Economic populism is back, with attacks against inequality and the “greedy rich” back in style. But at the very moment that the public is outraged over the rich getting richer, the rich might actually be losing their share of the nation’s wealth.
Of course, the economic crisis is affecting all income and wealth groups. But if history is any guide, the proportion of national income and wealth held by the richest 1%–decried for years as being close to pre-Depression levels–probably will shrink markedly in coming months.
To understand why I interviewed Emmanuel Saez, the income-share expert and economics professor at the University of California, Berkeley. Here is an edited excerpt:
ROBERT FRANK : Does history offer any guide for what will happen to wealth shares of the top 1% in the current crisis?
EMMANUEL SAEZ: Perhaps the best comparison is the Great Depression. During that period, the income share of the top 10% was stable. But that masked a sharp fall for the top 1%. The income share of the top 1% fell from 24% in 1928 to 15.5% in 1931.
RF: Why such a big drop?
ES: Mostly because capital gains took a big hit, and I think it will in the coming years as well. One of the most important (factors) during the Great Depression was that profits to business took a huge hit. That affected the top 1%, but the top 10 % as a whole remained stable because the high-wage earners did pretty well during the Great Depression. Those guys rarely lose their jobs and don’t get much of a pay cut.
RF: How much will the shares for the top 1% fall in the current crisis?
ES: It was 23% in 2006 and I believe it will have peaked around 23% or 24% in 2007. It’s likely to drop by about 4% or 5%. It will be probably be pretty significant but it might be temporary. Today the new reason (for drop in top 1%) is related to incomes from stock options.
RF: So they lost their share of incomes. What about wealth?
ES: That dropped dramatically, too.
RF: Public concern over inequality seems to be at a peak. There is a growing call by Sen. Barack Obama and others to raise taxes on the wealthy to shrink the wealth gap. Are they worried about a problem that’s already being fixed by the markets?
ES: The key question is whether you want to take a chance and let such excess come again. If the public and government don’t want that anymore they might impose law and regulations.
RF: But the top 1% didn’t regain its share immediately after the Great Depression.
ES: Because the New Deal made the fall in top incomes permanent. Today, it can easily come back if the stock market comes back.
RF: What is your best guess about what will happen with wealth shares and policy?
ES: My guess is that without a change in policy, inequality will fall temporarily in the next two years but not too much, because compensation structures have changed dramatically. It cannot be totally undone by the financial bust. Policy makers now have a golden opportunity like [President Franklin] Roosevelt to do something more permanent.