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Originally Published: 1/22/2011

PLUTONOMY

By The Issue Wonk

 

According to Investopedia, plutonomy is the “Economic growth that is powered and consumed by the wealthiest upper class of society. Plutonomy refers to a society where the majority of the wealth is controlled by an ever shrinking minority; as such, the economic growth of that society becomes dependent on the fortunes of that same wealthy minority.”

The term “plutonomy” was coined in 2005 by Ajay Kapur, a “global strategist at Citigroup,” and his research team - Niall MacLeod and Narendra Singh. It describes “a country that is defined by massive income and wealth inequality.”1 And, according to Frank,1 this describes the economies of the U.S., the U.K., Canada, and Australia. Kapur, MacLeod, and Singh explained it:2

Plutonomies have occurred before in 16th century Spain, in 17th century Holland, the Gilded Age and the Roaring Twenties in the U.S. . . Often these wealth waves involve great complexity, exploited best by the rich and educated of the time. . . In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer,” or indeed the “Russian consumer.” There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “no-rich,” the multitudinous many, but only accounting for surprisingly small bites of the national pie.

That a consumer-driven society is heavily impacted by the wealthy should be no surprise. They have more money so they spend more. But they have other impacts, too. “The nation’s top 1% of households own more than half the nation’s stocks, according to the Federal Reserve. They also control more than $16 trillion in wealth - more than the bottom 90%.”1 Kapur and his team described the 3 characteristics of plutonomies:1

They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants . . . the rule of law and patenting inventions.

There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.

Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.

So, what does this mean to the so-called “average” folks? Well, first, “Plutonomies are far less stable than economies built on more evenly distributed income and mass consumption.”3 Then there’s the impact on the rest of us. Let’s look at one item: gasoline. If gas prices double, triple, quadruple, the wealthy don’t care. They pay the price and continue their driving patterns. They can afford it. But the rest of us have to pay it, too. And when they keep buying at the higher prices, it maintains those prices, driving the lower classes further down the economic scale. And, finally, in a consumer-driven society, it means that marketing will be more and more targeted to the rich, eventually making ordinary products more difficult to obtain and driving up those prices.1,3

There is also reason to believe that any “improvement” we’ve seen in the economy in the last couple of years has had everything to do with the spending habits of the richest few. Moody’s has kept track of consumer spending habits, including the richest 20% of the population. Over the past 20 years, the richest 5% alone contributed 37% to consumer spending. The bottom 80% (the rest of us) contributed less than 40%. The richest 10% make about half the income of the United States.3 And, they own everything. According to a study released in 2006 by the Federal Reserve, economist Arthur Kennickell4 found that the wealthiest 10% of the nation held almost 70% of the wealth. That means for every dollar of value in the sum total of all non-public assets of the U.S., 90% of the population owns only 30¢ worth. Conservatives love to complain about the redistribution of wealth. Well, that’s exactly what’s going on, but it’s being redistributed up - from the poor, middle, and upper-middle class to the very wealthy, driving everyone else down. According to Edward Wolff, only the top 5% of American families increased their share of the country’s total household net worth from 1983 to 2007.4 So the last 30 years have seen a great theft of wealth from most of us by 1% of Americans.

What many don’t understand is that this is all the result of the Reagan Revolution. Notice that the decline in household net worth noted by Wolff above, looks at the timeline from 1983. This is no accident. One of the hallmarks of the Reagan Revolution was to change the direction of the redistribution of wealth. Until that time the U.S. taxed the wealthy at higher rates and used the money to pay for things that ordinary folk need. Dave Johnson put up several charts5 showing economic indicators before and after Reagan. The charts show what many people already know:

Reaganomics transformed the U.S. from the largest creditor nation in the world to the largest debtor nation.

Working people’s share of the profits from increased productivity has been declining. (Note: Productivity just means that fewer people are getting the same amount of work done for less money.)

Wealth hasn’t been this concentrated at the top since 1927. Remember what happened then?

Working people have been forced to spend their savings (which goes into the coffers of the wealthy) just to survive.

When savings run out, working people go further and further into debt.

The increased debt and decreased savings has kept the economy from growing.

So, what has Plutonomy done to our economy? A study by Pew Research6 found:

More than half of all workers today have experienced a spell of unemployment, taken a cut in pay or hours or been forced to go part-time.

The typical unemployed worker has been jobless for nearly 6 months.

Collapsing share of investments and house prices have destroyed a 5th of the wealth of the average household.

About 20% of mortgages are underwater.

1 in 4 of Americans between the ages of 18 and 29 have moved back in with their parents.

Fewer than half of all adults expect their children to have a higher standard of living than theirs, and more than 25% say it will be lower.

For many Americans the recession has been the sharpest trauma since WWII, wiping out jobs, wealth, and hope.

So, where are you? Millions of Americans have lost their jobs, their savings, their homes. Their grown children have moved back in with them, often with their children. Their parents have moved in with them. State and local taxes are rising. Police and firefighters are being laid off. (Hope you don’t need those services.) The schools their children attend are crumbling; teachers are being laid off. Roads and bridges are falling apart. Water systems are in danger. Public libraries are being closed. So, why isn’t government working for us? Because it’s been bought.

But, what if you’re doing okay? What if you’re in the upper middle class, or even the upper class - just not the very wealthy? Do you need to be concerned? You sure do. Even if you don’t care that the soup kitchens are running out of food and people are dying, you should be concerned because you’re losing money, too. Internal Revenue figures demonstrate that if the middle- and upper-middle class families had maintained the same share of American productivity gains that they had in 1980 (there’s that date again), they would be making an average of $12,500 more each year.7 This translates into $1 trillion extra every year for the richest 1%, not including their tax cuts. Think about that. Each middle class and the upper-middle class family has been handing over $12,500 each year to the wealthy, not to mention paying their share of taxes. The wealthy argue that all that extra money gets translated into more jobs. Not so. In 2009 the 500 largest U.S. companies cut a record 821,000 jobs while their collective profits increased threefold to a record $391 billion.8

Well, I guess if they have more money, they’ll spend it, thus stimulating the economy. Right? Wrong. The top 10% of earners receive about 50% of all income but they only account for about 22% of all spending. So, where does their money go? They gamble with it - also known as the stock market, also known as investing. It’s gambling, pure and simple. But the excessive amounts of money in the so-called “market” are the cause of the economic bubbles - that eventually bust and take down the entire economy. This is a good reason for taxing the wealthy at a much higher rate. It reduces the excessive amounts of money they have available to gamble in the market and screw everything up, thus leading to greater economic stability as noted above.

Plutonomy and the great disparity in income destroys a society. This has been demonstrated in many studies. The Spirit Level: Why Greater Equality Makes Societies Stronger (Bloomsbury Press, 2009) by Richard Wilkinson and Kate Pickett documents all the studies that have been done that correlate wealth inequality with shorter life expectancies, increased disease and health problems, and even higher murder rates - all attributable to the stress of “relative deprivation.” “Relative deprivation” refers to people trying to survive in a community where economic, educational, and health care disadvantages persist in an otherwise prosperous environment.

The Gilded Age is back and it’s not going away. It’s growing and will continue to grow unless the American people step in and demand changes. Plutonomy has been pushed, prodded, and orchestrated by the marriage of government and corporations - through the private funding of political campaigns, now done secretly thanks to the U.S. Supreme Court’s Citizens United decision. Former Secretary of Labor Robert Reich calls it “the perfect storm that threatens American democracy: an unprecedented concentration of income and wealth at the top; a record amount of secret money flooding our democracy; and a public becoming increasingly angry and cynical about a government that’s raising its taxes, reducing its services, and unable to get it back to work. We’re losing democratic capitalism to plutocratic capitalism.”9 It’s called plutonomy.

 

_______________

1  Frank, Robert. Plutonomics. The Wall Street Journal, January 8, 2007.

2  Lind, Michael. Is America a Plutonomy? Salon, October 5, 2010.

3  Frank, Robert. U.S. Economy Is Increasingly Tied to the Rich. The Wall Street Journal, August 5, 2010.

4  Wolff, Edward N. Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze - an Update to 2007. Levy Economics Institute of Bard College, March 2010.

5  Johnson, Dave. Reagan Revolution Home to Roost - In Charts. Campaign for America’s Future, June 15, 2010.

6  Pew Social Trends Staff. How the Great Recession Has Changed Life in America. Pew Research Center, June 30, 2010.

7  Robyn, Mark, & Prante, Gerald. Summary of Latest Federal Individual Income Tax Data. The Tax Foundation, October 6, 2010.

8  Wahba, Phil. Fortune 500 Shed Record 821,000 Jobs in 2009. Reuters. April 15, 2010.

9  Reich, Robert. America is Becoming a Plutocracy. Salon, October 18, 2010.

 

© The Issue Wonk, 2011


 

 

 

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