Engine of Inequality. Karen Petrou
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Fed and President Trump make the same mistake: they measure the economy by across-the-board indicators. Most of these matter only to the wealthiest Americans who own most of the assets in the stock and bond market. Unemployment may have looked as if it was at record-breaking lows before the pandemic, but that's only if you ignore labor-participation rates, which also show who wants to work or work more. At the height of the seeming boom in 2019, one-third of Americans reported that they were not working as much as they wanted. This is a far more telling number than the aggregate employment dot on the Fed's chart. It proves just how many Americans struggled. Indeed, even this number underestimates the struggle – far more Americans worked more jobs and/or more hours than ever before in late 2019, but their wages barely budged.28
From 1989 to 2018, middle-class, real (i.e., inflation-adjusted) wealth increased about 1 percent a year;29 over the same period, real gross domestic product went up about 2.5 percent a year.30 Clearly, someone was getting a lot richer as the US economy prospered, but it was not the middle class.
It's not just numbers that obscure the economic reality confronting most Americans. Many economists also firmly believe that capitalism ensures that those who try are those who win. For economists, this conclusion is cloaked in “efficient market” theory – that is, markets reward skill and talent. Conservative politicians concur, but also believe that wealth accumulated ultimately trickles down to lower-income workers, who then get their chance to compete for capitalism's rewards. Some have even said that it's not actually all that bad that almost 40 percent of Americans can't handle a $400 expense since most of them have friends or willing creditors.31 It goes unsaid that such assistance impoverishes families and loads them down with debt in an endless, debilitating cycle of deepening impoverishment.
Some go beyond aggregate data or supply-side theory to say that America is only unequal because a lot of Americans are indolent, sometimes renewing attacks on “welfare queens” to argue that folks would get back to work if government benefits such as disability payments to veterans were curtailed.32 Others quibble with various statistics illustrating income and wealth inequality on grounds that this or that data point ostensibly fails to include one or another additional or different data point such as receipt of food stamps that a particular pundit prefers.33 None of these inequality dissenters notes that, even if one adjusts data points up or down to reflect refinements, trend lines are inexorable: America is clearly unequal no matter how one measures income or wealth and became far more unequal far faster after the financial crisis. After 2008, middle-class wealth collapsed, but the wealth of the top 10 percent grew 19 percent in the following decade,34 resulting in the largest wealth-share increase – 6 percentage points – since the Second World War.35 At the same time, middle-income family wealth was still below its 2008 level, and lower-income families lost 16 percent of their pre-crisis wealth (not much to start with, of course).36
Why So Unequal So Fast?
Something happened after the 2008 crisis ebbed that turned inequality into a faster and still more corrosive force running through the fabric of American social and political thought. This book will show that this something wasn't the great financial crisis itself – painful though it was, the years between 2008 and 2010 were actually more equalizing than those that preceded them due in large part to the short-term decrease in the value of assets held by the wealthy. What happened starting in 2010 is that federal financial policy-makers tried to boost the economy and redesign American banking through a series of unprecedented market and regulatory interventions. All were well intentioned but most were nonetheless still directly and demonstrably destructive to US income and wealth equality.
Is it really plausible that financial policy on its own could make the US so much less equal at such speed? Yes. Economic equality is determined by who has the money and financial policy sets the terms on which markets allocate money to whom as dictated by the inexorable forces of profit maximization. Indeed, as we will see, financial policy now even defines what money is as well as who gets it. “Profit maximization” sounds like a textbook term, and indeed it is. But its meaning is anything but academic: profit-maximizing companies (and that's virtually all of them) set corporate strategy to satisfy the investors on whom corporate survival – not to mention senior-management bonuses – depend. Scrupulous companies will not violate law or rule to maximize profits, but they will find a way to align profits and compliance, no matter the cost to economic inequality. Once, investors were tolerant of long-term strategies that sacrificed a bit of near-term return in favor of long-term profitability. Now, not so much.
This profit-maximization construct is so common that it has characterized American corporate life for the half-century and more since Milton Friedman first pronounced:
There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.37
Many dispute the economic wisdom and even the morality of this corporate edict, but it has nonetheless defined US business behavior before, during, and after the 2008 great financial crisis and again after COVID struck in 2020. Indeed, the profit-maximization, quarter-over-quarter ethos is one contributing crisis cause. However, unless or until investors relent, it prevails.
As a result, corporations through their actions convert economic theory into financial-market reality – and a very hard reality it became after post-crisis financial policy redesigned finance. The Federal Reserve bought trillions of dollars of assets from the banking system starting in 2009, ultimately growing its portfolio to $4.5 trillion. Although these purchases effectively countered the crisis at the start, they did not jumpstart the economy as the Fed hoped. Indeed, over time, the Fed's huge portfolio made inequality even worse because the long-term impact of this unprecedented policy was to boost equity prices in the stock market, not long-term, job-producing growth.38
In 2020, the Fed repeated this playbook, this time throwing still more trillions into the financial market. As a result, stock markets bounced back from the brink in record time even as American unemployment continued to skyrocket to levels not seen since the Great Depression of the 1930s, if then.
As the Federal Reserve sucked trillions of safe assets from the financial system, investors looked desperately for places to put their funds. Starved of Treasury obligations and even of the chance to earn a reasonable rate of return by putting money in the bank, investors had little choice but to head to the stock market or to high-risk assets promising returns above the Fed's low rates. All this demand boosted equity prices, which led to more demand and still higher stock prices. The more financial markets go up, the still better off the wealthy become, at least for as long as markets go up or the Fed prevents them from coming back down.
If all Americans owned stock, then all Americans would benefit from rising markets, but all Americans don't own stock; the bulk of household stock ownership – 86.5 percent – was in the hands of the wealthiest 10 percent of households, and the top 1 percent owns more than half of all US stock.39
To be sure, many Americans owned stock in 401(k) plans and mutual funds. But