“The Engine Of American Inequality”: The Consequences Of A Free Wheeling, Unchecked Financial Industry
The past three decades have been a period of explosive growth for Wall Street and the financial industry. Meanwhile, a tiny slice of the population has claimed an ever-bigger share of this country’s economic rewards. The highest-earning one percent of Americans collected roughly 20 percent of total income last year; the top .01 percent – not enough people to fill a football stadium – had 5.5 percent of the income.
Could there be a connection here? Could our booming financial sector, which now generates an astonishing 30 percent of all corporate profits (more than double the figure of thirty years ago), help explain America’s rapid ascent to the highest level of economic inequality since the eve of the Great Depression, and the highest of any of the world’s rich nations? A growing number of economists and other authorities think the first trend may have more than a little something to do with the second.
The economic and political establishments long ago settled on a theory of rising inequality: technology and globalization, they told us, were carving a rift through the American labor force between those with and without the right kind of education and know-how. This idea was criticized from the start for ignoring a formidable corporate campaign to rewrite the rules of the U.S. economy at workers’ expense, and over time it has increasingly failed to account for the reality of who is getting ahead and who is falling behind.
In his 1991 book “The Work of Nations,” former (then future) Labor Secretary Robert Reich embraced a version of the “skills-gap” story. But in his recent film “Inequality for All,” Reich has more to say about discrepancies of power than of skill.
The longer this trend continues, in fact, the more it resembles the Occupy Movement’s picture of a soaring 1 percent and a lagging 99 percent. Out of every dollar of income growth between 1976 and 2007, the richest one percent of U.S. households collected 58 cents; and after taking a big hit in the financial crisis, they were soon back on track, capturing an extraordinary 95 percent of all the income gains between 2009 and 2012. To put it more plainly, since the beginning of the current economic “recovery,” the top 1 percent (who make upwards of $400,000 a year in household income) are pretty much the only ones who have recovered.
Within that small subset of Americans, executives, traders, fund managers and others associated with the financial sector loom large, comprising about a seventh of the one-percenters and accounting for about one fourth of their income gains over the past thirty-plus years. That’s not counting the many lawyers and consultants with financial sector clientele, or the growing number of executives of nonfinancial companies who seem to make most of their money these days through stock options and short-term financial plays. Together, corporate executives and financial sector employees account for well over half the post-1980 income growth of the top 1 percent and more than two-thirds of the even more remarkable gains of the top 0.1 percent.
Pinpointing the causes of an economic trend is a hard business. But there is global as well as historical evidence for a link between financial sector expansion and rising inequality. Studies of rich and relatively poor nations alike suggest that inequality goes up when societies tie their fortunes to a free-wheeling financial industry and the easy flow of global capital. There is also substantial research to suggest that much of the financial sector’s recent growth has come by extracting wealth from other areas of the economy, not by spurring innovation and opportunity for the society at large.
Several recent studies trace the industry’s pay-and-profit surge mostly to its success in the political and regulatory arenas. See, for example, this paper by Thomas Philippon and Ariell Reshef of New York University and the University of Virginia, who attribute between 30 and 50 percent of the financial sector’s recent gains to economic “rents.” That’s basically a polite way of describing the ability of many of today’s financial heavyweights to use their market clout, their inside knowledge and various explicit and implicit taxpayer subsidies to make money out of thin air.
Banking and finance were not always a road to fabulous riches in this country. As recently as the early 1980s – and throughout much of the 20th century – there was almost no pay differential between financial and non-financial professionals. Today, by contrast, financial workers make about 1.83 times as much as other white-collar workers. You’d have to go back to the Roaring Twenties, at the tail end of America’s original Gilded Age, to find another period when financial sector incomes and profits reached such conspicuous heights. That should tell us something.
In any case, these are pivotal questions for the country – and unavoidable questions for those seeking a path toward what President Obama has been calling a “middle-out” rather than a top-down economy. Broad prosperity, the president says, calls for greater public investment in education, infrastructure and other long-term needs, and for higher taxes on the wealthy to help pay for such things. That may be a worthy agenda. It has certainly proved to be a politically difficult agenda. But in a country that has let its financial sector become an engine of inequality, more will be required.
If we believe in our founding ideal of America as a land where children should start off on roughly the same footing regardless of history or ancestry, we will all have to screw up our courage and refocus on (among other challenges) the unfinished work of making sure we have a financial economy that serves the real economy, not the other way around.
By: Jim Lardner, U. S. News and World Report, October 11, 2013
“The Brittle Grip”: Wall Street And The Financial Sector Aren’t Accustomed To Criticism
Republicans often say that the business community feels threatened by President Obama — that he’s hostile to money, hostile to business, etc. You’ve heard this before. And much of it is campaign chatter. But not all. I don’t think we can understand the dynamics of this campaign without getting that a lot of it is actually true — not the reality necessarily (in my mind not the reality at all) but the perception of it in key parts of the financial sector like Wall Street, venture capital and the dread world of private equity.
The case of Wall Street is in many ways the hardest nut to crack. President Obama took a huge political hit for massive amounts of public money that went to bailing out the major banks. By most measures, along with his predecessor, he more or less saved US and global capitalism. And yet, when you talk to people in finance, this is entirely forgotten. What you most often hear about are two or three statements from the President that are still potently remembered.
Most often it’s a late 2009 quote when he said “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street. They’re still puzzled why it is that people are mad at the banks. Well, let’s see. You guys are drawing down 10, 20 million dollar bonuses after America went through the worst economic year in decades and you guys caused the problem.”
That’s not something you’d expect folks in finance to like particularly. But it did come after about a year of the President getting grief from Wall Street while simultaneously taking the political hit for bailing the same folks out with tax payer dollars.
I’ve heard similar things talking to folks in the business community in DC. And what strikes me again and again is how much it comes back to a handful of statements and anecdotes, things people remember the President saying over the last three plus years.
Some of this shouldn’t surprise us, I suppose. President Obama has pushed more regulation of business than his predecessor. (It’s certainly a change after eight years of George W. Bush; and it’s an eight years over which quite a lot has changed in the country.) He’s supported — though as yet not acted on — his call to roll back the Bush tax cuts. But Bill Clinton did all of this and more. Clinton after all is the guy whose tax hikes the Bush tax cuts in large part repealed. By most objective standards the President is actually more solicitous of the business community than most or all Democratic presidents over the last half century.
So what’s the explanation? Over recent weeks I’ve come to think that something else is in play: namely, the dramatic run up in wealth at the top of the income scale, not just over the last 35 years but particularly over the last 15 years. More or less since the beginning of the Clinton years. In a sense it’s the other side of the 99% vs 1% meme that has been the most successful legacy of the Occupy Wall Street Movement.
This is less an argument than a theory in progress. So I’d like your input. But I think the very wealthy and those who work in the most advanced and aggressive parts of finance are more defensive about their wealth than in the past — at least in terms of the political expression of it. There’s really no time in the last century in which you’d expect that a candidate running for a major political office who’d been responsible for shutting down a lot of factories wouldn’t have that come up in a major way in a campaign. Simply no way. Agree or not, it would be entirely par for the course. And yet now it’s treated as a possibly unexpected or unacceptable development.
That’s weird.
At the same time, the most important voices in the media are much, much wealthier than in earlier eras. The very wealthy are their friends and peers. Concentrated wealth simply has a stronger hold over mass communications than in the past — not necessarily in venal or corrupt terms but often simply by owning minds and mentalities. What all that amounts to is that people on Wall Street and the financial sector aren’t accustomed to a lot of criticism.
All of it goes to explaining a basic conundrum — President Obama is, when compared to Democrats over the last half century, objectively quite middle of the road. And yet the reaction from Wall Street and the halls of finance is one you’d think meant he was trying to bring capitalism to its knees. The President’s policies and tenure in office simply don’t explain the reaction. And I don’t think political spin does either. We need to look deeper into the political economy of the nation at large to understand it.
By: Josh Marshall, Editor and Publisher, Talking Points Memo, May 21, 2012
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