What happens economically when wealth tilts to the top?

Trickle-down is trickling away.


Trickle-down is trickling away. The high priests of America’s trickle-down temple may still be preaching their gospel — the notion that enriching the rich will end up enriching us all — but fewer and fewer people are taking them seriously. The “facts on the ground” have simply become too compelling to ignore.

Facts like this: Between 1979 and 2019, the Economic Policy Institute reported this past December, the bottom 90 percent of American paychecks barely annually increased at all. In effect, EPI observes, wages for the bottom 90 percent have been “continuously redistributed upwards” — “frequently” to the top 1 and 0.1 percent.

The end result of that relentless upward redistribution? The United States has become the developed world’s most deeply unequal nation. In 2020 alone, the Credit Suisse Research Institute revealed last month, the U.S. cohort of “ultra high net worth individuals” — deep pockets worth at least $30 million — increased by 21,313. No other nation last year gained as many as 10,000 new ultra rich.

This torrent of wealth stuffing the pockets of America’s richest has left most Americans lagging far behind their similarly situated counterparts elsewhere in the world. Just how far behind can be difficult, at first, to comprehend. Simple averages can make the United States seem an average person’s economic paradise. If we divide, for instance, total wealth in the United States by the number of U.S. adults, the “average” American ends up sitting on a $505,420 personal fortune. Only one other nation in the world, Switzerland, has a higher average personal net worth.

But “averages” can be incredibly deceiving, especially where wealth concentrates intensely. In a 10-person society where one person holds $5 million in wealth and everyone else holds zilch, the “average” wealth of the 10 people will be $500,000.

We do, fortunately, have an arithmetic alternative. We can calculate the wealth of America’s most typical adult, that adult who holds more wealth than half our nation’s adult population and less wealth than the other half. Last year, notes the Credit Suisse Research Institute, the most typical — the median — American adult had a net worth of just $79,274, a far cry from America’s $505,420 adult “average.”

In more equal developed nations, the contrast between “average” and “most typical” personal wealth runs nowhere nearly as stark. Belgium, for instance, has an “average” adult net worth of $351,330, far below the $505,420 U.S. average. But the most “typical” Belgian holds $230,550 in net worth, nearly triple the net worth of the typical American.

Stats like these have left America’s trickle-down ideologues with all the credibility of carnival barkers. The policies these ideologues have so fervently pushed — everything from tax cuts for the rich to deregulation for the corporations they run — have not played out as advertised. These policies have not enriched everyone. They have instead concentrated America’s wealth — and left rich people-friendly politicians scrambling for distractions to keep people of modest means from focusing on that concentration.

How can we overcome those distractions? Maybe we ought to be paying much more attention to the dynamics of exactly what happens to economies when wealth concentrates. Most of us with egalitarian sensibilities don’t tend to do that. We tend to concentrate on the moral ugliness of America’s concentrated wealth, on the shameful contrast between the millions of families struggling paycheck to paycheck and the lives of wasteful luxury the richest among us live.

We need to see more than this contrast. We need to see the overall economic impact of the inequality that defines us.

Progressive analysts, as economist Steve Roth explains, have done a great deal of important work “on the sources and causes of wealth and income concentration.” And they’ve done equally impressive research on the social and political consequences when wealth flows overwhelmingly to the already wealthy. But progressives, Roth argues, “have largely failed to ask or answer” a perhaps more basic question: What happens economically when wealth ends up “held by fewer people, families, and dynasties, in larger and larger fortunes”?

Roth currently serves as the publisher of Evonomics, an effort founded in 2015 to showcase the “Next Evolution of Economics” with contributors who’ve ranged from former World Bank lead economist Branko Milanovic to Nobel prize-winner Joseph Stiglitz. In his own latest work, Roth directly takes on the question of what happens when wealth concentrates, building on historical U.S. wealth and consumption spending data series that have only become readily available in recent years.

Roth has teased out of these historic data points an economic measure he calls the “velocity of wealth,” and he’s developed a model that riffs off this measure. America’s poorest 80 percent of households, this model posits, turn over their “wealth in annual spending three or four times as fast” as the top 20 percent. The significance of these differing rates? A “more broadly distributed wealth,” Roth notes, will mean more spending, “the very stuff of economic activity” and “itself the ultimate source of wealth accumulation.”

Roth has tested his model against the last three decades of actual U.S. economic experience, starting with the actual wealth of the U.S. top 20 and bottom 80 percent in 1989 and extrapolating forward to predict “levels of wealth, spending, and shares of wealth and spending” 30 years later. His model’s predictions for 2019 turned out to match up closely with what actually took place. Roth’s model predicted a total U.S. wealth of $114 trillion for the end of the 30-year period. The actual, real-life wealth total for the end of the period: $118 trillion, giving his model a modest 4 percent miss after three decades.

Roth takes one further step in his research. He uses his model to play out a counterfactual: What would have happened over the past three decades if some percentage of top 20 percent wealth had been “transferred, redistributed” to the bottom 80 percent every year over those decades?

An annual downward transfer of 1.5 percent of top 20 percent wealth, Roth’s model finds, would have left “everyone quite a lot wealthier, faster.” The greater spending resulting from that transfer downward would have generated a 549 percent increase in U.S. overall wealth. In real life, overall wealth over the course of those 30 years increased 421 percent.

Most of that extra wealth growth, Roth calculates, would have gone to the bottom 80 percent, but the wealth of the top 20 percent would have increased as well. What would not have increased — in Roth’s 1.5-percent counterfactual — would have been the top 20 percent’s share of society’s total wealth.

In life as actually lived over the past 30 years — life under rich people-friendly trickle-down policies — the wealth share of America’s top 20 percent increased from 61 to 71 percent.

What about the “very richest percentile groups” within the top 20 percent? We don’t have the data available right now, Roth indicates, to play out his counterfactual’s specific impact on America’s most financially favored. The annual downward redistribution rate, he suspects, would have to be substantially stiffer than 1.5 percent to keep the super rich from “getting richer as the economy grows.”

“But with adequate redistribution to counter the ever-present trend toward economy-crippling wealth concentration,” Roth adds, “everybody else prospers as well.”

Roth’s new wealth paper — entitled “How downward redistribution makes America richer:  An empirical, ‘money view’ model of spending, wealth concentration, and wealth accumulation” — should help spur just the sort of robust dialogue and debate we so desperately need, the dialogue and debate our political champions of trickle-down so desperately want to avoid.

Other analysts are engaging in efforts that complement Roth’s labors. They’re underscoring the “increasing imbalance of wealth that could enfeeble the economy for years” to come. One example: Economists Atif Mian of Princeton, Ludwig Straub of Harvard, and Amir Sufi of the University of Chicago have been exploring how concentrating wealth is squeezing average Americans into a “debt trap.”

“A substantial fraction of household debt in the United States,” the trio relate, “reflects the top 1 percent of the wealth distribution lending to the bottom 90 percent.”

Elevating debt levels for average Americans, the three analysts go on, “weigh negatively on aggregate demand,” in the process undermining the nation’s economic health. The way out of the “debt trap”? Generating “a sustainable increase in demand,” Mian, Straub, and Sufi contend, would require wealth taxes and other “redistributive tax policies” as well as structural policies “geared towards reducing income inequality.”

Much of the work of economists now concentrating on concentrated wealth is breaking new economic ground. But their basic message — that concentrating wealth corrodes our economic health and vitality — has been around for quite some time, as former U.S. labor secretary Robert Reich reminds us.

“Years ago, Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, explained that the Great Depression occurred because the buying power of Americans fell far short of what the economy could produce,” Reich points out. “He blamed the increasing concentration of wealth at the top.”

Eccles happened to be right. We need to spread the word.


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