Income concentration and bubble-blowing

Long before the housing bubble finally broke, you would see cautionary comparisons from time to time of the parallels between the concentration of U.S. income in the 1920s and the 1990s and 2000s. The chart reproduced here, based on the work of economist Emmanuel Saez (who won the John Bates Clark Medal last week), traces the share of national income flowing to the top 10 percent of earners between 1917 and 2006.

Economic analyses of both periods tend to emphasize the explosive growth of speculation in financial markets. You might infer that it was the speculation that produced the income growth at the top, and to an extent that must be true. But the climax of speculative activity in both periods (from the start of 1928 onward in the pre-depression era, and from 2003-04 onward in the current instance) came after years of growing income polarization that produced massive concentration of gains at the top. 

And that suggests that to the extent there’s a causal relationship here, it was the polarization of incomes that produced the speculative booms rather than the other way around. By way of contrast, the golden age of U.S. capitalism–both from a worker’s perspective and in terms of American economic dominance globally–came during a period from the 1950s to the early 1970s when manufacturing was king, the top 10 percent were earning a much smaller share of the national income, and finance and banking played a mere supporting role in the economy.

We’ve all heard reference to people with “more money than they know what to do with.” So here is another reason to start redressing the polarization of income in America: When the wealthiest segment of the population controls the lion’s share of income, they do not just consume gaudy baubles and build monuments to their own dubious taste; they blow unsustainable asset bubbles, too.

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Comments (4)

  1. Submitted by dan buechler on 05/01/2009 - 08:24 am.

    Just look at the private assets i.e. multiple ultra high expense households, cars, boats, toys of petters and hecker. Ane Petters didn’t even have a real business it seems.

  2. Submitted by Annalise Cudahy on 05/01/2009 - 09:37 am.

    Thank you. This is exactly right – the speculative bubble came from people having more money than they knew what to do with, and then having even more. It went through a variety of industries – the first notable one being internet stocks, but that was rolled over into investments in large condo projects, et cetera.

    Just like the 1920s, when the key new technology was the automobile, it was bound to fail as it has. Too much is eventually enough.

    In the last Depression, a “New Deal” was the way out – a reshuffle of the cards so that the game could start over. Why not now?

  3. Submitted by Dan Hoxworth on 05/01/2009 - 04:34 pm.

    Thank you for sharing this insightful analysis. It is spot on and another reason for us to create a more progressive tax system at the local, state and federal levels. Let’s begin this effort during this legislative session in Minnesota!

  4. Submitted by William Pappas on 05/03/2009 - 10:58 pm.

    The characteristic of the tremendous economic growth occurring after the tech boom was that it left out the middle class. To a certain extent this has been building since Reagan began slashing the tax rate on upper incomes and deregulating financial institutions. Clinton compouned it by enabling NAFTA which allowed a mass exodus of American factories to find cheap labor and lax environmental laws that sent corporate profits soaring. Worse yet, cheap labor created downward pressure on American wages while the rich paid less tax to support our infrastructure. The result: college education becoming to expensive for the middle class and rapid drops in benefits and wages for employees. The ugly characteristic of our bubble economy now is that it produces very little wealth, just floats it around on paper. Other than the service sector the real wealth was in finance. Our best and brightest were learning how to perpetuate Ponzi schemes! Thanks, Mr. Perry, for furthering this discussion.

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