By William Apfel, CFA
From the Winter 2011 Edition of Values
Whether you view the Occupy Wall Street (OWS) protestors as passionate idealists or an unruly nuisance, they have dramatized the contrast between the financial rewards showered on Wall Street’s leaders and the current state of the economy. The basic facts regarding income inequality, heretofore disputed by some skeptics, would now seem to be incontrovertible given the exhaustive study published recently by the nonpartisan Congressional Budget Office (CBO). Indeed, might it be fair to claim that our land of opportunity for all has become the outstanding developed world example of extraordinary opulence for the few–popularly identified by the OWS movement as the “1 percent”?
Here are a few highlights: In 1979, the top 1 percent of households accounted for 7.7 percent of total after-tax income, including transfer payments. In 2007, just before the onset of the financial crisis, the top 1 percent accounted for 17.7 percent of such income. Their 10 percentage-point gain in share was mirrored by a corresponding loss by the bottom 80 percent of households. Over that same 28-year period, those fortunate few experienced inflation-adjusted income growth of 277.5 percent, well ahead of the 125.7 percent growth in gross domestic product (GDP). Meanwhile, median family income grew just 34.8 percent and none of the other income groupings tracked by the CBO managed to keep pace with overall economic growth. In fact, the lower the income bracket tracked, the smaller the growth in income. By 2007, the income of the average household within the privileged 1 percent was more than 20 times that of median. The corresponding figure in 1979 was less than 10 times the median.
The CBO report didn’t include an assessment of the top 0.1 percent—the most fortunate 150,000 families in the country. But according to a detailed academic study based on tax records (Thomas Piketty and Emanuel Saez), this sliver of the population averaged about $4 million in 2007 taxable income, or nearly 100 times the median. The bulk of the rise in incomes in the top 1 percent can be attributed to this tiny subset, especially during the past 10 years. CEOs of major public corporations, Wall Street titans, hedge fund managers, professional athletes, and celebrities are prominent members of this privileged stratum.
While this group of Americans prospered, how did those in the middle get by? Only the sharp rise of women in the workforce offset what would have been an even more dire predicament for households in the middle. Between 1979 and 2007, median real wages for men actually fell by 10 percent while the share of working-age men in the labor force gradually declined. In contrast, median real wages for women rose a positive but still modest 15 percent while their labor force participation steadily rose. Without this change in the contribution by women, middle-income families over this period would have experienced an absolute decline in their financial well being rather than the modest gains reported. Debt, of course, was the other piece of the puzzle. Year after year the rise in household spending outstripped the growth in income. By 2007 the combination of mortgage, student, and credit card debt per capita was sevenfold the level of 1979.
It is easy to dismiss the OWS phenomenon as an inchoate movement lacking focus and platform. Perhaps that’s a fair assessment. But the issues OWS draws attention to should not be dismissed by those of us who believe that market capitalism is the single best form of economic organization, and the one most consistent with a free society. Indeed, the popular support of an economic system that allows for a wide range of individual financial outcomes rests upon two simple propositions. First, that it enables a sustainable path to rising prosperity. Second, that that prosperity will be widely shared. Americans have typically been more tolerant of greater income equality than citizens of other developed economies precisely because of the conviction that our brand of free market capitalism rewards hard work and merit.
Recent facts challenge these propositions. High unemployment, burdensome debt, slow economic growth, and rising income inequality undermine the consensus that the system is working for most of us. If income inequality is understood to be the price we pay for the chance to improve individual economic well being, the CBO report finds we have been receiving less for that payment. During the past 30 years rising inequality has been accompanied by deteriorating mobility among income groups. Confounding popular perceptions that are as old as our republic, one study finds that the opportunity to improve one’s financial fortunes is now greater in Europe than in America.† During the three decades following World War II, greater access to higher education was the path that lifted the fortune of ever more Americans. But this path has narrowed also. In the past 20 years, the share of college students coming from the highest income quarter of households has risen while the share from the lowest has declined.
From today’s vantage point, three decades of declining tax rates for upper income households and financial deregulation, advertised as elixirs to energize our economy, would seem to have failed to improve the lot of the average family. For many, the financial crisis turned easy access to debt from a palliative for lagging income growth into one more roadblock on the path to a better standard of living. Rather than demonstrating the appeal of a system that rewards merit, the spectacular gains in wealth by a few risk robbing the system of its legitimacy. Is there any wonder that Wall Street’s leaders, perceived to be both the instigators and beneficiaries of these changes, are the most prominent targets of the OWS protest?
Surely, there is a tinge of the fanciful in the OWS movement. Fashioning a program to ensure that prosperity will be more widely shared is far more difficult than making the case that the 1 percent have prospered undeservedly. And it is disturbingly easy to conclude in anger that market capitalism itself is to blame. To the contrary, for 30 years following World War II, a newly regulated market economy with a safety net born of Depression-era reforms accompanied an unprecedented period of strong economic growth, financial stability, decline in income inequality, and upward mobility based on merit. The challenge today is nothing less than restoring a shared belief that this system can work for everyone.