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Study Shows Economic Crisis and Response a Victory for the Rich

Breakfast at Tiffany's is so passé; let's do Cartier in Shanghai to celebrate! (photo: Stuck in Customs via Flickr)

A recent paper shows the complete victory of the rich in the class war. If you had any doubt, consider these facts. In 1983, the 838,900 households comprising the top 1% in wealth held $6.6 trillion in financial assets (constant 2007 dollars). In 2007, the 1,161,200 households in the top 1% held $19.9 trillion. The average for each household went from $7,870,000 to $17,116,000.

To put this in perspective, in 1983, the middle quintile, the 16,779,000 households 10% on either side of the middle, held $261.7 billion, an average of $15,600 per household. That rose to $603 billion in 2007, when there were 23,224,000 households in that quintile. Each household in the middle quintile had an average of $26,000 in financial wealth. If just half of the gains to the top 20% were divided evenly among the other 80% of 2007 households, their average wealth would rise $157,776.

This and other equally astonishing facts appear in a paper written by Edward Wolff (pdf). Tables 3 and 4. Wolff’s paper is discussed in detail by William Domhoff here, with better charts. Financial assets include all assets other than home equity.

Wolff provides some estimates on the impact on wealth of the Great Crash as of July 1, 2009. His rough guess is that the impact on the very rich was substantially less than on the other groups, and that as a result, the share of wealth of the top 1% went up from 34.6% of total wealth to 37.1%. The number of households with zero or negative net worth went from 18.6% to 24.1%. That is because housing prices made up the biggest part of the wealth of the bottom four quintiles, so the losses on housing value had a huge impact. The stock market has risen further since, and housing prices have continued to decline, so it’s fair to guess that if he repeated his calculations as of today, the rich would have advanced further.

An additional source of problems for average households was the rise in their debt. For the middle three quintiles, the debt to equity ratio rose from 37% to 46% in 2007, and the debt to income ratio rose from 67% in 1983 to an astounding 157% in 2007. Wolff points to facts suggesting that the increase in debt was to finance normal consumption expenditures, and was not the result of some kind of spending binge.

One form of class war is the struggle over the allocation of the gains created by society. The rich won that struggle.

It was not an accident. It didn’t have to be that way, and it doesn’t have to be that way going forward. Nevertheless, President Obama and his economics team are trying to put the old system back in place: low taxes on the rich, speculation, unregulated shadow banking, light-touch regulation of exotic securities, malleable regulators, the whole plan of the rich.

Why would anyone except the rich support that?

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I read a lot of books.