The Agenda

The Fate of the Rich

Michael Mandel of BusinessWeek recently posted on the 2000s as a lost decade for U.S. economic growth.

From the second quarter of 1999 to the second quarter of 2009, real GDP grew at a 1.9% annual rate. That beats (in a negative sense) the 2.0% growth rate for the decade which ended in the first quarter of 1983.

It’s hard to wrap one’s head around the fact that this past decade was worse than the era of stagflation when it comes to growth, in part because of the tremendous wealth boom that happened at the top of the spectrum. That wealth boom was driven to a great extent by market forces, but there’s good reason to believe that so-called access capitalism has played a role, e.g., political insiders using their access to secure governments contracts, etc.

In today’s New York Times, David Leonhardt and Geraldine Fabrikant report that the trend towards the concentration of income and wealth, rising for the past thirty years, may be reversing. 

The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.

For every investment banker whose pay has recovered to its prerecession levels, there are several who have lost their jobs — as well as many wealthy investors who have lost millions. As a result, economists and other analysts say, a 30-year period in which the super-rich became both wealthier and more numerous may now be ending.

Is this just a function of the business cycle? At least one economist Leonhardt and Fabrikant interviewed believes that something more structural is at work.

“We had a period of roughly 50 years, from 1929 to 1979, when the income distribution tended to flatten,” said Neal Soss, the chief economist at Credit Suisse. “Since the early ’80s, incomes have tended to get less equal. And I think we’ve entered a phase now where society will move to a more equal distribution.”

Assuming we don’t see a sharp turn towards vastly higher taxes and higher spending, and that’s very much an open question, I think Soss is wrong. As Harvard economist Lawrence Katz told the Times, you need sweeping interventions to reverse the trend.  

Beyond the stock market, government policy may have the biggest effect on top incomes. Mr. Katz, the Harvard economist, argues that without policy changes, top incomes may indeed approach their old highs in the coming years. Historically, government policy, like the New Deal, has had more lasting effects on the rich than financial busts, he said.

Again, we could see the return of ruinously high marginal tax rates, but it’s important to note that the Democratic coalition depends on a small number of affluent voters who, as we saw during the debate over the proposed income tax surcharge in the House health bill, are tax-sensitive. While progressive activists want significantly steeper progressive taxes, the Democratic donor base does not.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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