“The middle class of this country over the past 40 years has been disappearing.” – Bernie Sanders
“If we wait until income inequality is much more severe, we will have a whole class of new superrich who will probably feel entitled to their wealth and will have the means to defend their interests” – Robert Schiller, Yale University
Yes, Robert Schiller. It’s already happened.
In 1961 income was more evenly distributed in the U.S. than it is today. The American Dream was alive and well. There existed a vibrant, growing and optimistic middle class. There was less obvious dissatisfaction (or maybe the word is envy) amongst the lower income groups. However, changes in the economy over the past 60 years have favored the wealthy which has caused growing discontent amongst lower income groups.
Long ago, in 1899, Thorstein Veblen, a Swedish Economist wrote “Theory of the Leisure Class”. Although the book was written at a time when the world was very different, Veblen described some important aspects of economic and social behavior that prevail to this day. He coined the term “conspicuous consumption” which is still used today and familiar to everyone. He also coined a less well-known term called “pecuniary emulation” which is the observation that “lower-status people emulate the respected, high-status members of their socio-economic class, by consuming over-priced brands of goods and services perceived to be products of better quality”. He observed that each economic group tends to emulate the group one rung ahead on the economic ladder. This, he reasoned, was because aspiring to a higher group many steps up the ladder would only lead to frustration and further, because lower groups had limited visibility up the ladder. Thus, in 1900, ordinary factory workers would not try to emulate J.D. Rockefeller or Andrew Carnegie because their wealth was too far out of reach and because the lowly factory worker may have only heard about Rockefeller and Carnegie or seen their photo in the newspaper. They had no real visibility into how the richest people lived. The uberwealthy were out of sight, out of mind and not to be envied in any serious way.
What’s changed about Veblen’s model of behavior over the past 120 years? Conspicuous consumption and pecuniary emulation still exist. People buy Rolex watches and Mercedes Benz autos mostly to impress other people. That part of the model remains intact. The part that’s changed is people’s visibility into how the rich live and how they got their money. The ubiquitous availability of media changed that. Now, everyone can see how the Kardashians live. A factory worker can easily find out his CEO’s salary and bonus. The great availability of information on the web and other media leads to more comparisons and more frustration amongst those lower on the totem pole (no disrespect to native Americans intended).
Also contributing to discontent is the fact that the distribution of income and wealth has become more skewed over the past 60 years. The gap between rich and poor has gotten wider. In 1961, the top 10% earned about 33% of the income; in 2021 that number increased to over 50%. From 1970 to 2020, the top .01% saw their income grow by about 7X while the incomes of the bottom 50% grew by only about 1.5X. In 1961, a mill worker could earn a livable wage, nothing extravagant but enough to feed a family. Today, fewer manufacturing jobs exist. Blue collar workers often need to settle for jobs in the services sector that don’t pay as well. The wealthy have gotten much wealthier because incomes of CEOs, entertainers and sports figures have increased and also at least partly because of big increases in the stock market and real estate. Today many movie stars and sports heroes are leveraging their popularity by starting businesses, (as if they don’t already have enough money). A few notables are George Clooney selling Tequila and espresso coffee, Dwayne “The Rock” Johnson selling his own brand of tequila and a new line of athletic wear with Under Armour, Jennifer Anniston selling protein drinks and Samuel L. Jackson and Shaq selling just about everything.
But the group that has become extremely wealthy, the top .1%, is comprised of entrepreneurs who struck it rich. The wealthiest people in the U.S. are:
- Jeff Bezos, Amazon
- Bill Gates, Microsoft
- Warren Buffett, Berkshire Hathaway
- Mark Zuckerberg, Facebook
- Larry Ellison, Oracle
- Larry Page, Google
- Charles Koch, Koch Industries
- Sergey Brin, Google
- Michael Bloomberg, Bloomberg
These men and others in the billionaire class make politicians like Bernie Sanders wonder aloud if anyone should really have so much money while others are having trouble making ends meet. This sentiment, which has gained some following, causes many to be angry. In Veblen’s day it would be easier for the uberwealthy to escape notice, but today they’re too obvious. The anger is similar to what Marx may have forecast.
This group of super wealthy have the money to pay off politicians so that they can control how legislation would affect them. Most of the payoffs are through their companies, like Google, Twitter, Facebook, Bloomberg, and Microsoft, monopolies with the wealth and power to buy politicians with large contributions.
If tax rates are raised by the Democrats, billionaires have the smartest lawyers and accountants needed to move or hide money from taxation. As Bill Gates said in a recent interview (paraphrasing) “I don’t mind paying a few million more in taxes but if you ask me for a hundred million, now you have my attention.”
Any new income or wealth taxes would likely hurt those in the top 25% much harder than those in the top .1%.
Another change since 1961 is that the cost of being average has increased. Sixty years ago, a teenage boy needed a couple pairs of jeans and a couple shirts. Today all kids need smartphones, computers, and Bluetooth earplugs. Every household needs big screen televisions with cable service, high speed Internet, a game box, movie channels, and more. The income and wealth gaps have widened and the cost of just being like everyone else has increased. This has only added to the frustration of people on the lower rungs.
Economists like Robert Schiller tell us that unless something is done about the distribution of wealth, we may face a revolution of the lower classes. Politicians are aware of this and people like Bernie Sanders mention it in their speeches. Although Bernie does not take contributions from the uber-wealthy, most politicians are not so unencumbered. Most are beholden to the top .1%. Coming tax changes are likely to have the greatest effect on those in the top 1%, 5% and 10% because these groups have much less political leverage.