1% versus 99%

“We are the 99%” is the slogan of the Anti-Wall Street campaign in the US.  This refers to the sheer inequality of income and wealth which exists in America.  According to the latest figures, the top 1% of income holders in the US receive over 20% of all income and own nearly 35% of all America’s wealth.

According to the latest estimates of Arthur Kennickell at the US Federal Reserve (Ponds and Streams: wealth and income in the US 1989 to 2007, http://www.federalreserve.gov/pubs/feds/2009/200913/200913pap.pdf), in 2007, the top 1% of wealth holders had net worth (that’s total wealth net of any debt) of nearly $22trn, or 33.8% of all net wealth in America ($65trn).   He also estimated that the top 1% of income earners had 21.4% of all income received in 2006 – or $2trn each year out of $9trn in total.  If we add in the next 4% of wealth holders, then the top 5% have over 60% of all wealth and 37% of all income.

It is increasingly fashionable to argue that inequality is the cause of the crisis in capitalism right now (for just one example among many, see Nouriel Roubini’s The instability of inequality, http://www.economonitor.com/nouriel/2011/10/17/full-analysis-the-instability-of-inequality/).  This is odd.  The cause of recessions and instability in capitalism in the 1970s was not assigned to inequality of income or wealth.  Indeed, many mainstream and heterodox economists argued the opposite, namely that it was caused by wages rising to squeeze profits in overall national income – see chapter 20 in my book, The Great Recession.  But now, many Marxist economists argue that this current crisis is a product of wages being too low and profits too high.  This leads to low wage earners being force to borrow more and thus eventually causing a credit crisis.  So it seems that the underlying cause of capitalist crisis can vary.  The trouble with this eclectic approach is that it becomes unclear what the cause of capitalist crisis is – is it wages squeezing profits as in the 1970s or is it low wages leading to a collapse of demand in the noughties?

Inequality of wealth and income may not be the cause of capitalist crises,  but it is certainly a product of capitalism.  Capitalism, or the private profit society, is increasingly inefficient in delivering our needs and increasingly unstable.  But it has always been unjust and unequal.  Actually, inequality of incomes and wealth in a society is a feature of all class societies, whether it is slavery, Asian absolutism, priestly castes, feudalism or capitalism.  By definition, inequality accompanies a class society.  After all, why would anybody want to be a member of the ruling elite if they did not enjoy the fruits, namely extreme wealth and income as well as power and status.  Indeed, even priestly castes, supposedly engaged in waiting for the rewards of the ‘after life’ and telling their flock that they must also wait, were not slow in coming forward to benefit from the material life?  Just take a look at the Vatican and other Christian churches, the mosques of the Middle East, the synagogues and going further back to the priestly rulers of Ancient Egypt, of the Aztecs and Incas of south America.  Class society means that the ruling class controls the surplus generated by the labour time of the non-rulers, in whatever form.  That means inequality is a consequence in all class societies and is not a specific feature of capitalism that could explain its continual boom and slumps.

How unequal in wealth and income is the world (not just in the US)  right now?  Well, Branco Milanovic at the World Bank has studied global inequality over the years carefully in a series of books and papers.  His measure of inequality is not a measure between nations but between individuals, even though inequality is decided more by which country you live in than by inequality within a country.  Global elites (the top 10%) take 57% of all the income created in the world and this ratio has hardly moved in 100 years.  As Milanovic explains, this flies in the face of the predictions of mainstream economics that argues inequality should decline as economies get richer.

Simon Kuznets developed what is called the Kuznets curve in the mid-1950s.  This tracked the idea that in pre-industrial societies where everybody is poor, inequality is low.  When industrialisation takes place, as in the UK in early 19th century and in the rest of major capitalist economies later in that century, then inequality grows between the urban and rural populations.  Then, as an economy matures, the urban-rural gap narrows and the welfare state kicks in and inequality falls.  So the Kuznets curve of inequality is an upside down U.  The other mainstream theory is that, as global trade expands, the demand for low-skill labour in poor countries rises and so their incomes rise relatively to those in mature economies.  Inequality should decline.

Well, the evidence refutes both those theories.  Global inequality of income – i.e. between world citizens – is high and has stayed high.  The Gini coefficient (which measures the ratio of income or wealth held by cohorts of individuals) has remained very high globally, near 70.  It has risen in the US and the UK over the last 30 years and it has also jumped in China.   So the richest 1% of the world’s population now receive nearly 15% of all the world’s income, while the poorest 20% receive only just over 1%!

Since the 1980s, inequality in incomes has grown in nearly all the major capitalist economies, but particularly in the so-called Anglo-Saxon, deregulated ‘free market’ economies like the US and the UK (the top 1% had about 10% in the early 1980s and now have nearer 20%).  In Continental Europe, inequality has been static – the top 1% had about 10% in the 1980s and now have much the same ratio.  In the US, average real incomes grew at a 1.3% rate between 1993 and 2008, but if you exclude the top 1%, the rate of increase was only 0.75% a year.  The incomes of the top 1% achieved a 3.9% a year rise, taking 58% of all the increase in real incomes between 1993 and 2008.  Indeed, in the great US booms of 1993-2000 and 2001-2007, the top 1% achieved annual growth in their incomes of over 10%, while the bottom 99% achieved only 1.3-2.7% a year.

The most comprehensive and up-to-date analysis of inequality in the capitalist world has been published jointly by the most eminent researchers in the field recently – Anthony Atkinson, Thomas Piketty (http://piketty.pse.ens.fr/index.php) and Emmanuel Saez (http://elsa.berkeley.edu/~saez/).  In their recent piece in the Journal of Economic Literature, Top incomes in the long run of history, they looked at top income shares for more than 20 countries.  They concluded that top income shares have increased “substantially” in the last 30 years.  The top incomes share fell somewhat in the early part of the 20th century, mainly during two world wars and the Great Depression.  Inequality declines in wars and recessions because profits collapse more than wages.  Also, as wealth in industry and in stocks and shares fall, the income from them falls for the richest and that’s a bigger part of their income than for rest of us.    In the last 30 years, the authors find that in all of the Western English-speaking countries and in China and India, the share of income going to the top 1% and 5% rose, with the US leading the way.  While southern Europe and the Nordic states also saw a rise in inequality, the change was small and from a lower level.  In mainland Europe (France, Germany and the Netherlands), there was no increase at all.  Atkinson also looked at the global rich, defined as those with more than 20 times the mean world income.  In the early 1990s, they constituted just 0.14% of the world population or 7m people, with more than 2m in the US.  These very rich earners had doubled in size in the US between 1970 and 1992.

The top 10% of income earners in the US, with incomes over $110,00 a year, now receive half of all the income each year.  The top 1% with incomes over $400,000 a year received nearly 25% of all income in 2007.  This 1% constitutes 1.5m earners out of 150m earners in America.  One of the stats that the authors reveal is that, in the Great Recession, the bottom 99% of income earners in the US suffered a 7% fall in their incomes, the largest drop since the Great Depression.    The other discovery is that it is the top 1% and even more, the top 0.1% of earners, who gained the most, compared with the top 5%.  The inequalities are rising within the rich to create a super-rich elite.  Whereas the top 1% took 9% of incomes in 1978 and the top 5% took the next 12% , to make 21% in all; by 2008, the top 1% took 21% while the top 5% took another 15% (making 36% in all).  So the top 1% have reaped the biggest gains in the last 30 years.  Also the top 0.1% took only 1% of incomes in 1978 but now take 6%!

The main reason for this higher concentration is the massive rises in the incomes going to the very top chief executives in the banks and big corporations.  It’s the same story in the UK.  The UK’s High Pay Commission found that bosses’ salaries rose by 63% since 2002, but  total pay packages for top company executives had gone up by 700% since 2002.  In contrast, pay levels for the average worker in Britain rose only 27%  before inflation and taxes.

These extremes of inequality and the particularly fast rise in that inequality in the last 30 years is now beginning to worry the strategists of capital in an environment of depression in the mature capitalist economies.  It is not that they think inequality causes crises (although some are beginning to argue that), it is because they fear a social backlash from the 99% towards the 1%.  And how right that fear now appears to be, given the global campaign developing against the super-rich.  As one City economist , Jeremy Grantham put it: “My worst fears about the potential loss of confidence in our leaders, institutions, and capitalism itself are being realized. We have been digging this hole for a long time. We really must be serious in our attempts to resuscitate the fortunes of the average worker.  Wouldn’t it be better for us to decide deliberately and by ourselves that income distribution which creates the best balance of social justice and incentive to work? How about going back to the levels of income equality that existed under the Presidency of that notable Pinko, Dwight Eisenhower?  And don’t think for a second that this more equal income distribution somehow interfered with economic growth: the 50s and 60s were the heyday of sustained U.S. economic gains.”

The rise of the super rich implies the expansion of the poor.  In the UK, the Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means that household disposable income will fall by 2% this year, more than double last year’s fall of 0.8% and the biggest drop since the savage 1919 to 1921 post-First World War recession.  In the current recession/depression, the ranks of America’s poor (as officially defined) swelled to nearly 1 in 6 people last year.  The overall poverty rate climbed to 15.1%, or 46.2m, up from 14.3% in 2009.  The US poverty rate from 2007-2010 has now risen faster than in any three-year period since the early 1980s recession.  Measured by total numbers, the 46m now living in poverty is the largest on record.  The poverty ratio is now as high as in 1993 and the highest since 1983.  Americans without health coverage now number 50m people.

But it is not just the very poor.  America’s so-called middle-class, in fact, the bulk of the working-class, have seen no rise in real earnings since the mid 1970s, and indeed from 2000 to 2010, real incomes fell. For American households in the middle of the pay scale,the real median household income peaked at $53,252 in 1999 and then fell to $49,445 last year, a level not seen since 1996.   For male workers in the US, the long-term trends are even bleaker. When part-time workers are included, the median wage for the US man has dropped 28% since 1970 in real terms, back to levels not seen since the 1950s!   According to a recent survey, one-third of Americans are living paycheck to paycheck, and if they lost their job, they would not be able to make their next rent or mortgage payment. Also, unlike the richest Americans, average families have most of their wealth tied up in the equity of their homes, which took a beating in the recession.  Also the price of a college education — still considered the ticket to higher wages and a better lifestyle — has surged over the last decade.  Census data showed about 14.2% of all young people aged 25 to 34 are still living in their parents’ homes this year, compared to about 11.8% before the recession began in 2007.
1% versus the 99% – plus ca change, plus c’est la meme chose!
The US Internal Revenue Service announced yesterday that 50% of US workers earned less than $26,364 a year in 2010, while those making $1m or more a year had risen 18% from 2009.   The median income figure of $26,364 compares with the mean average of $39,959 a year.  This shows that wage incomes are heavily skewed to the richer earners.  Indeed, the median earnings level (the halfway point of all earners) is now only 66% of the mean average income, down from 72% in 1980.

16 thoughts on “1% versus 99%

  1. Nothing is exempted from the iron law of élites. Capitalism and Communism included. Pareto was right and Bakunin vs Marx too.

  2. Silvano: for all their shortcomings the communist countries were much more equal societies compared to any version of capitalism.

  3. No, politicians and top public managers were de facto temporary owner of the means of production. Simply there wasn’t a market price to this kind power. Privileges and access to resources were Pareto distributed (like wealth and income in capitalist economies).

    Secondly, it is much better to be unequal in South Korea than equal in North Korea.Unequality can be an argument for a socialdemocratic program, but not for communism. If a poor can enjoy more goods and services under capitalism than a full time worker under communism the case is closed. Differences in relative positions can be unpleaseant and do have political consequences but unless you want to justify a revolution on social envy they are not a good economic argument against production for profit.

    Bakunin was right: marxism will produce oligarchies and ruling classes like capitalism, feudalism, etc. Unlesss you create children using laboratory, men are unequal. It’s not only economic success that is highly concentrated: intellectual success, sportive success, artistic succes and so on. Paraphrasing N.Taleb, “extremistan” (Pareto) is the rule, “mediocristan” (Gauss) the exception.

  4. The questions is: how communism can avoid elitism (a prerequisite for an equal distribution)? And does it worth? The second question is related to the fact that someone answered me that old communist countries were more equal (which is highly questionable) without referring to their living standard. Anyhow you cant compare historical capitalism with ideal communism. We must be fair: theory vs theory, history vs history. I deserve an answer rationally argumented.

  5. Silvano,

    Speaking of history, did you happen to know that the RSFSR (later the USSR) was a pre-industrial economy at it’s founding? Theory versus theory is too easy; if you want history versus history, then you need some awareness of the historical record. Further, it is indeed “questionable” that the Soviet bloc economies were more equal than their capitalist counterparts because it would be absurd to attempt such a comparison (say, via the Gini coefficient). Social necessities such as child care, elementary, secondary and higher education, cradle-to-grave medical care, and housing were not monetized, which is to say, they were separated from waged income. Ultimately, reference to standard of living measures might show that the former Soviet Union compares quite favorably with its Anglo-American counterparts when one controls for historical contingencies (e.g. relative phases of industrialization).


  6. So why communism fell?
    I can agree that certain services are hard to “quantify” and inequality has therefore a service-dimension which mere statistics on income cannot grasp (so the Gini coefficient cannot be reliable); but we cannot say that a comparison is impossible: if so, you can neither say capitalism is worse.
    A fact is that communist (or defined so) countries have fallen, people have asked for another system. Can you say they are all wrong? I would like somebody to answer me.

    People from ex communist countries define communists as parasites, exploiters, those who live at the expenses of others, which is very a similar definition like how “capitalists” were labelled. This makes me think that Silvano has got a point in saying that power concentration – a dispotic, egoist élite – is proper of communism (too).

  7. Social indicators could be very misleading because of the source and because also totalitarian regimes performed relatively well in this field. Fascism introduced public pensions for poor, social insurances and improved mass schooling in Italy. But is this a “good case” for Fascism? I doubt it.
    I had some relatives that visited and traveled USSR (since they were member of the Italian Communist Party): direct experience is very different from official statistics. Also my wife is Russian and she remembers long queue to get basic goods and the big difference from living in Moscow and living in the rest of Russia. She wasn’t free to check her medical exams (she learnt her bloody group at 30 years old..). Russians made Gagarin fly in the space, but were unable to deliver decent cars for common people: it wasn’t a technological problem, it was an economic one. Compare also the standard of living in Eastern Germany with the standard of living in Western Germany in 1989: the difference is visible.

    Anyhow this is not the point. My question is: how communism can avoid an elitist distribution of power to control resources, services and goods and improve the general welfare of people more than a socialdemocratic capitalism at the same time?

  8. Guys, here’s more on the latest IRS figures on incomes. Thanks to the recession, to get into the top 1% of income earners in the US, you now need to make only $343,927 instead of over $400,000 in 2008, according to newly released statistics from the Internal Revenue Service.

    There were just under 1.4 million households that qualified for entry. Collectively, their adjusted gross income was $1.3 trillion. And while $343,927 was the minimum, on average, top 1-percenters made $960,000!

    The income threshold for this exclusive group changes every year, largely with the performance of the stock market. In 2007, when times were good on Wall Street, one needed to have an adjusted gross income of more than $424,000 to get into the highest rank. But the stock market decline in recent years has helped lower that bar back to a level not seen since 2002.

    The financial professionals made up about 14% of the top rank in 2005. Executives, managers and supervisors working outside of finance accounted for 31%, the largest share, according to an analysis by Jon Bakija of Williams College, Adam Cole of the Treasury Department and Bradley Heim of Indiana University. Medical professionals came in at 15.7%, while lawyers made up 8.4%.

    As the data in the post above showed, the top 1% earned 22.8% of the nation’s income in 2007, more than double the amount in 1986, according to IRS data. The recession has since brought that slice down to just under 17% for 2009.

  9. Static measures of wealth and income distribution tend to follow monetary disturbances. They don’t capture very well the essence of the phenomena. And yes I think that after a bust and during the ensuing recession statistics fill figure more “equal”. I agree: marked and prolonged unequalities (like now) are consequences, not causes, of business cycles and financial bubbles. This is consistent with Marx’ notion of “fictious capital”, with so called “malinvestments” in Austrian Theory of Trade Cycle and with the description of financial boom bust cycle made by Minsky.

  10. Guys

    Yet more data on inequality in America. A new report by the Congressional Budget Office found that the after-tax income of the wealthiest 1 per cent of US households had increased by 275 per cent between 1979 and 2007. They rose by 65 per cent for the rest of the top 20 per cent of Americans. For the 60 per cent in the middle-class (read worlking-class) , after-tax incomes grew by slightly less than 40 per cent, and for the poorest 20 per cent by only 18 per cent.

    The CBO said the primary source of greater income disparity in the US was that the richest 1 per cent simply raked in a much bigger share of money than they had in previous decades, pointing to some possible factors such as changes to executive compensation policies. But the CBO also said tax and spending policies had contributed to rising inequality by not “equalising” the dispersion of income as much as it did three decades ago.

    By the way, at last count, there were 245 millionaires in congress, including 66 in the Senate.

  11. This will probably seem unnecessarily pedantic, but I don’t think this is true:

    “By definition, inequality accompanies a class society.”

    One can imagine a feudal society in which a peasant family produces 100 turnips every cycle, of which the local lord takes 50. There’s a class relationship there–the lord is living off the surplus–but there’s also equality. Earlier class societies were both more absolutely impoverished and more equal than capitalism, just because they weren’t very productive. Capitalism could in principle become quite egalitarian indeed, at least in accounting terms, while maintaining its class character.

  12. One peasant family and one lord divide output in half? More realistically, what if there are one miliion peasant families and 100 hundred lords and each of the peasant families give half their output to the 100 lords. That means 500,000 turnips per lord and 50 turnips per peasant family. I think there’s inequality there. But I take your point that the smaller the value produced by all, the lower the inequality is likely to be. Although capitalism is defined by its class character, it is difficult to imagine a Pareto-style equality of income and wealth and still have a functioning capitalist class.

  13. Wealth and income are quite different. Even if you imagine a full employed society with the same wage for everyone (Lenin’s dream), unless you abolish savings, you will have a very unequal distribution of wealth due to demographic factors, i.e. the older will be the wealthier.

    Skip’s example is quite simple, but it is about the theoretical possibility while you excluded it from a historical / pragmatic retrospective. Secondly, every complex organization implies some form of power’s concentration. I reapeat: how communism can escape a subdivision of income or wealth or political power according power-laws AND produce more welfare, innovation, etc. without compelling people to do something?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: