The Great Divergence

Popular Economics Weekly

The so-called “minimalist” budget deal just reached by Congress is another illustration of the great divergence in wealth distribution of recent years that has eclipsed the middle class. The Great Divergence is not a term usually associated with inequality, but a term coined my historian Samuel Huntington to explain Europe’s explosive economic growth in the 19^th century that left the rest of the world behind. But today, it best explains what has reduced domestic economic growth and job formation over the past 30 years.

Until 1970 wealth had been fairly evenly distributed so that the rising tide of economic growth lifted most boats, but then something happened. The middle class began to disappear, with wealth flowing upward, so what was left was either the poorest or richest among us.

The results of such a ‘divergence’ of wealth from what was its distribution since World War II has not been well documented, and ultimately resulted in the Great Recession (which some have called the Lesser Depression). Middle class consumers in particular saw their accumulated wealth disappear with the busted housing bubble, and income growth that did not keep up with inflation. Both household and government revenues declined to record lows as a percentage of overall economic activity.

What happened since then is conservative economic policies begun under Presidents Carter and Reagan, have gradually shifted most of U.S. wealth created to the wealthiest individuals and corporations, resulting in money flowing to those who either hoard it (such as record corporate cash assets of more than $2.2 trillion), or play the financial markets, causing speculative bubbles that have resulted in 5 recessions since 1980.

There has also been a gradual reduction in economic growth since then, with GDP growth averaging 2.5 percent, whereas it averaged 3.5 percent up to 1980, including the Great Depression. It is even worse today, averaging 2 percent since the end of the Great Recession, with the unemployment rate stuck at 7 percent.

This is not new news. It has been well documented by such as Professors Thomas Piketty and Emmanuel Saez’s research on income inequality, and Robert Reich in his book and movie, Inequality for All. But we are now just beginning to understand its effects.

According to the Congressional Budget Office, between 1979 and 2007 incomes of the top 1 percent of Americans grew by an average of 275 percent. During the same time period, the 60 percent of Americans in the middle of the income scale saw their income rise by 40 percent. From 1992-2007 the top 400 income earners in the U.S. saw their income increase 392 percent and their average tax rate reduced by 37 percent. In 2009, the average income of the top 1 percent was $960,000 with a minimum income of $343,927

And now, the brutal cuts to federal spending known as the sequester have wreaked havoc on important programs for mostly the poor, cutting off hundreds of thousands from Head Start and low-income housing assistance, setting back scientific research and environmental protection, and costing more than a million jobs. Getting rid of the sequester for domestic programs was a high priority for Congressional Democrats, yet very little was achieved in a budget deal reached last Tuesday to right this great divergence of wealth from the have-nots to the haves.

Lowering the maximum income tax rates for the wealthiest to 36 percent from as high as 48 percent during the Reagan era, lowering capital gains, inheritance tax rates, as well as giving energy companies and major corporations huge tax loopholes to drive through, has transferred most of the wealth created since then to the top 1 percent, while corporations have amassed record amounts of cash reserves, much it held overseas where most growth has occurred for the multinational corporations.

And corporations have used their increased economic power and profits to cement their economic dominance; by suppressing collective bargaining, minority voting rights, and a great number of environmental regulations in state legislatures via ALEC, the American Legislative Exchange Council that actually writes the legislation for conservative state legislatures.

The result is that most of the productivity gains enabled by both technology and globalization (i.e., relaxed trading regulations and oversight) have gone to corporations and their investors, abetted by the reduced tax base.

This is while middle class incomes and retirement accounts have been depleted, and governments have been starved of funds to even keep up with outmoded infrastructure maintenance, while reducing educational spending, environmental enforcement that pay forward benefits for future generations.

The Great Divergence is once again a fact, but a fact that highlights the decline of western economies due to the increasing concentration of wealth. It should raise alarms in Europe as well, where austerity programs are at work impoverishing their middle class.

Harlan Green © 2013

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