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Five Reasons Why Rich Americans Grow Richer as the Middle Class Declines

Oct. 3, 2012
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 If you want to see what’s wrong with America, take a good look at the list of the 400 richest Americans—the Forbes 400. While the economy struggled to create jobs, it was another banner year for the super-rich. They increased their collective wealth by a whopping $200 billion, which is more than enough to provide every student in the country with free higher education.

Meanwhile, the median middle-class family—the one smack in the middle of the income distribution—saw its net worth (assets minus liabilities) drop from $102,844 in 2005 to $66,740 in 2010, according to the U.S. Census Bureau. So while the richest 400 Americans increased their wealth by 54% since 2005, the average middle-class family saw its wealth decline by 35%. Welcome to the new American math.

Here’s more new math:

The richest 400 Americans have as much combined wealth as 25.5 million middle-income Americans. That’s 400 = 25.5 million!

The average wealthy member of the Forbes 400 is 63,000 times as rich as the average middle-class family. Yes, that is 1 = 63,000!


What Do the Richest of the Rich Actually Do?

The rich list gives us insight into how wealth is accumulated today. Are the super-rich “wealth creators” who bring new goods, services and jobs to our economy? Or are they “wealth extractors” who cleverly skim it from the rest of us? Here’s the breakdown of the main industries represented by the 400 richest Americans:













Health Care


The first Forbes 400 list, published in 1982, just 30 years ago, reflected a very different economy. Only 9% were in finance, while 15.5% came from manufacturing. But since then our best and brightest have learned a new lesson: It is far better to take than to actually make.


Why Are the Super-Rich Getting Richer While the Middle Class Implodes?

To break out of the 1970s economic doldrums, the economics and policy establishment, including leaders of both parties, agreed on a new model. We needed to build an investment-led economy, they said, by cutting taxes, deregulating industry and creating more labor “flexibility” (which is French for “union-busting”). Together, they argued, these policies would dramatically increase capital investment, which in turn would lead to innovation, more jobs and higher incomes for all Americans. Here’s what actually happened:


1. Tax Cuts for the Super-Rich

Step by step, the tax code was altered to appease and aid the super-rich. First, marginal tax rates were dramatically reduced on the top brackets, falling from a post-war high of 91% in the 1950s to 35% today. But the biggest giveaway was cutting the capital gains rate to 15%. You pay a much lower tax on money you make from investments than the money you make going to work each day. Since most of the super-rich receive their income in the form of capital gains, this was like winning the lottery, each and every year. That’s how Mitt Romney could pay only 13% to 14% on his enormous income.


2. Financial Deregulation

Both parties tripped over themselves to assist Wall Street by dismantling nearly all of the critical New Deal financial curbs that actually kept us from falling into a severe recession or depression for more than 60 years. Until deregulation, Wall Street was a rather boring place to work, with incomes nearly identical to those with similar education in other sectors. After deregulation, it became a gold mine. Anti-trust actions to break up big banks no longer occurred. The famous Glass-Steagall Act, which separated speculative investment banking from what we know as traditional commercial banking, was gutted. This opened the doors to the abuses that led to the collapse of the banking sector in 2008 and these too-big-to-fail mega-banks while incomes continued to rise for financiers.


3. Union-Busting

From the end of WWII until the early ’70s, employees’ salaries grew in real terms at about the same rate as the increase in productivity. Things started to change in the ’70s. Say what you will about unions, but the fact remains that when unions are strong, the middle class prospers and the income gap closes, even for non-union employees. It’s remarkable how the rise of the super-rich and the decline of the middle class correspond to the generation-long assault on unions. National Labor Relations Board (NLRB) and court rulings combined with new anti-union tactics by employers have made organizing new members more difficult. Also, the decline of domestic manufacturing, aided and abetted by hedge fund managers looking for the fast and large return, further eroded labor’s base. Unfortunately, until this turns around, the middle class, as well as the poor, will suffer.


4. The Wall Street Crash and Bailouts

The financial crash devastated the middle class, basically because their wealth is largely dependent on housing values. When the financial system collapsed, the housing bubble imploded. As the economy nearly came to a standstill in 2008-’09, 8 million jobs vanished in a matter of months, all destroyed by Wall Street’s reckless adventurism. To prevent another Great Depression, Washington bailed out the big banks and hedge funds, but not homeowners. The idea, successfully marketed by Wall Street’s minions in government, was that by saving Wall Street, the economy as a whole would be resurrected. Trickle-down practices again failed to aid the middle class, as unemployment grew toward Depression-era levels. Yes, GM and Chrysler received support as well, which kept employment from crashing even further, but Wall Street received most of the booty.


5. Corporate Money in Politics

As more and more money gushed to the top, more and more money entered into politics and lobbying. The net result was more government goodies for the super-rich. Corporate America, in every shape and form, took effective control of the legislative process so that both parties continued to shower the wealthy with tax breaks and their industries with direct subsidies. While conservative political theorists sang praises to the all-powerful free market, the largest corporate players raided the treasury again and again. And while some complain about the undue influence of liberal “special interests,” the biggest interest of all is business, which outspends labor to the tune of $14 to $1…and that was before Citizens United. Today, there are about 12,500 business lobbyists, compared to about 400 for labor.


So What Can America Do and Not Do?

The Romney/Ryan approach glorifies the concept of wealth and the few who amass it. As a result, they are fully committed to precisely the same policies that created the obscene wealth gaps in the first place. They want even more tax cuts for the rich, even more regulatory freedom for Wall Street, and even more attacks on unions. If they reinstitute these failed policies, we certainly will see larger too-big-to-fail banks that will again gamble and eventually fail, and again look to the taxpayers for a bailout. All the while, those juicy tax cuts for the super-rich will float over to the Cayman Islands, while average middle-class incomes decline. Maybe before the 2008 crash we could have had a serious debate about the merits of tax cuts and deregulation. But we just lived through a real-life experiment using precisely those policies, and the result was a near-collapse of the world financial system.


What Will It Take to Resurrect the Middle Class?

Americans don’t begrudge the accumulation of wealth as long as their own standard of living improves and their children have a good shot at doing better. However, we do not expect to work hard and then watch our standard of living decline, while the uber-rich live lavishly by skimming away our collective wealth.

There is a way out—but it won’t come easy. It’s a hard road because it runs counter to nearly everything we hear about the economy. Revitalizing the middle class (and lower-income groups as well) starts with one central observation: The private sector on its own will never create enough jobs for all who need them. The private sector definitely has a major role to play, but an advanced economy like ours needs more to create full employment. And without full employment, we will continue to see our incomes stagnate and decline.

Unfortunately, it’s hard for us to trust that the government will play its part because we live in a surround-sound world that incessantly blares out anti-big-government ideology. As a result, many believe that a government job is somehow less worthy than a private-sector job. But is a teacher employed at a private school somehow more valuable than a teacher at a public school? Is a private security guard more worthy than a police officer? You can try this kind of thought experiment up and down the occupational ladder, and you’ll find millions of jobs that are done better in the public sector.

But that’s just a start for retooling our minds. The biggest breakthrough comes when we finally realize that after a major financial crash, it’s just not possible for the private-sector economy on its own to produce the jobs needed to put our people to work. We’ll be waiting decades to get back to full employment if we rely solely on private-sector expansion. It won’t expand until demand increases, and demand won’t increase until we expand, not contract, public employment.

If you want to see a vibrant middle class, then we should be creating vibrant middle-class jobs in the public sector—more teachers, more social workers, more workers rebuilding our infrastructure and weatherizing our buildings. And yes, some of the public expenditures will fund private contractors—for example, to do much of the construction of highways, schools, etc. All of these employees will pay taxes and spend money, creating more jobs in the private sector. Only when more people are buying things and services will the private sector invest. Instead, we are doing precisely the opposite: We are gutting public employment—about 650,000 good-paying federal, state and local government jobs were eliminated over the past two years, all in the name of debt reduction.


A Simple Reform

We don’t need to run up debt to put our people to work.

All we need to do is make those who caused the crash pay to help clean it up. Here’s an example of a simple reform program that neither party has the courage to implement since it might offend some major donors:

1. Apply a financial transaction tax on Wall Street trades, especially on risky derivatives.

2. Eliminate the special tax rate for capital gains.

3. Institute a 3% yearly wealth tax on anyone with a net worth of $10 million or more.

Collectively this would produce revenues in excess of $300 billion per year, which could readily create 6 million new public-sector jobs both directly and through contractors. (And if we do it right, every new job could be green and reduce our carbon footprint.) Add in a multiplier that exists when employees spend their incomes at grocery stores and department stores, and our economy would soon reach full employment.

We are at a clear fork in the road: Either we create the jobs we need right now by creating a fairer tax system where we tax Wall Street and the super-rich, or the rest of us will suffer several decades of stagnation while the private sector continues to mint a surplus of financial billionaires and a deficit of decent jobs.


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