What's Wrong With The Economy, In One Simple Chart
Here it is, the most important chart of the year
This chart shows the history of income inequality in America.
Highlights include the peak in 1928 and subsequent fall, otherwise known as The Great Depression.
The share of income going to the top 1% fell to around 10% in 1953.
In the period from WWII to 1970, the middle class grew & the American economy was the best in the world, as was American achievement.
Economic success came to every income bracket, as the government safety net, including social Security, pulled millions out of poverty.
Unfortunately, beginning in 1976, the share of income going to the top 1% rose again, and once again led directly to a crash of the economy, aka The Great Recession.
While the top 1% chowed-down a bit less in 2008, they still ate 21 of 100 pieces of the American Pie, and got fatter than at any time in U.S. History.
So here we are. The chart disproves many ill-thought-out ideas, including the concept that giving more money to the top income brackets is somehow good for the American economy.
Look at it again.
Twice now the share of income going to the top 1% of the people has risen to almost 25%!
That's ONE-QUARTER of ALL the money, folks!
It's like taking 100 people, combining all the money they have into one big pile, then giving 1/4th of it to a single person!
After we did exactly that with the US economy, the US economy has been wiped out.
TWICE.
SUPPLY AND DEMAND ("Demand and Supply" would be more precise).
We can understand why we produce the negative effects of having a large inequality in income by looking at the free-market process of Supply and Demand. For that system to work, the Demand-side needs to push the Supply-side to manufacture services and products at their most efficient level, to fill the needs of the Demand-side.
As Demand pushes, Supply reacts, and the economy grows.
However, when Demand falls, Supply ends up with a surplus of goods and services. Too much inventory. More stuff than is needed to meet the Demand. Then the economy slows down and stalls, because Supply doesn't need to make more stuff, and they need fewer people to make or sell the stuff they already have on hand.
When the top 1% takes too great a share of the national income, the rest of the people don't have enough money to buy all the stuff that the businesses owned by the high earners can produce.
So the people with money to invest hold onto their money, because even a tiny % in interest is better than a losing investment in a business because the customers don't have the money to buy the products.
That is what is happening now. There is a lot of money available, but it's not being invested in American commerce, because of the lack of Demand.
With this understanding comes another. It simply makes no sense to give the investor class even more money, if the money they already have is sitting on the sideline, not helping the economy.
Money needs to go to the Demand side, to the middle class and poorer who will use all of the money.
Whether in terms of actual cash, or benefits that free-up cash, when the great majority of Americans can afford to go ahead and buy the products and services the investors make, from hi-tech to solar panels, kids birthday parties to after-school sports and art programs, the economy grows and Supply reacts and grows to meet the Demand.
The chart also illustrates another important idea. In order to get the investor class to put the money they already have into action, something needs to 'jump-start' the economy.
It's no coincidence that the small rapid drops in the 80s, 90s and 2000s to the share of income to the 1% are there, that is when government investment went into the general economy to stop previous recessions, providing the middle class with a temporary but slightly larger share of the overall money.
Economists from both political parties have understood this for years, which is why we have recovered from every previous recession by investing government money into the economy, putting people to work either directly for the government, or through investment in private industry backed up by government funds.
Once the middle class is employed and investors are making money by investing, the economy rolls right along, and everyone benefits. We then have the money to fund the social safety net, to provide for defense and education, and other things a good government provides for the populace. The middle class thrives, and the top income brackets continue to make a healthy profit.
Looking at these simple facts, it is readily apparent that reducing taxes on the wealthiest Americans will not fix any of the problems we face. The problem is not too little money available to invest, it's too little incentive to entice investment, which comes from people having too little money to provide that incentive.
So we have not only a well-understood Theory of Supply and Demand arguing strongly in favor of government investment in jobs and industry, we have a clear history of the negative effects on the economy when we have such massive income inequality.
All of this makes it pretty obvious that to make American strong again we need to return money to the middle class by a combination of slightly higher taxes on the top income bracket, strong investment in American small business, education and new industries, and increased social benefits to the poor and middle class.
