Many books and articles have been published on the stock market crash of 1929, but one book in particular stands out as short, only 197 pages, readable and relevant for today’s debacle. It is The Great Crash, by John Kenneth Galbraith.
After using newspaper and other accounts he describes what happened in journalistic fashion with a final chapter titled Causes and Consequence. The first cause on his numbered list is “The Bad Distribution of Income.”
Allow me a brief quote.
In 1929 the rich were indubitably rich. … The proportion of personal income received in the form of interest, dividends and rent – the income broadly speaking of the well-to-do – was about twice as great as in the years following the Second World War.
This high unequal distribution of income meant that the economy was dependent on a high level of investment or a high level of luxury spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be on luxuries or by way of investment in new plants and new projects.
Mr. Galbraith was writing 50 years ago about events of nearly 80 years ago, but it is helpful for man of his distinction to confirm what is the underlying cause of America’s crash of 2008: the bad distribution of income.
The growing inequality of income is well documented in the Federal government’s publication of the Current Population Survey. In their table of Selected Measures of Household Income Dispersion the highest 10 Percent of household income continue to gain income share year by year on the bottom 10 percent, but also the bottom 20, 50 and 80 percent of households.
The wealthy pay the same price for bread, eggs and milk as everybody else which is why they have extra money to speculate in Wall Street’s new and exotic investment derivatives: hedge funds, collateralized debt obligations, mortgage and asset backed securities, principal only strips, credit default swaps and so on.
In the mean time heavily taxed wages are going up slowly, but not as fast as prices, a reality documented by the Bureau of Labor Statistics. More of us are reaching credit card limits and home equity loan limits. Refinancing mortgages for cash, or lower interest rates, did provide a boast to buying power, but these too are running low.
A mass society needs mass participation, which the unequal distribution of income limits. The crisis of 2008 tells us the wealthy have failed to return their savings and tax cuts back into the economy in a constructive way to create long lived assets and jobs. They have failed themselves and the country. It is time for the wealthy to pay more tax.