The 1 percent recovery

March 8, 2012

Forget Roman Catholics and contraception, evangelicals and Mormonism, Newt Gingrich’s three wives and even Mitt Romney’s dog. If you are struggling to understand a roller-coaster U.S. election season, described by one writer as “wackadoodle,” your Rosetta Stone should be a dry academic paper by the economist Emmanuel Saez.

In an age of celebrity scholars, Saez, a professor at the University of California at Berkeley, is a shy data jock who does most of his communicating by marshaling vast pools of statistics. But he has probably done more than any pundit or political spinmeister to shape the political narrative of our age — it is the number-crunching of Saez and his longtime collaborator, Thomas Piketty, that gave us the notion of the 1 percent and the evidence that they are pulling away from everyone else.

That’s why, in the community where economics and politics intersect, a new Saez paper is hot news. And his latest, which set Twitter abuzz this week, is a humdinger. Saez has come up with a killer fact: In the 2010 recovery, 93 percent of the gains were captured by the top 1 percent. That’s because top incomes grew 11.6 percent in 2010, while the incomes of the 99 percent increased only 0.2 percent.

That gain is particularly painful because it comes after an 11.6 percent drop in income for the 99 percent, Saez reports, the largest such fall over a two-year period since the Great Depression. That decline more than erases the income gains since the last downturn. We may not yet be a lost generation, but we have certainly experienced a lost decade.

This battering of the middle class — or really, everyone except the rich — is the powerful and painful economic reality that is driving the angry, polarized political debate in the United States. Saez is hardly a household name in the U.S. heartland, but the economic whiplash he describes is American everyday life. It is why voters are so angry, and why they are attracted by candidates who present themselves as outsiders offering a vision of change.

The healthy rebound of the 1 percent that Saez documents is also important because it runs counter to the rising narrative of an economic elite that is under siege. The recent decline in Wall Street bonuses and attacks on the titans of finance by both Occupy Wall Street and, less predictably, the Republican presidential candidate Newt Gingrich, have provoked the angry retort that the people at the top have suffered from the financial crisis, too, and that their travails are no less worthy of sympathy.

But Saez shows that while the financial crisis hurt those at the top more than anyone else — the income of the 1 percent plummeted 36.3 percent between 2007 and 2009, compared with an overall average fall of 17.4 percent — their recovery has been spectacular, while everyone else has languished. Interestingly, the top 1 percent fared better in President Barack Obama’s recession than they did in the recession of President George W. Bush from 2000 to 2002.

Conventional wisdom has it that Americans are more tolerant of the ultrarich than people in many other countries, and that one reason for this benevolent attitude is that in the United States, those at the top earned their way there. Saez offers some support for this view.

“The evidence suggests that top income earners today are not ‘rentiers’ deriving their incomes from past wealth, but rather are ‘working rich,’ highly paid employees or new entrepreneurs who have not yet accumulated fortunes comparable to those accumulated during the Gilded Age,” Saez writes.

That’s a good thing, and it helps to explain why the same people who cheered Occupy Wall Street also treated the death of Steve Jobs like the passing of a secular saint.

But Saez cautions that a plutocracy of the working rich “might not last for very long,” pointing in particular to the cuts in the estate tax as a measure that could “accelerate the path toward the reconstitution of the great wealth concentration that existed in the U.S. economy before the Great Depression.”

In a footnote, Saez also directs readers to a 2007 paper he co-wrote that reveals another worrying characteristic of the 1 percent. Social mobility — the other great promise of U.S. capitalism — is weaker than Americans assume, and it’s getting worse. “At the same time as the gap in earnings between the upper-middle class and the top percentile was drastically widening, it was becoming less likely that an upper-middle class earner could reach the top percentile within 10 years,” he writes.

Saez’s new research is bad news for Mitt Romney, this political season’s most striking emblem of the 1 percent, and it provides a playbook for Obama’s re-election campaign. But the men who will take the most pleasure from it are former President Bill Clinton and his economic team, a group today much maligned for not foreseeing the financial crisis.

The Clintonites turn out to be the heroes of Saez’s economic history of the 1 percent. The economic expansion between 1993 and 2000 was a bonanza for the 1 percent, whose income grew 98.7 percent, a staggering increase that exceeded even the 61.8 percent gain for the 1 percent during the 2002 to 2007 Bush expansion. But the income of the 99 percent grew only 6.8 percent during the Bush go-go years, while it increased a solid 20.3 percent during the Clinton expansion.

As Saez dryly comments: “Those results may also help explain why the dramatic growth in top incomes during the Clinton administration did not generate much public outcry while there has been a great level of attention to top incomes in the press and in the public debate since 2005.” That is the ultimate irony — Clinton, a hated figure of the right, was actually the guy who made it safe for the 1 percent.


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I disagree on several points. First, there are degrees of wealth that are not being captured here.

For example, someone who creates a company that hires 10-50 employees and sells out after 20 years for $5 million is vastly different than Eric Schmidt at Google who changed his corporate title and picked up $100 million dollars.

Schmidt did very little at Google than a thousand other (mostly) men could not have done. And his “reward” shows that, contrary to what Saez says, he and his CEO peers are rentiers. They are able to twist the system to gain outsized benefits.

The most obvious measure, of course, is the vast gap between CEO pay and the lowest paid employees in their companies. This differential is a classic sign of a gamed system. And it should be no surprise after three decades of de-taxing extreme wealth, suppressing wages, and deregulating (mostly by allowing endless mergers and concentrations of wealth/power). These policies were pursued by Republicans and Democrats alike. Indeed, Obama’s policies have been very much in this direction (e.g. helping rush three stalled “free” trade agreements a week or two after Occupy Wall Street took off).

The real untold story is how (from what I’ve read, can’t find the source) 6-7 out of 10 of the top .1% are senior managers of public corporations. If true, it suggests we have an economy with a set of rules this group uses to hoover vast sums of undeserved money. They didn’t create their companies, for one, and for another they’re easily replaced by any number of other senior managers in their companies and in related industries.

I’d also suggest the reason Americans tolerate extreme wealth is not because they tolerate extreme wealth. It’s because they haven’t realized how extreme wealth hurts everyone, including the wealthy. If extreme poverty is dangerous to a free society, so is extreme wealth. The question, of course, is where to draw the line. And to educate the 99.9% that their interests are not served when we have billionaires.

Posted by FredFlintstone | Report as abusive

Thank you for the comprehensive reporting. It would be interesting to see a composite graph showing the ups & downs, by year, that you mention in the income of each group – the 1% and the 99% – during the past six terms: from Bush I through Clinton and Bush II to Obama to-date. I say that because most reasonable people would agree that externalities such as 9/11 (Bush II) and the Greek/Euro crises (Obama) cannot be blamed on the sitting President but can greatly (if only eventually) affect individual income. On the other hand, domestic policies that affect individual income are exactly the province of the sitting presidents – and, of course, their counterparts in Congress. The time lag between Congress signing a law and each of the two groups feeling the financial effects of that law means that there will usually be some overlap in the cause-and-effect chain from one president’s period into his successor’s. Nevertheless, such a graph might make clearer the effects that each administration policy initiatives had on overall income for each group. Example: I would not have imagined that the greatest gain for the 1% occurred during the Clinton Administration.

However, I do have one issue with your report. I disagree with your statement that, “…the men who will take the most pleasure from [Saez’s new research] are former President Bill Clinton and his economic team…” In fact, I think the only ones likely to find your analysis “good news” are Republican strategists. The rest of us in the 99% continue to suffer with the consequences.

Posted by JeffsComment | Report as abusive

The 99% are getting restless. As more and more is taken away (ie, health benefits, social safety nets) a simmering anger will develop, and this has to be vented somewhere. The extent and depth of the anger will dictate the turmoil that follows. Historically, it hasn’t been pretty for the wealthy.

Posted by urownexperience | Report as abusive

Great article.

Also, recall that NAFTA (the North American Free Trade Agreement) really put the nail in the coffin of American manufacturing. And NAFTA happened under Bill Clinton.

The rush to globalization benefits the 1 percent, not the 99 percent. They, the 1 percent, are the one’s pushing for it relentlessly. The 1 percent, throughout history, also naturally push for lower labor costs, and achieves it by immigration, pitting cheap immigrant labor against the existing workers, lowering wage rates. Downward and downward.

The H1B visa program has increased the profits of the 1 percent, but has devastated livelihoods of the engineering and computer programmers in America.

A generation ago, an American college student who persevered the heavy class load, and successfully obtained an engineering degree could count on a decent wage that would allow him to buy a house and raise a family while he vigorously pursued his occupation.

Today, that is simply impossible because the H1B visa program has flooded virtually every American city with large numbers of youths who have just graduated from engineering schools in India, China or Russia.

It’s a simple case of supply and demand. The 1 percent continually lobby for more and more immigration, so that the supply of labor goes up and the price of labor goes down, and down, and down.

Thus the 1 percent extract a profit today, but the consequences to society are terrible and long term.

Much like the founders of America accumulated great wealthy through the importation of African slaves for cotton and tobacco. That 1 percent grew wealthy, but the consequences of their actions have harmed America and Africa for generations, even to today.

Posted by AdamSmith | Report as abusive

QUESTION: Why do you solicit comments to your article, and then not show them? That simply alienates people that would otherwise be on your side.

Posted by AdamSmith | Report as abusive

Just more proof that we are already a long way down the road towards third-world banana-republic status. A few rich people, a large army/police/judiciary to protect them, with the rest of us (99%) surviving on the scraps from their tables….

Posted by edgyinchina | Report as abusive

“He finds that while the financial crisis hurt the top 1 percent more than anyone else, their recovery has been spectacular — while everyone else has languished.”

Hurt top 1% more than anyone else? What’s he smoking? I have been watching the financial crisis built and unfold like a hawk for a decade. I have not seen a single report or analysis that suggest, less prove, that the top 1% has been hurt more than anyone else. Especially after all those uncapitalistic bailouts.

But let’s say it is true. Why that only mean one thing – American capitalism, that magical, supremely superior system of wealth creation, works!! 100% of the time, for the 1%.

Posted by TomKi | Report as abusive

A very enlightening in depth statistical analysis indeed, of events and fact already known, but not in detail and in such context.

So now that we can ‘finally’ admit that there is no real difference between Democrats and Republicans, isn’t time for a new party, the Independent Party? or something ?
Or have the 1% elite attained so much control of our ‘sold Democracy’, and the possession and control of global finances, that it would in effect tender useless any attempt to reverse or minimize this huge gap in wealth so prevalent worldwide?
Apparently China is not so bad after all.

Posted by GMavros | Report as abusive

I didn’t hate Clinton, but I also have read enough about the garbage he pulled off while President to know that he was no economic guru. The housing bubble and our close ties with China being just two little legacies he left the middle class. He wasn’t anywhere near the great President some people think he was, and Bush wasn’t nearly as bad as people think either. Neither the Republicans or Democrats can be counted on to do the middle class any favors. Basically when we vote we are just choosing our poison.

Posted by GLK | Report as abusive

There are a lot of grey lines in this line of thinking. It is all about making the world a perfect place to live. Do you really think that any political solution will evenly distribute the money? There will always be those in a position of power to move money towards themselves. I believe that between the death tax and real taxation at the higher end – the monies get moved to government. But that is the problem – our government continues to squander whatever you give them – Democrat or Republican. Solve the squalor in Washington first and you will go a long way to making life better for the 99%……Stop whining about the rich – as if they owe you something. They aren’t the problem – it is a government that conspires and takes money – to create a tax free situation for them – while enriching themselves.

Posted by xit007 | Report as abusive

There are lies, damned lies and then statistics. UC Berkely eh, well not exactly a bastion of conservative thought and not news that someone there wants the wealth re-distributed. Can any of us trust the news anymore?

Posted by zotdoc | Report as abusive

So can we have a Revolution already?

That would solve the problem.

don’t want a Revolution? OK Solution #2…

If this is a democracy we need to elect a leader that will use the power of the state to arrest these people and then eliminate them.

Posted by Lord_Foxdrake | Report as abusive

The thing is, in America anyone can move to any city and start any business and work 20 hours a day.

You cannot do that in China or France or Russia.

Stop them if you like, but you won’t gain anything.

Posted by Stu255 | Report as abusive

Now, you’ve hit on the premier issue of the past two generations. Income disparity as the result of Class Warfare by the Tenth Percenters (not merely the One Percenters) has already changed this country radically. However, it’s is way late. The Class War has already been won and the Tenth Percenters are now just crowing about their victory.

We’re doomed (the 99.9%).

Now, it’s time for the Tenth Percenters to sell the United States to the Chinese, assisted by Walmart*, of course.

Posted by ptiffany | Report as abusive

@AdamSmith: exact, my comments, even if I consider them constructive and polite, perhaps a bit on the sharp edge, are CENSORED by this author.

I guess you need to belong to a certain “club” and write just what they like.. :)

Posted by robb1 | Report as abusive