The American Economy is Not That Great Except for the Rich
by John Lawrence, July 17, 2018
Thanks to the financialization of the economy, rising GDP doesn't mean that more money is going into workers' pockets. When a private equity fund strips a company and sells off the parts, GDP goes up because that economic activity is added into GDP. In 2012,Hostess Products, the makers of Twinkies, filed for bankruptcy under the private equity firm Ripplewood Holdings, and some 8000 workers lost their jobs. Hostess has bounced back and forth among multiple private equity companies with the result that executives of those companies have gotten rich and workers have lost their jobs. In every case the shenanigans of private equity firms and hedge funds have caused GDP to rise, but the only financial gains have gone to the very rich and not to the average worker. Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry.
The Fed's policy of holding interest rates at zero has caused massive inflation in the real estate and stock markets, but this is not reported as inflation due to the way inflation is computed. Here too this rapid increase in home prices has made the GDP increase while pricing many average people out of the real estate market. Advantage: the rich. Disadvantage: everybody else. The American economy which seems to be in good shape with its various economic indicators like GDP, has mainly benefited the rich while seemingly benefiting everyone. But while economic indicators are all positive, the results are a further divide between the rich and the poor with the rich reaping all the gains of an economy in which the gains and increases go mainly to them.
Medium reported:
Adjusted for inflation, the US economy has more than doubled in real terms since 1975.
How much of that growth has gone to the average person? According to many economists, the answer is none or close to none.
In a recent gloomy study of the American economy, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman find that between 1980 and today, almost none of the gains from economic growth accrued to the bottom half of the population. They write, “Looking first at income before taxes and transfers, income stagnated for bottom 50% earners: for this group, average pre-tax income was $16,000 in 1980 — expressed in 2014 dollars, using the national income deflator — and still is $16,200 in 2014.”¹ Piketty, Saez, and Zucman also found that incomes of the top 1% tripled over the same time period.
New York Times columnist David Leonhardt, reacting to this work, concluded “the very affluent, and only the very affluent, have received significant raises in recent decades.”
So the world's largest economy is essentially a bifurcated economy with the rich racking up phenomenal gains while the poor and middle class stagnate. However, some in the middle class are still doing OK. They are mainly the ones who bought stocks and real estate 20 or more years ago. Those stocks and real estate have inflated due to the Fed's interest rate policies. The other middle class group that has prospered are those who have benefited from a transfer of wealth from the previous generation. Those who have inherited neither stocks nor real estate and have had to start from zero are in the worst shape because they are likely to be the ones that have acquired student loan debt to get an education that purportedly would gain them a toe hold in the middle class. But that toe hold has slipped and they have ended up with no real estate (they can't afford a mortgage because of the student loan debt they have to pay off) nor have they been able to acquire stocks at greatly inflated prices.
The intergenerational transfer of wealth has exacerbated the wealth gap between white and black families. The Atlantic reported:
A forthcoming study from Meschede and Joanna Taylor, also a researcher at Brandeis, in the American Journal of Economics and Sociology, makes the point clearly. Building on a 2017 study of theirs that examined wealth accumulation among college graduates—as well as “intergenerational financial transfers,” like when a parent helps a recent college grad out with rent or, say, gives her $1,000 a month to spend on whatever she pleases—the two looked specifically at how family inheritances, which are usually larger and tend to come all at once, factor into building and maintaining wealth.
The two researchers focused specifically on inheritances among families where at least one parent has a college degree. They looked at families like this in order to test the notion that higher education is a great equalizer.
The differences that they found between black and white families were stark. “Among college-educated black families, about 13 percent get an inheritance of more than $10,000, as opposed to about 41 percent of white, college-educated families,” Taylor said in a release announcing the new research. More specifically, white families that receive such an inheritance receive, on average, more than $150,000 from the previous generation, whereas that figure is less than $40,000 for black families.
So far from being an equalizer between black and white families, a college education has only indebted black families on average even more. In other words they are worse off with a college education than they would have been without one. A college education for many blacks and poor whites has only been a debt trap, a debt trap that follows them to retirement where their social security is snatched away from them for repayment of their student loan debt.
So Donald Trump will probably fool a lot of voters who will be sold the bill of goods that the economy is doing great. They will wonder why that is not so for them, but will have to chalk it up to their own failings. Meanwhile, Bernie Sanders, Elizabeth Warren and others will have to try and explain a more nuanced picture - that the economy is doing very well for the rich but not for those at the lower end of the economic spectrum. Again people will probably not have the mental aptitude to grasp that distinction and will probably vote against their own interests.
