Recession Caused by Concentration of Wealth

Robert Reich comments on the "silly" stimulus package and the failure of supply-side economics on Marketplace this morning (and hooray! American Public Media has the text online!). He notes that one part of the stimulus package, condensing corporate tax breaks for machinery purchases from the usual several-year scale to all happen this year ("accelerated depreciation") won't work (and didn't work last time it was tried in 2002) because "companies won't invest in more machines when demand is dropping for the stuff the machines make. And right now, demand is dropping for just about everything" [Robert Reich, "Don't Leave Demand out of the Equation," Marketplace Morning Report, 2008.01.30].

But wait a minute: if Americans are all getting richer, shouldn't there be more demand? Even if it's just the rich getting richer and the middle and lower class treading water, well, rich folks know how to "Buy, buy, buy!" just like anyone else, don't they?

Actually, no, says Reich:

Most of what's being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they're rich -- which means they already have most of what they want. Instead, the rich invest their earnings wherever around the world they can get the highest return.

Now add all this together and there's just not enough consumer demand out there to keep the American economy going. We're finally feeling the whirlwind of widening inequality and ever more concentrated wealth [Reich, 2008.01.30].

Look at the stimulus package in terms of what Reich just said:

Suppose we are willing to borrow $146 billion from our kids just to keep today's economy humming. If we handed every penny of it in big chunks to the million richest Americans, they'd blow, say, 50% of it on buying things. (That stat is a wild guess; hard data is welcome!) The rest of the money would go into investments, much of it into foreign economies. If we handed every penny of it in little chunks to the hundred million poorest Americans, they'd spend almost all of it on stuff, just like they do with their regular incomes.

But forget the stimulus package: Reich is pointing out that if the economy is slowing down, it's happening in part due to the increasing concentration of wealth. If you're going to base your economy on consumer spending, well, you need consumers to have wealth to spend. Concentrate that wealth in the hands of a few, sandbag the many with increasing debt, and you get a situation like, oh, now.