The 1 Percent Republic

“Really, if the lower orders don’t set us a good example, what on earth is the use of them? They seem, as a class, to have absolutely no sense of moral responsibility.” Oscar Wilde was trying to be ironic when he had Algernon, a character in “The Importance of Being Earnest,” pronounce these words. Now we are living in an era when very real characters are clearly at the height of the aristocracy Wilde imagined.

Let us take as an example multimillionaire Stephen Schwarzman — with personal assets of $6.5 billion — CEO of the Blackstone investment fund. When asked about America’s fiscal problems, he noted the 45 percent of his compatriots who did not pay federal income taxes:

“The issue isn’t the amount, it’s the concept that we are all in this together, solving problems together. I can’t micromanage what anybody pays or doesn’t pay. But the concept that half of the public isn’t involved with the income tax system is somewhat odd and I’m not saying how much people should do, but we should all be part of the system.”

That 45 percent is mainly made up of taxpayers who do not meet the minimum requirements to pay direct taxes: the unemployed, students, retired people. Obviously, they do pay indirect taxes.

Schwarzman wants those who have less to pay more. It could be said he regards them as privileged. Algernon would happily subscribe to this thesis. This is not what the fiscal reality of the U.S. indicates. The 400 richest taxpayers — with a median income of $200 million — pay nearly 20 percent of their income in taxes, approximately the same percentage corresponding to those who earn between $200,000 and $500,000.

In 2009, 116 of these 400 multimillionaires paid less than 15 percent in taxes.

It Does Not All Boil Down to Taxes

The truth is that what was called the American dream now is no more than a pale reflection of reality. Inequality is increasing in the United States. The process did not begin with the current crisis but has accelerated or perhaps has become more difficult to hide.

“One aspect of fairness that is deeply ingrained in American values is opportunity,” writes Joseph Stiglitz in his book “The Price of Inequality.”

“America has always thought of itself as a land of equal opportunity. Horatio Alger stories, of individuals who made it from the bottom to the top, are part of American folklore. But … increasingly the American dream that saw the country as a land of opportunity began to seem just that: a dream, a myth reinforced by anecdotes and stories, but not supported by the data. The chances of an American citizen making his way from the bottom to the top are less than those of citizens in other advanced industrial countries.”

The same can be said of another myth — the one saying if those at the top do not work hard enough, they or their children will see themselves overtaken by more clever citizens. This could be true of corporations, including some very large ones, but not people.

In June 2001, Time dedicated a long article to a new trend, which some economists had argued about up until then but did not all accept. The title — “Is the Middle Class Shrinking?” — was revealing. This phenomenon had only begun to be spoken of in the 1980s, only in academic circles and following progressive criticisms of the Reagan administration’s economic policies.

They confronted the problem of defining exactly who makes up the middle class: A customary starting point was choosing families with annual incomes between $15,000 and $50,000. It could not be denied that many of those abandoning the middle class were moving upward, not just down.

Inclusion of Women

The income of many families had previously been favored [in the economy] because of the inclusion of women in the labor market. Two salaries had allowed them to confront the high-inflation era of the 1970s, but since the 1980s, the effects of job losses in the industrial sector, sharpened in the following decade, have become evident.

There was a difference in the reality of this workforce and the new jobs that emerged in the service sector. These occupations offered lower salaries, less health coverage and less union protection. The Time article portrayed this difference through the example of Keith Grant, a 28-year-old steelworker in Chicago, laid off from his job paying $30,000 a year, two years earlier. He had only been able to find work in the maintenance department of a Holiday Inn hotel for $13,000 a year.

It was the end of the growing prosperity the U.S. middle class had enjoyed since the 1950s and ’60s. In this period, a worker’s median income had gone from $14,832 to $27,338, and then, the American dream machine halted. In the year 2000, this figure was $27,735. The social elevator was now broken.

What was a collection of indefinite indicators at the beginning of the decade became more apparent in the years before the current crisis. In 2005, three economists from Citigroup gave it shape in a provocative manner [in a study] by coining the term “plutonomy” to refer to the economies of the United States, United Kingdom and Canada. Economic growth was basically a result of spending by the super-rich, a privileged minority, and they were its main beneficiaries. It was this 1 percent that was spoken of later thanks to the Occupy Wall Street mobilizations.

This wave of wealth from a very select elite had “occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S,” according to the authors. In the distribution of income and consumption, the privileged were the heartbeat of the economy.

Income Gap

The richest 1 percent make as much as the poorest 60 percent do in a year. In absolute figures, 1 million households receive as much income as 60 million, whose assets are similar to the poorest 90 percent.

On various occasions, Citigroup’s attorneys have threatened legal action against websites that have reproduced the study, so it appears and disappears on the Internet with a certain frequency. In the financial world, it makes a bad impression to be associated with such a gesture of sincerity. Other data confirm the idea of the report’s authors. According to Moody’s Analytics, the wealthiest 5 percent were responsible for 37 percent of consumption in 2010, only 2.5 points under what 80 percent of the population on the lower rung spends. If it is true that inequality goes down during recessions, the opposite occurred during the last one. Between 2007 and 2009, it increased, and according to Gallup, between May 2009 and May 2011, daily consumption increased 16 percent for Americans earning over $90,000 annually. The rest showed no significant variation.

The recovery of the stock market, which has been enjoying an upward momentum since last year, is very much above what is occurring in the labor market. It is a departure from recession with an employment recovery more anemic than any in memory. Those with more receive a greater part of their income thanks to investments in the stock market; therefore, it is logical that a difference exists. Additionally, since the bubble burst the value of housing has gone down, and usually, housing is the greatest economic asset of the middle class.

Therefore, this produces an increment of 1.6 percent in income inequality in 2011, the greatest annual increase in the last two decades, according to data distributed in September 2012 from the Census Bureau. The poverty rate has remained stable compared to the previous year, but a new reality is beginning to break through in the national conscience. One-third of Americans place themselves in the lower or lower-middle class, when four years ago, it was 25 percent. At the top of the pyramid, everything looks better. The richest 5 percent — with incomes greater than $186,000 — see their percentage of the national pie increase by 5 percent in just a year.

Worsened Labor Conditions

There are structural changes in the economy that favor these trends. Since 2007, the U.S. economy has lost 2 million jobs in administrative and office positions, usually designated as white-collar. Other jobs have emerged, many of them related to technology and the health and dependent-care sector, but generally offer lower salaries.

For one reason or another, the median income of a North American family has fallen 5.6 percent since June 2009, when the recession technically ended, and 8.9 percent since the beginning of the 21st century.

The matter is that although the U.S. is enjoying a recovery yet unknown in Europe, it is those at the top who have seen more benefits. The French economists Thomas Piketty and Emmanuel Saez reached the conclusion that 93 percent of the extra income generated by the economy in 2010 ended up with 1 percent of taxpayers — with a minimum income of $352,000.

The 99 percent were left with the remaining 7 percent, averaging $80 per household and not accounting for inflation. The end of the tax cuts for the rich passed in the Bush era will only slightly weaken these numbers.

However economic circumstances may change, there is something that continues being true: In principle, there are more possibilities of finding a job and having a high salary if one has a college degree. Education is the great social equalizer — for those who can afford it. This social elevator can jam if the weight of the debt, which students take on to pay for expensive tuition and are required to pay back after graduation, keeps growing. The volume of this debt has grown 511 percent since 1999. The U.S. has the largest percentage of the population actively pursuing higher education among the largest economies. However, among young people age 25 to 34, they are not even in the top 10.

In an economy with lower salaries, many believe paying back those loans will be an unbearable weight. Many families cannot even afford for their children not to be working for four or five years, and what happens when, after school, one has to pay the bill and cannot find a job? Forty-one percent of graduates in the past two years are working jobs that do not require a college degree, according to Accenture. They are waiters, taxi drivers or cashiers, shouldering debts of $30,000 or $50,000.

The most embarrassing showcase of the situation are the salaries of the CEOs of large corporations. Bloomberg compiled the figures of the total compensation for the CEOs of the corporations quoted on the S&P 500 index, estimating that the ratio to the average salary of their workers is 204 to 1. In some companies, the difference is immense: JC Penney (1,795 to 1); Abercrombie (1,640 to 1); Oracle (1,287 to 1); Starbucks (1,135 to 1); CBS (1,111 to 1); and Nike (1,050 to 1).

A 2012 study by professors Lawrence Michel and Natalie Sabadish included stock options exercised by executives in addition to salary. The ratio was 20.1 to 1 in 1965. It reached its highest point in the year 2000 at 383 to 1 and went down to 231 to 1 in 2011.

Three years ago, Congress passed a law that orders corporations listed on the stock exchange to make public the difference between what the highest executives and their workers get paid. It cannot be surprising that pressure from large corporations has impeded it from being implemented. The Securities Exchange Council still has not approved the criteria for putting this requirement into practice.

The U.S. Increasingly Seems to Be a 1 Percent Republic

Levels of inequality are at their highest since the 1920s. It is a coincidence, or perhaps, not so much, that another film version of F. Scott Fitzgerald’s “The Great Gatsby,” published in 1925, is now premiering.

The novel allowed a curious combination of literature and economics. Alan Krueger, president of the Council of Economic Advisers for U.S. President Barack Obama, in 2012, named the graphic that unites the Gini coefficient — a standard measurement of inequality — with the “intergenerational elasticity of income,” the “Great Gatsby curve.” In this last case, a position near 1 conveys the idea that income and the social position of children totally depends on what the parents had. The U.S. is situated in a place nearer to Latin America than to Nordic, European countries.

The fascination with the life of those at the top and the unswerving hope that hard work can carry a person very far has been an indispensable element of social cohesion in American society. Everything seems possible, whether true or not. Gatsby, as a youth, yearned for that “green light” at the Buchanan mansion, symbol of what he wanted to achieve. Afterward, others desired to be able to share in Gatsby’s mystery and wealth.

Is it possible to get a seat at the table of the 1 percent someday? In a certain manner, Fitzgerald was the first to utilize the concept of the 99 percent, seen on so many placards denouncing the economic crisis in recent years.

In a little known story [by Fitzgerald], “The Swimmers,” published only five days before the crash in 1929, a French woman sees a group of happy American youths on the beach, with their futures ahead of them. She says to her husband that the dreams of the girls are no more than dreams. Almost all of them will be left disappointed, “That’s the story they are told; it happens to one, not to the ninety-nine.”

Will a moment arrive when the 99 percent will see that dream is unattainable?