According to the following graph from economists Emmanuel Saez and Gabriel Zucman, the share of the nation’s wealth held by the 0.1% is now back to pre-Great Depression/New Deal levels, on par with what it was before World War I or in the 1920s.
However, something else stands out in that graph: not just the peaks, but the nadir. The lowest point on that graph looks to be at the last quarter of 1977. The initiatives of the New Deal and the Great Society–as well as the largely Keynesian macroeconomic policies of the post-war era–had helped to reduce inequality. And events in the 1970s like the oil crisis and the Iranian Revolution shook things up for the investor class. The inflation of that decade, moreover, would have devalued their assets. And as Paul Krugman mentioned in a post earlier today, the investor class hates inflation for precisely that reason. And they will not stand for it.
And when the investor class feels that they have had enough, politicians listen.
In their book Right Turn: The Decline of the Democrats and the Future of American Politics, Thomas Ferguson and Joel Rogers look at the collapse of the New Deal consensus and analyze the roots of the right turn of the Democratic Party in the late 1970s and into the 1980s. This moment marked a key point in the shift:
In late 1978, however, the bottom at last fell out of the Carter coalition. Anxious about both the pace of economic growth in the United States and the potential for a major downturn abroad, the Administration had for two years maintained a relatively easy monetary policy and allowed the exchange rate to fall. With the rate of unemployment dropping, however, imports rose, and in 1978 wage gains again briefly pulled ahead of productivity gains.Hoping to continue its expansionary policies, the Administration reviewed various methods of wage restraint….[T]he Administration sought international agreement for a multinationally coordinated expansion (“joint reflation”) of the economies of Britain, Germany, and the United States. At the Bonn summit of the major industrial powers, however, the allies balked….With the U.S. rate of inflation racing ahead of that of its allies, anxiety about the dollar grew. In October 1978, the effects of the Administration’s earlier reluctance to rein in the money supply became dramatically visible. A giant run on the dollar developed.
Forced at last to choose between his constituencies, Carter did not hesitate. To restore confidence in the dollar, Carter promised in late October to reduce the growing budget deficit, cut government hiring, and eliminate additional regulations. He also announced a new series of wage-price standards, in another bid to get control of inflation.
By then, however, the Shah of Iran had been driven from his throne, announcing a major disaster for many of America’s largest industrial and service firms—including major banks, oil companies, construction firms, weapons suppliers, and any number of other exporters and service enterprises—that had been deeply involved in the Shah’s regime. Stunned by its real and prospective losses, the business community’s demands for increased military spending were reaching a crescendo. Compounding these problems was the oil shortage of early 1979, rising inflation, and another run in the dollar. In July, Carter acted, in a complex rearrangement of his Cabinet and other positions in the Administration. In the most important moves, Carter dismissed liberal HEW Secretary Joseph Califano and Treasury Secretary Michael Blumenthal; he then moved Fed Chairman G. William Miller to Blumenthal’s old spot. Then, after David Rockefeller, Democratic investment banker Robert Rosa, and Bank of America chairman A. W. Clausen refused the post, he appointed Paul Volcker, a former Chase employee, to be Chairman of the Federal Reserve Board. Volcker immediately raised interest rates.
From that point, everything went from bad to worse. Another dollar crisis led the Fed to pursue even more Draconian monetary policies, and interest rates approached lunar levels. Real growth in the economy collapsed altogether, and for a couple of quarters was even negative.
But the economic collapse gave Carter little room to maneuver. By early 1980, with Democratic investment bankers holding late-night meetings with the party’s congressional leadership to demand budget cuts, the leader of the party of Roosevelt, Truman, Kennedy, and Johnson was forced to do the unthinkable. Only months before an oncoming election, he was forced to make massive cuts in funds for the poor, blacks, and the cities, and to further tighten the money supply. At the same time, Carter made clear his commitment to massive (5 percent in real terms) annual increases in military outlays.
As alluded to above, Paul Volcker was up for the challenge of saving the beleaguered billionaires:
Volcker Asserts U.S. Must Trim Living Standard
Warns of Inflation if Oil Spending is Not Cut
By Steven Rattner
Special to the New York Times
Washington, Oct. 17 —Paul A. Volcker, the chairman of the Federal Reserve Board, asserted today that Americans must accept a reduction in their living standards, if inflation is to be reduced.
In Congressional testimony before the Joint Economic Committee, Mr. Volcker maintained that, because of the drain of American wealth to the oil-producing countries, Americans would have to accept less. If they try to keep up, he warned, the result would be a new burst of inflation.
“The standard of living of the average American has to decline,” he said. “I don’t think you can escape that.”
And he continued to try to push down such living standards during his tenure under Reagan:
By the fourth quarter of 1981, the inflation rate had fallen by double digits, but compensation for employees was still increasing at a rate of more than 10 percent….When White House officials congratulated themselves on how swiftly inflation was declining, Volcker pulled out his card on union wages and warned them not to be too optimistic. Until labor got the message and surrendered on its wage demands, the underlying rate of inflation would continue to push prices upward—and collide with the stringent reality imposed by the Fed’s money policy.
“Volcker wanted to break the back of wage trends just as he wanted to break commodity price speculation,” David Stockman said. “Kudlow and I were telling him that inflation would come down fast. He said, “Nope, it can’t happen. Wages are about two-thirds of GNP, and inflation can’t come down faster until labor unit costs come down faster.”
The research from Saez and Zucman also reveals the growing disparity within the rich as well.
As you can see below, the share of wealth held by the top 1-0.5% fell gradually during the 1970s and early 1980s and has since remained relatively constant, tipping only slightly upwards. Since 1960, the peak share here was about 7.9% and the nadir was about 6.3%.
The top 0.5-0.1% saw a similar pattern, but with slightly steeper rises and falls. Here, the peak share since 1960 was about 11.5% and the nadir about 9.5%. The peak today, however, is only slightly higher than the share in 1960.
The top 0.1-0.01% have seen a much steeper growth in share of national wealth. From a nadir of about 5.3% in the late 1970s, it is now at about 10.2%. It has effectively doubled.
And the growth in the share of national wealth held by the 0.01% has been even steeper. From a low point of about 2.3% in the late 1970s, their share is now about 11.3%.
Looking outside the top 1%, the wealth share of those in the top 10-1% has actually fallen since the late 1970s. From a peak of about 46% in the mid-1950s (and a 43/44% throughout the 1970s), this share has fallen to 35%.
And back to the 0.01%, the Supreme Court’s recent decision in McCucheon vs. FEC has freed them to spend up to $2.43 million per election cycle. And if they take up that new opportunity, I’d expect to see the red line in that penultimate graph keep on rising.