Two Americas: The Gap Between the Top 5% and the Bottom 95% Widens   (August 18, 2010)

Statistically, there is no middle class in America; there are only two Americas: the top 5% and the bottom 95%.

Fifty years ago, Michael Harrington's The Other America: Poverty in the United States galvanized the nation's leaders to address the painful divide between the ever-more prosperous middle class and those still mired in poverty.

To close this divide, social programs such as Medicare, Medicaid, food stamps and housing subsidies were launched. The legacy of those programs is now mixed, as their growth has far outstripped that of the underlying economy, and various fiefdoms and cartels have gained control of the pursestrings of programs such as Medicare.

But despite the vast sums expended on these social programs, the gap between the super-rich, the wealthy and "the rest of us" has widened, creating what is in essence two Americas--the top 5% and the bottom 95%.

As total household income declines, the wealthiest Americans take home a larger piece of the national income pie. In 2008, Americans reported $8.4 trillion in total income, down 4.6% from 2007. Adjusted for inflation, that is down 8.4%, the sharpest decline in total income since the brief recession that began in 1990.

David Stockman, director of the Office of Management and Budget under President Reagan, recently noted in an editorial that the top 1% of Americans received two-thirds of the gain in national income from 2002 to 2006.

Economists Emmanuel Saez and Thomas Piketty have reported that the top 10% of earners took home about half of all income as of 2007.

The number of people in the highest reaches of income also fell--tax returns reporting income of $1 million or more fell by 22% to 321,294, and the number of returns that reported income of more than $10 million fell 36% to 13,480.

Put the data together and this reveals an increasing concentration of income and wealth at the top.

The U.S. economy is thus increasingly dominated by the wealthy. According to research from Moody’s Analytics, the top 5% of Americans by income are responsible for 37% of all consumer spending—about the same as the entire bottom 80% by income (39.5%).

These are rather startling statistics: out of 130 million households, 1/100 of 1% rake in $10 million or more annually. As consumers, the top 5% carry the same weight as the bottom 80%. The top 10% take in 50% of the income.

This trend has coined a new word: Plutonomy, an economy That is dependent on the spending and investing of the wealthiest slice of citizenry.

As a result, when the 5 percent in income earners--those households earning $210,000 or more annually--rein in their discretionary spending, then the U.S. economy tanks.

Indeed, the slump in the economy this summer can be tracked directly to a decline in the discretionary spending of the wealthiest Americans.

The very rich are pulling away from the merely wealthy. Those earning $10 million or more per year are increasingly wealthier than the 321,000 earning $1 million or more, and those top earners are pulling away from the 6 million others who make up the top 5% of households by income.

In the housing and stock market boom years of 2002 and 2007, the bottom 99 percent of households by incomes grew by a meager 1.3 percent a year in inflation-adjusted terms, while the incomes of the top 1 percent grew 10 percent a year.

Over the past 25 years since 1985, the top 1 percent's share of national income has doubled; in 2007, it netted 23 percent of the nation’s total income. The income of the wealthiest Americans--the top 0.1 percent—has tripled in that 25 year period. This wafer-thin slice of Americans now earn as much as the bottom 120 million people.

The extremely wealthy are pulling away because their earnings come from capital, not labor. While wages have stagnated, returns on capital investments and speculations have soared. None other than former Federal Reserve Chairman Alan Greenspan recently described this yawning divide between those in the top slice of the economy who are doing very well and the 95% below them who are struggling.

Our problem is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it. Large banks and large corporations, as everyone’s pointing out, are in excellent shape.

The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.”

This great divide between the spending and income of the wealthiest 5% and the rest of us (95%) calls into question the value of the GDP (gross domestic product) as a meaningful statistic. If the wealthiest Americans are buying luxury cars and apparel again, that may pump up the nation's GDP, but it doesn't mean 95% of the populace are doing better financially.

Indeed, the top 5% don't need the bottom 95% to prosper at all; all they need is for the debt-serfs to service their staggering debts, accept the status quo, quietly take the Savior State handouts and then go home to Facebook, texting and the Tellie.

Today, there is no rallying cry against rising inequality; there is only the rustle of self-absorbed greed as the top 5% secure their benefits and perquisites within their protected fiefdoms, safely overseen by the Savior State and its Global Empire.

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