Is the rich getting richer slowing down the economic recovery?

An oped in the New York Times by Robert B. Reich, who was a secretary of labour in the Clinton administration, makes a connection between our painfully slow economic recovery and income inequality.

He also sets out the coping mechanisms most of us have used to bridge the widening gap between our relatively flat earnings and the growing mountain of stuff what we want to buy (the zombie economy) . This pre dates the use of debt and of course is all relevant to NZ.

Reich points to research that shows that in the US in late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.

It’s a bit difficult making similar comparisons with NZ because of different data sources, but according to a Treasury working paper the increase in New Zealand’s income inequality seems to have been proportionately larger than that seen in most other developed economies. “New Zealand now appears to have one of the highest levels of inequality in the OECD.”

Most of this occurred in the 1980s and 90s. According to the Ministry of Social Development’s 2009 Social Report, income inquality dipped in NZ in the mid 2000s before rising again in 2007-08. 

Reich says it’s no coincidence that the last time income was so concentrated in the US was in 1928. “I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economic declines.”

He says the connection is more subtle.

“The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.

“What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.”

Meanwhile ‘Joe public’ consumers no longer have the purchasing power to buy the goods and services they produce as workers – “their means haven’t kept up with what the growing economy could and should have been able to provide them.

“…for years American families kept spending as if their incomes were keeping pace with overall economic growth. And their spending fueled continued growth. How did families manage this trick? First, women streamed into the paid work force. By the late 1990s, more than 60 percent of mothers with young children worked outside the home (in 1966, only 24 percent did).

“Second, everyone put in more hours. What families didn’t receive in wage increases they made up for in work increases. By the mid-2000s, the typical male worker was putting in roughly 100 hours more each year than two decades before, and the typical female worker about 200 hours more.

“When American families couldn’t squeeze any more income out of these two coping mechanisms, they embarked on a third: going ever deeper into debt. This seemed painless — as long as home prices were soaring. From 2002 to 2007, American households extracted $2.3 trillion from their homes.

“Eventually, of course, the debt bubble burst — and with it, the last coping mechanism. Now we’re left to deal with the underlying problem that we’ve avoided for decades. Even if nearly everyone was employed, the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing.”

That sounds a hell of a lot like what’s going on in NZ.