Wealth Gap Will Widen in Downturn

The U.S. economy shrank 5.5 percent in the second quarter of 2009, the second steepest decline in 27 years and the first overall decline in 4 straight quarters since 1975. Thirty million people are now officially "underutilized," the largest number in history. New jobless claims increased, business inventories fell, and exports plunged as the bad economic news continued.

Only two years ago, Steve Forbes, CEO of Forbes magazine, declared 2007 "the richest year ever in human history." During the 8 years of the Bush administration, the 400 richest Americans, who now own more than the bottom 150 million, increased their net worth by $700 billion. In 2005, the nation's top 1 percent claimed 22 percent of the national income, while the top 10 percent took half the total income, the largest share since 1928.

However, in June 2009, the Merrill Lynch Global Wealth Report estimated that the world's wealthiest lost 15 percent, the steepest decline in the report's 13-year history. The number of millionaires in the U.S. fell 19 percent to 2.5 million people, and the 10 wealthiest saw their fortunes decline slightly from $252.6 billion to $239.8 billion.

Sam Pizzigati, associate fellow at the Institute for Policy Studies in Washington, DC, notes that, "The source of wealth has changed over the past thirty years; corporations have become the engine of inequality in the U.S.... In the past, wealth came from ownership. Today it comes increasingly from income." In 2007, the ratio of CEO pay to the average paycheck was 344 to one; lower than the record 525 to one ratio set in 2001, but still substantial. This year's ratio is estimated to decrease to 317 to 1. In the 1960s, 1970s, and 1980s, the average ratio fluctuated between 30 and 40 to 1.

Despite the myth of the U.S. being a nation of "small business," over 40 percent of GNP comes from Fortune 500 companies. According to the World Institute for Development Economics Research, the 500 largest conglomerates in the U.S. "control over two-thirds of the business resources, employ two-thirds of the industrial workers, account for 60 percent of the sales, and collect over 70 percent of the profits."

These corporations have systematically created a wealth gap over the past 30 years. In 1955, IRS records indicated the 400 richest people in the country were worth an average of $12.6 million, adjusted for inflation. In 2006, the 400 richest averaged $263 million in income, representing an epochal shift of wealth upward.

A portion of that wealth came from lower taxes. In 1955, progressive federal income rates were 91 percent, though loopholes allowed the wealthy to pay only 51.2 percent of their income in taxes. By 2006, the richest paid 17.2 percent of their income in taxes. In that same period, the proportion of federal income from corporate taxes went from 33 percent to only 7.4 percent in 2003.

The Bush tax cuts helped: 53 percent of the cuts went to the top 10 percent, while 15 percent of the cuts went to the top 145,000 taxpayers in the country. The top 400 taxpayers began paying the same percentage of their incomes in taxes (before deductions and accounting tricks) as those making $50,000 to $75,000. Since 1996, the top 400 wealthiest doubled their share of total U.S. income.

While the rich were getting richer, average income dropped. Wages for most Americans didn't improve from 1979 to 1998 and the median male wage in 2000 was below the 1979 level, despite productivity increases of 44.5 percent. Between 2002 and 2004, inflation-adjusted median household income declined $1,669 to $44,389. In 2006, the Center for American Progress found that fewer than one-third of all American families had savings equaling three months wages. Debts soared, equaling 125 percent of disposal income in 2006.

Pizzigati sees the change in wealth disparity as a result of several factors. The end of WWII allowed U.S. corporations to dominate the world's economy and Americans' income doubled in the next 25 years. As the world's economy revived, U.S. corporations chose to squeeze more profit from their workers. They also increased markets through acquisitions and mergers, rather than building better products.

"But over the past few decades," Pizzigati says, "downsizing has been a corporate wealth generating strategy. Today, CEOs don't spend their time trying to make better products; they spend their time maneuvering to take over other companies, steal their customers and fire their workers. That's the way they make money."

Growing conglomerates illustrate this trend. Hewlett Packard made 96 acquisitions, almost all of them since 1991. Mark Hurd has conducted 31 mergers since becoming CEO in 2005 and has downsized 40,000 workers and collected $40 million in compensation, according to Pizzigati. Oracle and hundreds of other companies grew in the same way.

The labor movement, which once represented 35 percent of private sector employees—today it's down to 8 percent—no longer serves as a powerful political force to limit excessive executive pay. Additionally, when Reagan cut the top income tax rates, the wealthy had more funds to lobby Congress to change laws to continue to increase their income.

Recent efforts to corral CEO pay have been weak and ineffective. CEO pay may have fallen during these economic hard times, but the huge disparity isn't going away. Without a strong movement for change, the wealth gap will only increase in this downturn.

"There won't be a restructuring of the economy unless we take on executive compensation," concludes Pizzigati. "Outrageously large rewards give executives an incentive to behave outrageously. If we allow these incentives to continue, we will just see more of the reckless behavior that has driven the global economy into the ditch."

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Don Monkerud is an Aptos, California-based writer who follows cultural, social, and political issues.