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For a while, these trends seem great for consumers, who benefit from falling prices. But eventually all the innovations enhance the economy's productive capacity to the point where it outstrips people's ability to consume. Then, we get falling profits, layoffs and recession -- or worse.

This is where the disparity of wealth becomes a factor. According to Greider, Keynes and Marx, the arrival of that terrible day of reckoning is hastened when wealth and income become concentrated in too few hands.

"The run-up to the 1929 financial crash and the Great Depression was also an era of robust industrialization distinguished by the same sort of huge imbalances between excess supply and inadequate demand," Greider says. "Despite assurances from orthodox economics, the market did not arrive at an eventual balance; the market collapsed."

If the maldistribution of wealth and income does in fact contribute to the development of inadequate demand to sustain growth, then the latest data from the Federal Reserve Board suggests we are now heading down precisely the wrong road. According to Edward N. Wolff, an economics professor at New York University who tracks this data, the top 1 percent of U.S. households owned 42 percent of all stock in 1997, the last year for which figures are available. The top 10 percent of households owned 82 percent of all stock-market wealth. In fact, the majority of Americans have not even been invited to this decade's stock-market party. Only 27 percent of households held more than $10,000 in stock in 1997, and that included all of their holdings in 401(k)s, Individual Retirement Accounts and Employee Stock Ownership Plans. Meanwhile, 57 percent of Americans didn't own any stock at all. This extreme concentration of wealth simply mirrors what's going on with income distribution. According to a recent analysis by the Center on Budget and Policy Priorities, a Washington-based think tank, the top fifth of households saw their income rise 43 percent between 1977 and 1999, while the bottom fifth saw their income fall 9 percent.

The annual Census Bureau report on income and poverty in America that was released Thursday shows the booming economy of the past few years has done nothing to reverse that trend. Since 1973, every group in society except the top 20 percent has seen its share of the national income decline, with the bottom 20 percent losing the most. They have just 3.6 percent of national income, down from 4.4 percent a quarter century ago.

Indeed, the top fifth now makes more than the rest of the nation combined. Rebecca Blank, who recently left the President's Council of Economic Advisors, pointed out, "We've gone back to levels of income and wealth inequality that this country hasn't seen since the teens and 1920s." I asked a number of Wall Street strategists and economists what they thought of the growing gulf between rich and poor. None mentioned that it might create economic instability. Their big fear was that if too many people felt left out of prosperity, it would lead to a political movement for (heaven forbid!) the redistribution of wealth, or the enactment of policies like trade protectionism that could undermine the current good times. Political instability, in their view, might ride into next year's primaries on a horse named Pat Buchanan.

But there are a few economists who have seen the ghost of Keynes and worry that the maldistribution of wealth and income itself may jeopardize prosperity. Exhibit A in their brief comes from recent Fed data that shows that wealth-poor U.S. households, as well as, curiously enough, businesses, have been piling up extraordinarily high levels of debt -- precisely what you might expect when incomes lag behind the propensity to consume.

On the household side, consumers have been refinancing their mortgages in record numbers. But not many are doing it to lower their monthly mortgage costs. Instead, they've been using the cash to finance home additions, buy new cars or retire credit card debt -- a one-time fix that can only be repeated if home values continue to rise and interest rates continue to stay low.

On the business side, corporations have been buying back stock by issuing bonds. Why? To keep their stock prices up. This fuels consumption among the stock-owning public through the so-called wealth effect. High-income folks go out and buy Lexuses and take exotic vacations because the stock market is doing their saving for them.

The combined effect has been a domestic debt level that has risen at a better than 9-percent clip over the past 18 months, while the national savings rate has fallen into negative territory. Debt-fueled consumption "represents the Achilles heel of the U.S. economy," says Jane D'Arista, an analyst at the Fed-watching Financial Markets Center. "Servicing debt for households is now 20 percent of disposable income after taxes, up from 17 percent in the early 1990s."

The growing inequality in wealth and income -- a long-term secular trend -- makes it more difficult for debt-laden households in the bottom half of the population to repair their tattered balance sheets. They will escape their personal debt traps only if the economy continues to grow, unemployment stays low, the government passes another increase in the minimum wage and they post real wage gains. In that regard, yesterday's income report showing solid gains for every income group was welcome news.

If, on the other hand, the stock market takes a tumble and upper-end consumption slows, that could trigger layoffs in many of the high-flying service businesses that employ so many people on the bottom half of the income ladder. This would then expose the ugly fact that the final years of our consumption-driven economic expansion have been built on a shaky foundation of debt.
salon.com | Oct. 1, 1999

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