March 20, 2014--The Rich Get Richer, The Poor Get . . .

The intellectual firepower in economic theory that claimed that economic growth over time reduces inequality was provided during the 1950s and 60s by Simon Keznets.

Most starkly, he put forth the Kuznets Curve that graphically illustrated what he argued was a natural curve, a natural cycle that begins with widening inequality while an economy grows but then decreases, again naturally, over time until a "certain average income is attained." In other words, after overall economic growth, inequality, if we are patient, is reduced.

His work was derived by his assembling reams of data primarily from tax returns. He argued that between 1913 when the income tax was introduced in the United States until the end of World War II in 1948, the portion of the national income earned by the richest 10 percent of Americans declined from a little under half that total income to "only" about a third.

In other words, Karl Marx and more benign progressives were wrong--the free market was a self-correcting system and governments should get out of the way and allow economic justice over time to express itself.

Now there is a new, massively data-rich study by Thomas Piketty of the Paris School of Economics, Capital in the 21st Century, that looks at even more data. Much more data. He studied income and wealth disparity over hundreds of years in dozens of countries and comes to very different conclusions than Kuznets.

In brief, Piketty found that the rate of return on capital investment (machinery, real estate, land, financial instruments) is much higher that the rate of economic growth.

This means that wages cannot keep up with capital formation, inequality therefore increases rather than decreases over time, and it is not self-correcting. That is, if markets are left to themselves. But when governments intervene through, say, progressive taxation, the gaps between the haves and have-nots can be narrowed.

From his data Piketty cites numerous examples of how the unfettered market increases inequality but how with shifts in public policy it has been and can be reduced.

He shows that inequality today is reaching and exceeding the upper limits of the Gilded Age. According to a essay in the New York Times from data mined by Piketty, investment profits account for the largest share of national income since the 1930s and as a result, the richest 10 percent of Americans control a larger share of the economic pie than at any time since 1913.

In regard to Kuznets, Piketty demonstrates that the data that underlie the Curve were amassed from an idiosyncratic period in one country's history--the years in the United States when the Depression destroyed a large portion of the richest people's wealth while at the other end of the period Kuznets studied, the economy benefitted disproportionately by the spending and government investments required to arm the country to fight the Second World War.

Ironically, the forces that ultimately led to the end of the Depression and an era in which income equality was reduced were more the result of government taxation and spending policies than the Invisible Hand of the free market.

The free market brought about the Depression while government intervention and a world war were essential to ending it.

Piketty argues that unless we amend current fiscal policy--especially taxation--the concentration of wealth will continue and inequality will worsen. There are no examples in history since the Industrial Revolution that the market will in and of itself make a difference. Not even expanded investments in education, which to many is the best way to proceed.

February 6, 2014--The Middle Class

Finally the 1 percent or the 5 percent or the 20 percent are noticing that the middle class, what's left of it, is struggling and that is bad for them--"them" being the 1, 5, 20 percenters.

It's one thing when the economy is in almost total collapse (as it was in 2008) and how that makes it awkward for those hardly touched to live opulently. Openly opulent that is. (See below.) It's another thing, however, when the shrinking middle class and their shrinking disposable incomes are so reduced that there are no longer enough markets or customers to fuel the bottom lines of the privileged.

Now they are concerned. Concerned because a diminished middle class is bad for business and thus bad for their assets.

On the other hand, the high-end continues to do very well. "Luxury is not a dirty word anymore, reports a consultant with Robb Reports, a lifestyle magazine for wealthy readers. "In 2008, luxury was a dirty word."

No longer.

Maserati, with sales up 55 percent in 2013, is opening dealerships all across the United States and Rolls-Royce had its best, most profitable year last year. The CEO of The Collection, a luxury car dealership in Coral Gables, Florida, was recently quoted in the New York Times as saying that "People were pulling back when they had to let people go. They'd come in to buy, but it would be the same car and same model so no one knew they got a new car." Now, once again, rich buyers are apparently not having a problem flaunting it.

In 2012, the top 5 percent were responsible for 38 percent of domestic consumption, up from 28 percent seven years earlier. And since 2009, the year the Big Recession technically ended, spending by this top 5 percent of earners rose 17 percent, compared with just 1 percent by the bottom 95 percent.

And thus goods and services that have traditionally targeted the middle class are hurting. Sears and J.C. Penney, as evidence, are in dire straits. Both are in danger of going out of business. Sears is closing its Chicago flagship store and J.C. Penney recently announced it will be shuttering 33 stores and laying off 2,000 employees. Loehmann's, where generations of middle-class women clamored to buy discounted designer-label dresses is bankrupt and already out of business. As another sign of the times, high-end retailer Barneys, which moved out of its original New YorkCity store and rented the space to Loehmann's, is moving back in, feeling that the exponential growth of downtown gentrification will assure the store's success.

As bellwethers, restaurants that depend on middle-class diners are suffering. Foot traffic at Red Lobster and Olive Garden has dropped every quarter since 2005. An average meal at Olive Garden is $16.50 a person and that relatively steep ticket requires middle-class customers. And with fewer and fewer of these every year, places such as Olive Garden and Red Lobster are in trouble.

But now the affluent are worried. Not because they will soon no longer be able to get their garlic knots at Olive Garden but because its stock price is way down, as are other companies' that traditionally draw on the middle-class.

Something that I find curious is the passivity of the middle-class as they see their prospects shrinking. Unlike in the past when there were serious downturns and structural reshaping of the larger economy, this time, with the exception of the short-lived Occupy Wall Street movement and aspects of the Tea Party agenda, there is silence.

Economic downturns are common. In fact, they were so common during the late 19th century through the World War II that hard times for the majority was the norm. Also the norm were the ways in which displaced and exploited working people responded to the recessions and panics and depressions.

I've been reading Doris Kearns Goodwin's Bully Pulpit, her biography of Presidents Theodore Roosevelt and his successor and friend, William Howard Taft. From the economic tumult during their collective 11 years in office there is a lot to learn about our current troubles and how the public responded to it.

Between 1901, when Roosevelt became president after the assassination of William McKinley, and 1913, the year Woodrow Wilson took office, there were no fewer than four crises--the Recession of 1902, the Panic of 1907, the Panic of 1910, and the Recession of 1913.

And in every case, right through until the end of the Second World War (there were a total of seven severe economic downturns between 1913 and 1945), including, in 1929, the biggest Depression in American history), each recession and panic elicited direct and credible threats to the United States' economic system.

There were bomb-throwing anarchists and fierce socialists and communists who organized nationwide strikes that paralyzed entire industries from the railroads to the steel mills to the coal fields.

There were many times when our political leaders thought that unless the economy picked up, unless something was done to reform factory work and bust trusts and legislation was passed to provide the beginnings of a social safety net to take care of people falling through the cracks, unless this and more was accomplished, our very capitalist system might be overthrown. All the agitation the result of aggressive investigative journalism (an important subject in the Goodwin book) and pressure from the bottom up, very much including union activity and progressive political advocacy.

Now, again with the exception of a few months of non-violent demonstrations by Occupy Wall Street protestors, things have been preternaturally quiet.

Is there anything ticking out there? Any undercurrent of threat to the system itself?

Nothing of this sort appears to be looming on the horizon.  Perhaps, though, it things for the middle class continue to deteriorate, if they see opportunities for their children more permanently threatened, the great sleeping giant--the American people--will rise from their Barcaloungers, put aside their iPhones,  and . . .

No wonder the 5 percenters are worried.