Stuckness: America's Enrichment Obsession

Stuckness: Rising Enrichment, Rising Inequality

Much has been said about inequality of late. Let’s put just a couple numbers to that conversation. Here I draw on a pretax earnings spreadsheet that Cal's Professor Saez has prepared using IRS digests. The Saez spreadsheet breaks the US population into seven groups - one group for all of the Bottom 90%, and six groups for the Top 10%.

In the graph below, I compress his data into three groups - the Bottom 90%, the Next 9%, and the Top 1%. For each, I have extracted total pretax earnings (adjusted for inflation) from his spreadsheet.

The graph below tells a story that our chattering classes have been slow to acknowledge. From the end of the Second World War through the end of the 1970s, income shares for these three groups were remarkably stable. Then the rules changed. The behavior of the American economy shifted. And from the early 1980s forward, Americans have lived within quite a different economy - altered rules, altered behaviors, altered outcomes.

From 1946 through 1981, the Bottom 90% typically received 67 percent of the nation's pretax earnings. 

The Next 9% typically received 25 percent of the nation's pretax earnings.

The Top 1% typically received 8 percent of the nation's pretax earnings.

And then the stabilizing forces that had made this possible were taken away. In the early years of the Reagan Administration, the share going to the Bottom 90% began to fall. In the later years of the Reagan Administration, the process of squeezing the Bottom 90% accelerated.

And now the Saez spreadsheet tells of a very different economy. 

For those at the bottom, the share of Pretax Earnings has fallen from 67 percent to 52 percent.

For those in the Next 9%, the share of Pretax Earnings has risen from 25 percent to 30 percent.

And for those in the Top 1%, the share of Pretax Earnings has shot up from 8 percent to 18 percent.

These are not modest shifts. This graph draws our attention to what has clearly been a drastic change in the American economy. What was once an economy optimized for Prosperity is now an economy that's been optimized for Enrichment.

(discussion continues following Chart)

As these new trends have taken hold, there has been a lot of “Let’s pretend” from economists. Let’s pretend – this was caused by globalization. Let’s pretend – this was caused by a growing mismatch between the skills the economy needs and the skills people have. Let’s pretend – this was caused by the decline of American manufacturing.

As we will see in greater detail later, there’s a better way to get at the heart of what happened. The federal government changed sides! 

Once America's economy lived within an operating system that protected working Americans - call this the era of "FDR's Rules." Call this our era of "Prosperity Economics."

The team that took over the Federal Government on Reagan's election deliberately and drastically changed the rules. 

The old economy had emphasized Prosperity for the Bottom 90%.

The new economy was to emphasize Enrichment of the Top 1%.

How could this happen? What makes it possible for the American economy to be reset, with such drastic results?

Here's what we haven't noticed.

The American Economy has two faces. One is the face of production. The other is the face of wealth.

And - because of these two faces - there are two different ways to optimize the American economy. 

It can be optimized for Prosperity, as it was by FDR.

Or it can be optimized for Enrichment, as it was by Reagan.

But it cannot be optimized for both at the same time.

It was not by accident that the American Dream has gone dark for so many working Americans. Those now in charge wanted it to go dark.

More stuckness!