May 11, 2012
This is what a second Gilded Age looks like.
The above chart compares the inflation-adjusted incomes of the top 0.1 percent with annual inflation-adjusted S&P 500 prices, both indexed to 100 beginning in 1913. (Note: The income numbers for the 0.1 percent come from Picketty and Saez. The real S&P prices come from Robert Shiller).
It tells a three-part history of our economy over the last century. It's a story about the age of the rentiers, their retreat, and subsequent return.
By 1913, the robber barons were in relative twilight. The so-called "malefactors of great wealth" had suffered a series of political setbacks over the previous decade -- from Teddy Roosevelt's trust-busting to the creation of the income tax itself. But they were still robber barons. The super-rich of the day still had more than enough wealth to live off. That's what we see in the chart above: the incomes of the top 0.1 percent more or less track the S&P 500.
And then the New Deal happened.
Something, well, new happened. Markets went up, but incomes at the top didn't. This change wasn't evident until after the war because neither the Great Depression nor a time of mass rationing were exactly good for stocks -- but it seems fair to ascribe it to FDR's fundamental reshaping of the social contract. Most obviously there were very high top marginal tax rates, up to 94 percent at its peak. But it wasn't just about higher taxes. Tough financial regulation reined in the casino culture that had prevailed on Wall Street before the Great Crash -- which in turn reined in both incomes and how sensitive they were to the market. But even this isn't the full story. There was a cultural shift too. Executives were embarrassed by high pay. Executives like George Romney, who turned down a bonus, because he didn't think anyone deserved to be paid that much.
It's hard to imagine such reluctance nowadays. Consider the following chart, comparing real incomes of the top 0.1 percent, 1 percent and GDP per capita over the past three decades.
Say hello to the return of the rentiers. After three decades of broad-based prosperity following World War II, the superrich have once again decoupled from everybody else. Remember: median households have underperformed GDP per capita (the blue line) over this period.
What's been going on the last 30 years? It's a story of the uber-wealthy percent increasingly moored to markets and markets unmoored to any rules. Consider this profile of the 0.1 percent from Mike Konczal of the Roosevelt Institute: 40.8 percent are non-financial executives and another 18.4 percent are Wall Streeters. Whether it's due to stock-options or trading, both groups more or less depend on markets. That much is clear from our first graph -- which shows how the incomes of top-earners have recently tracked the S&P 500 very closely.
Especially since the tech bubble got going. It's startling how much stock prices went vertical in the late 1990s. The same, of course, is true of housing prices a decade later. It's hard to fathom how historically large these two bubbles have been -- bubbles that have benefitted the top 0.1 percent enormously. And, of course, this has all coincided with an era of declining taxation on capital. We've cut capital gains taxes from 28 percent in 1986 to 20 percent in 1997 to 15 percent in 2003.
The rise of the rentiers is nothing new. What is new is the degree of financial globalization and liberalization that has supercharged the fortunes of the super-wealthy even beyond robber baron levels. But it's no mystery how to reverse this. It's a matter of setting better rules for markets and taxing earners at the top a bit more.
Answers don't elude us. Political will does.