Here is a graph of income in the United States since 1979. We see the wealthiest 1% skyrocket. The wealthiest 20% grows, but much more slowly. And the bottom 20% has not grown at all, except for keeping up (barely) with inflation. (h/t New York Times)
When we think about economic inequality and the concentration of wealth in the hands of the top 1%, we almost always think first of the negative effects on the poor and the middle class. We think about poor people living in substandard housing, and receiving substandard food, education, healthcare, etc., and low income communities that are unable to provide people with the tools to move up the economic ladder. We also think of a middle class in which it is almost always required that both parents work, families taking fewer vacations, working more weekends and overtime, and still holding much larger debts that their parents did.
What we rarely think about is the negative effects of the giant pool of money that the top half of 1% have at their disposal. Beyond having enough for themselves and their children, beyond having enough to capitalize a business or a wide set of investments, they have more money besides, and sometimes do not know what to do with it. I am not talking about John McCain-style, 10 houses and 13 cars money.
The super wealthy have far more money than they can consume. How many more cars can John and Cindy buy?
So the vast majority of the assets of the very wealthy are invested (as opposed to the poor and middle class, who spend their money). Once the obvious good buys on the stock and bond market were all bought up, the wealthy still had money to invest. Real estate comes next. Capital funds looked for start-ups to invest in. Other funds invested abroad. But there was still money to invest. So hedge fund managers and investment advisers went looking for new and novel things to do with the giant pool of money. (To a large extent, the same is true for the enormous wealth of oil states like the Saudis).
To help the wealthy find places to put their money, Federal Reserve Chairman Alan Greenspan, with the support of both Democratic and Republican Treasury Secretaries, smiled on increasingly complex financial instruments: derivatives, futures, options, and mortgage-backed securities. The easy money policies of the Fed encouraged a feeding frenzy in these obscure markets, creating huge pressure on local banks to write and sell more and more mortgages through the last decade.
And here we are. As we move forward, it is essential that tax writers in Congress determine ways to grow our nation back together, and decrease inequality. Taxation will be absolutley required to rebuild America’s infrastructure and create jobs to help us out of the recession — and the top 1/2 of a 1% can and should take the vast majority of the burden, since they have been so privileged for so long. Besides, wealth inqueality is not reduced, if the excess wealthy of the top 1/2 of 1% of Americans will continue to create speculative bubbles in the future, and we will all be the worse for it.