It’s all downhill for US equality

Image of Gillian Tett

This spring, an intriguing pattern has developed in the real estate market in Aspen, the upmarket Colorado ski resort. Properties that are worth more than $10m – those sold to mega-oligarchs – have generally held much of their value in recent years. Meanwhile, condos (or flats) that are valued at less than $1m are continuing to sell to vacation companies, albeit for less than five years ago.

However, properties worth between $1m and $10m are seeing a dearth of bidders. The reason? Locals are apt to blame the “bonus belt” problem. More specifically, although some global oligarchs appear protected from economic swings, the top- tier bankers who were splashing around their cash before 2007 – and who typically bought those $1m-$10m ski lodges – no longer feel so flush. Bonuses have been squeezed, jobs are being cut, and many wealthy residents have suffered paper losses on their assets – including real estate in places such as Aspen.

Don’t expect the rest of mainstream America to shed any tears about this. On the contrary, the whole issue of wealth is currently stirring up unusually strong emotion there. Never mind the wave of protests that has occurred in the “Occupy Wall Street” camps, where the “99 per cent” are railing against the richest 1 per cent. What is really sparking polarisation now is a call by President Obama and other Democrats to tax the rich more heavily. Republicans claim that this is tantamount to “class war”.

But in spite of all this emotion – or rather, because of it – what is happening in Aspen is thought-provoking. In recent years there has been growing evidence that income inequality is rising in America. Economists calculate, for example, that 23 per cent of all national income is now going to the top 1 per cent of Americans, double the rate seen 25 years ago. That top 1 per cent also hold around 40 per cent of all wealth. But although such statistics have caused hand-wringing, what is less clear is what has actually caused this trend, who precisely is receiving this cash – or, for that matter, what might change the pattern in the years ahead.

The work of James K. Galbraith, an economics professor at the University of Texas, offers food for thought. During the past few years, Galbraith and a team of economists have created a centre dedicated to understanding modern patterns of inequality, and they are now releasing this analysis via a new book, Inequality and Instability. Now, as texts go, this is not easy for non-academics to read. But it makes some fascinating points.

First, writes Galbraith, it is important to understand that most of the current statistics on inequality are flawed. For while economists typically focus on income data – or measures such as the “gini coefficient” – these are extremely crude and tend to focus on outdated ideas about how economies work. Second, he adds, if you crunch the numbers in a more granular and up-to-date way, this challenges some orthodoxies. In particular, most economists (and politicians) have assumed in recent years that the US was becoming more unequal because of industrial change, such as a loss of manufacturing jobs to China.

But Galbraith sees little evidence of this. “At the global level, the data give no support to the vast outpouring in the professional literature arguing that changes in inequality are based on so-called ‘real factors’ such as a race between technology and education,” he writes. “On the contrary, financial factors explain a very large share (practically everything) that can be explained.” More specifically, as the financial world has exploded in size across the west, this has made bankers rich, and – equally importantly – pumped up the value of their assets, such as stocks and bonds. And, of course, Aspen real estate.

And that leads to a third key point: the recent increase in inequality in America is not actually due to anything that has happened to the bulk of the population. Instead, the statistical shift has been driven by the growing wealth of a super elite. Rather than watching the 1 per cent, the “Occupy” movement should be thinking about the 0.1 per cent – or the 0.01 per cent – since subtle changes in that subset can skew the data in big ways.

Now, such arguments will not convince some economists (let alone bankers). But, if nothing else, Galbraith’s work raises an intriguing question: if the finance sector shrinks in the coming years, could the inequality trend ease? It is certainly hard to imagine right now, given the degree to which Wall Street power still seems entrenched. But as Galbraith notes: “The difference between the financial sector and other sources of income is a large source of changing inequalities. In the wake of crises, as we observe directly in the [history of the] United States and Latin America, the financial sector shrinks and inequalities tend modestly to decline.”

Those realtors in Aspen could face a chillier climate for some time. Even – ironically – as the “Occupy” protests get better at making their voices heard.

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