Inequality of Wealth and the Story of the Two Bubbles

Sometimes you come across a set of ideas and a mental framework that makes things that are difficult to comprehend suddenly extremely clear.  And one thinks, “Wow, anybody should be able to understand this!”

Yesterday I listened to a downloaded 20 minute interview with Robert Reich speaking about the causes of our current “Great Recession.”  Reich is an economist, Professor of Public Policy, and former Labor Secretary.

I was interested in this interview because I saw that he was making this premise:

Too much concentration of wealth at the top is not just bad for people in the middle and bottom, but it’s also bad for the economy.

This is a message that is easily understood and that can help explain why our economic system is in such terrible shape, and that making the system more fair is also the way to fix it.

There are links to the podcast and also a complete transcript of the interview at the bottom of this post.

Here is a summary:

ReichAnd then I looked at the research and was amazed to discover there were two years in the 20th century in which income concentrated to such an extent it actually centralized a great deal of the nation’s income right at the top.

“One year was 2007, when the richest [1% of] Americans took home, or got, I should say, about 23 and a half of total income. The other year was 1928.”

————————————-

Year
% of wealth owned by the richest 1%

1928     23%

1979       9%

2007    28%

————————————–

Industrialization was the force that led to huge side-by-side bubbles of wealth and debt just before the Depression.

Globalization, automation, and information technology are what have led to the same side-by-side bubbles of huge wealth and debt that now exist.

Too much wealth in the hands of the rich and super rich means:

a) The middle and lower classes have to go deeper and deeper into debt in order to keep paying at least partially for their modest lifestyles.

b) The wealthy have so much money that they can only spend a small amount, which means that they:

i) speculate in securities, creating an expanding bubble there,

and that

ii) too much of the burden of spending to keep the economy going is financed by too-much debt taken on by the middle class, thus creating another big bubble of debt for the economy to rest on.

When these two bubbles became too large they collapse, and the market and the whole economy collapses with them.

After the Great Depression, it was by pumping money back into the hands of the middle and lower classes that the debt bubble decreased enough and the economy got restarted, but only after many years of slow recovery.   As all economists know and often tell us, the middle and lower classes spend much greater proportions of their income than the wealthy.  World War Two also helped unleash radical levels of government spending to “fight the war” and put people back to work.

Among the wealth-re-balancing changes put into place by Roosevelt:  Legalization of labor unions and collective bargaining – illegal before 1935 – Social Security, a minimum wage, and a 40 hour workweek – all of which were bitterly fought by industrialists and others who favored the status-quo.

You can download the 20 minute podcast and a complete transcript here:

Fresh Air, 9/29/2010

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1 Response to “Inequality of Wealth and the Story of the Two Bubbles”


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