. They fear that the distribution of
wealth and income has gotten so out of whack that it now
threatens to undermine the nation's current prosperity. Their
caution is especially sobering now that the long-running bull
market is starting to show its age.
This argument owes an intellectual debt to Karl Marx, although
no one in this post-communist era would acknowledge it. Marx
was one of the few thinkers to try to analyze the threat to
capitalism represented by disparities in the distribution of wealth.
John Maynard Keynes, who saved capitalism from its
Depression-era midlife crisis, also understood the problem in
these terms. William Greider, in his recent book "One World
Ready or Not," analyzed the emerging global economic crisis in
our time from a similar perspective.
The idea is simple: In eras of great innovation, like the one we are
living through now, capitalism spawns new products and new
tools, making most workers vastly more productive than they
were before. These fabulous new tools (like the one you're
reading these words on) give the economy the capacity to
produce more goods, more services and more information at
lower and lower costs.
In the somewhat rarefied enclave of North America, Alan
Greenspan may be worried about the danger of inflation, but look
around the world to see what is actually happening to prices.
Oil is a third the price it was in the late 1970s. The price of a
computer is cut in half every 18 months. I can easily buy a shirt
sewn in Honduras or Malaysia at a downtown department store
for the same price I would have paid 10 years ago. The cost of
virtually everything is falling in China and Japan.
For a while, these trends seem great for consumers, who benefit
from falling prices. But eventually all the innovations enhance the
economy's productive capacity to the point where it outstrips
people's ability to consume. Then, we get falling profits, layoffs
and recession -- or worse.
This is where the disparity of wealth becomes a factor. According
to Greider, Keynes and Marx, the arrival of that terrible day of
reckoning is hastened when wealth and income become
concentrated in too few hands.
"The run-up to the 1929 financial crash and the Great Depression
was also an era of robust industrialization distinguished by the
same sort of huge imbalances between excess supply and
inadequate demand," Greider says. "Despite assurances from
orthodox economics, the market did not arrive at an eventual
balance; the market collapsed."
If the maldistribution of wealth and income does in fact contribute
to the development of inadequate demand to sustain growth, then
the latest data from the Federal Reserve Board suggests we are
now heading down precisely the wrong road. According to
Edward N. Wolff, an economics professor at New York
University who tracks this data, the top 1 percent of U.S.
households owned 42 percent of all stock in 1997, the last year
for which figures are available. The top 10 percent of households
owned 82 percent of all stock-market wealth. In fact, the
majority of Americans have not even been invited to this decade's
stock-market party. Only 27 percent of households held more
than $10,000 in stock in 1997, and that included all of their
holdings in 401(k)s, Individual Retirement Accounts and
Employee Stock Ownership Plans. Meanwhile, 57 percent of
Americans didn't own any stock at all. This extreme concentration
of wealth simply mirrors what's going on with income distribution.
According to a recent analysis by the Center on Budget and
Policy Priorities, a Washington-based think tank, the top fifth of
households saw their income rise 43 percent between 1977 and
1999, while the bottom fifth saw their income fall 9 percent.
The annual Census Bureau report on income and poverty in
America that was released Thursday shows the booming
economy of the past few years has done nothing to reverse that
trend. Since 1973, every group in society except the top 20
percent has seen its share of the national income decline, with the
bottom 20 percent losing the most. They have just 3.6 percent of
national income, down from 4.4 percent a quarter century ago.
Indeed, the top fifth now makes more than the rest of the nation
combined. Rebecca Blank, who recently left the President's
Council of Economic Advisors, pointed out, "We've gone back to
levels of income and wealth inequality that this country hasn't seen
since the teens and 1920s." I asked a number of Wall Street
strategists and economists what they thought of the growing gulf
between rich and poor. None mentioned that it might create
economic instability. Their big fear was that if too many people
felt left out of prosperity, it would lead to a political movement for
(heaven forbid!) the redistribution of wealth, or the enactment of
policies like trade protectionism that could undermine the current
good times. Political instability, in their view, might ride into next
year's primaries on a horse named Pat Buchanan.
But there are a few economists who have seen the ghost of
Keynes and worry that the maldistribution of wealth and income
itself may jeopardize prosperity. Exhibit A in their brief comes
from recent Fed data that shows that wealth-poor U.S.
households, as well as, curiously enough, businesses, have been
piling up extraordinarily high levels of debt -- precisely what you
might expect when incomes lag behind the propensity to
On the household side, consumers have been refinancing their
mortgages in record numbers. But not many are doing it to lower
their monthly mortgage costs. Instead, they've been using the cash
to finance home additions, buy new cars or retire credit card debt
-- a one-time fix that can only be repeated if home values
continue to rise and interest rates continue to stay low.
On the business side, corporations have been buying back stock
by issuing bonds. Why? To keep their stock prices up. This fuels
consumption among the stock-owning public through the
so-called wealth effect. High-income folks go out and buy
Lexuses and take exotic vacations because the stock market is
doing their saving for them.
The combined effect has been a domestic debt level that has risen
at a better than 9-percent clip over the past 18 months, while the
national savings rate has fallen into negative territory. Debt-fueled
consumption "represents the Achilles heel of the U.S. economy,"
says Jane D'Arista, an analyst at the Fed-watching Financial
Markets Center. "Servicing debt for households is now 20
percent of disposable income after taxes, up from 17 percent in
the early 1990s."
The growing inequality in wealth and income -- a long-term
secular trend -- makes it more difficult for debt-laden households
in the bottom half of the population to repair their tattered balance
sheets. They will escape their personal debt traps only if the
economy continues to grow, unemployment stays low, the
government passes another increase in the minimum wage and
they post real wage gains. In that regard, yesterday's income
report showing solid gains for every income group was welcome
If, on the other hand, the stock market takes a tumble and
upper-end consumption slows, that could trigger layoffs in many
of the high-flying service businesses that employ so many people
on the bottom half of the income ladder. This would then expose
the ugly fact that the final years of our consumption-driven
economic expansion have been built on a shaky foundation of
salon.com | Oct. 1, 1999
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About the writer
Merrill Goozner is chief economics
correspondent in the Chicago Tribune