Why huge wealth threatens the US economy

Policy makers and the media are paying too much attention to how quickly the U.S. economy will emerge from the pandemic-induced recession, and not enough to the nation’s deeper structural problem – the growing wealth imbalance that could weaken the economy. economy for years.

Seventy percent of the US economy depends on consumer spending. But rich people, who now own more shares of the economy than at any time since the 1920s, spend only a small percentage of their income. Low-income people, who were struggling even before the pandemic, spend all they have – which has become very little.

In a very practical sense, the US economy depends on the spending of most Americans who have little to spend. This announces trouble to come.

It is not just an adequate “stimulus”. The checks for $ 2,000 contained in the US bailout have already been distributed and the additional unemployment benefits will expire soon. Consumer spending will be sustained as employers increase their payrolls. Biden’s spending plans, if passed, will also help keep consumers afloat for some time.

But the underlying imbalance will persist. Most people’s wages will still be too low, and too much of the economy’s earnings will continue to pile up at the top, for aggregate consumer demand to be adequate.

Years ago, Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, explained that the Great Depression happened because Americans’ purchasing power was far less than the economy could produce. He blamed the growing concentration of wealth at the top. In his words:

“A giant suction pump had, in 1929-1930, attracted into a few hands an increasing share of the wealth currently produced. As in a game of poker where the chips were concentrated in fewer and fewer hands, other players could only stay in the game by borrowing. When their credit ran out, the game stopped.

The rich of the 1920s did not know what to do with all their money, while most Americans could only maintain their standard of living by going into debt. When this debt bubble burst, the economy sank.

The story repeats itself. The wages of typical Americans have barely increased in decades, adjusted for inflation. Most of the economic gains went to the top, just as Eccles’ “giant suction pump” drew a growing chunk of the nation’s wealth into a few hands before the Great Depression.

The result has been consumer spending financed by debt, creating chronic fragility. After the real estate and financial bubbles burst in 2008, we avoided another Great Depression only because the government put enough money into the system to keep demand going, and the Fed kept interest rates close to. zero. Then came the pandemic.

The wealth imbalance is now more extreme than it has been for over a century. There is so much wealth at the top that the prices of luxury items of all kinds are skyrocketing; so-called “non-fungible tokens,” ranging from art and music to tacos and toilet paper, sell like exotic 17th-century Dutch tulips; cryptocurrencies have taken off; and stock values ​​continued to rise even during the pandemic.

Businesses don’t know what to do with all their money. Billions of dollars sit idle on their balance sheets. Larger companies have feasted on the welfare of Fed companies, as the central bank obligingly holds corporate bonds that companies issued before the recession to fund share buybacks.

But most people have little or no assets. Even in 2018, when the economy looked strong, 40% of Americans had negative net incomes and borrowed money to cover basic household needs.

The heart of the imbalance lies in the wealthy Americans and the companies they own have enormous bargaining power – both market power in the form of monopolies and political power in the form of lobbyists and campaign contributions.

Most workers have little or no bargaining power – neither within their companies due to the virtual disappearance of unions, nor in politics because political parties have gone from giant membership organizations to union machines. Fund raising.

Biden’s “stimulus” programs are fine, but temporary. The most important economic reform would be to correct this structural imbalance by reducing monopoly power, strengthening unions and taking a lot of money out of politics.

Until the structural imbalance is corrected, the US economy will remain dangerously fragile. He will also be vulnerable to the next demagogue wielding anger and resentment as substitutes for real reform.

Robert reich

Published with permission from Robert Reich’s blog