By Gary W. Harding
I, like most Americans, have become increasingly frustrated with our government and its connections with economic policy (1-5). William Greider has pointed out (3) that, as a consequence, "Politicians are held in contempt by the public. That is well known and not exactly new in American history. What is less well understood (and rarely talked about for the obvious reasons) is the deep contempt politicians have for the general public." Is it any wonder then, that despite all the efforts, we cannot get anything which reasonably reflects our views out of the representative process? Why can we not get what we want from our leadership? Who really controls the governing and economic activity processes? The answers to these questions determine how we the people regain control.
It is no surprise that the governing process has an enormous impact on economic policy and activity. We all understand this and that the interactions involved are extremely complex. What we do not understand is the rhetoric and wrangling that produces confusion on the one hand and a result contrary to our wishes on the other.
What is going on?
There is a way to cut through all the complexity and confusion to demonstrate what is really going on. The trick is to look only at the net results from governing policy and economic activity; not to try to keep track of and attempt to explain the effects from each of the billions of daily transactions. A very revealing measure of the net process is to look, over the years, at the percentage of total US wealth which has been held by the richest 1% of households (2,6). That is, at the end of any particular year, add up all the wealth in the country, count the wealthiest 1% of households, and then determine what fraction of the wealth is held by the richest 1%. These data come primarily from analysis of probate-court and divorce-settlement records. By converting everything to percentages, the results compensate for: 1) the changing value of the dollar; 2) the growing population and its demographic distributions; 3) the differences in what constitutes economic value as new technologies replace old and the worth of financial paper fluctuates; and 4) the shifting influences of other factors.
A line graph of the percent of total wealth held by the richest 1% of households is presented in Figure 1 for 1900 through the preliminary estimate for 1995. Along with this curve, a bar graph is shown at the bottom which counts, for each of the three major governing institutions (the White House, the Senate, and the House of Representatives), the number (0 to 3) controlled by the Republican Party. Party control of the governing process is defined here as the one which holds or has a majority in two or more of these three institutions. An inverted bar graph is shown at the top of the figure which indicates when major recessions occurred and how severe they were on a 1 to 3 scale (a 1 unit bar indicates moderately severe, 2 units means very severe, and a 3 unit bar is used for the depression of the 1930s).
The first thing to notice is that over this century, the richest 1% have held an average of 28.5% of the total wealth with a high of 36% and not less than 21%. Are you as surprised by that as I was when I first saw this? Secondly, close examination of the curve reveals several interesting points:
1) The percentage rose during the first decade of the century under long-standing Republican-Party control of all three governing institutions. The curve flattened during World War I and Democratic-Party control.
2) The percentage then rose to the maximum (just above 36%) in 1929 which was followed by the Great Depression. The depression was preceded by the return to control of the Republicans during the 1920s.
3) The percentage then declined until the mid 1930s and started up again. This upward trend was interrupted by the onset of World War II, which produced a downward course that reached the minimum (21%), 5 years after the war.
4) The curve then turned up again during the first term of the Eisenhower administration when Republicans were again in control. This was short lived, however, as the Democrats regained the House and Senate and the curve flattened.
5) A steep rise occurred in the early 1960s with the Kennedy-Johnson administrations, but this quickly subsided with high inflation (guns and butter during the Vietnam War and the Great Society) and the oil embargo of the early 1970s (7).
6) The Nixon-Ford administrations were unsuccessful at turning the curve more than a little upward because the House and Senate were controlled by the Democrats. Also, these administrations were stuck by the Democrats with cleaning up the Vietnam mess. However, there was a major recession in 1973-1974.
7) The Democrats regained control in 1977 and the curve turned slightly downward again. However, the Carter administration produced high inflation and a moderate recession in 1981.
8) The percentage rose sharply after 1981 with the Reagan-Bush administrations and the Tax Reform Act of 1986. Although the House Democrats participated, the White House and Senate were controlled by the Republicans. The peak in 1986 at 36% was followed by the stock market crash in 1987 and a very severe recession in the early 1990s. This recession caused the percentage of total wealth held by the richest 1% to drop precipitously.
9) The percentage then rebounded quickly with a Republican-controlled Congress and majority of governorships. If the Republicans continue to control Congress and regain control of the White House in 1997, we will again have a situation just like the decade that preceded the 1930s.
Now that you have seen the story for the richest 1%, what about the rest of us? There is another way to look at the net consequences of governing and economic activity which demonstrates how they affect all of us. For any individual household, governing policy and economic activity produce income, assets and liabilities. The net result is reflected in the percentage of households that have different levels of income and net worth. An example is shown in the bar graph of Figure 2, which demonstrates how these data will be presented. The gross-income data come from personal income tax returns and the wealth data are from the same sources as in Figure 1.
To the left of center, the percentage of households with the levels of income indicated on the left-hand scale are plotted as horizontal bars. Right of center shows bars for the percentage of households with the level of net worth listed in the right-hand scale. The income and net-worth scales are not necessarily equivalent at any particular level. An individual household appears in the graph twice; once in the left half for its income level and once in the right half for its net-worth level. Intuitively, the stack of bars would form a pyramid with many poor and middle class at the bottom, some well-to-do households in the middle, and a few wealthy at the top. The richest 1% are in the left and right bars at the peak of the pyramid.
Figure 2 actually shows what the income, net-worth pyramid looked like for the US in 1970, expressed in 1990 dollars. This one is presented for comparison to the situation in 1990 (Fig. 3). The 1970 graph shows more detail at the point in Figure 1 where the percent of total wealth held by the richest 1% was down to about 24%; just after the Kennedy-Johnson administrations. We see that most households were doing reasonably well. The proportion of poor and lower-middle classes is far outweighed by those in the middle and upper-middle classes.
By 1990, when the holdings of the richest 1% in Figure 1 had recently reached 36% and the consumer price index had tripled, the distribution of household income and net worth changed dramatically, as can be seen in Figure 3. During 1981-1987, the Republicans were in control. Under the Reagan-Bush administrations, the percentage of households in the middle and upper-middle classes declined and that for the poor and lower-middle classes expanded. It is clear that the middle and upper-middle classes moved down into the lower-middle and poor classes and the top of the pyramid got fatter, particularly for net worth.
It was intimated above that the Tax Reform Act of 1986 substantially benefited the rich. This will be documented here by taking the same approach used for the richest-1% curve and income/net-worth pyramids illustrated in Figures 1 - 3. Rather than getting embroiled in the law itself and its effect on individual tax payers, we can look at the net effect over all tax returns by income levels (similarly to that in the pyramids above).
The IRS knows exactly how many returns are filed each year and for each return, what the income was and how much tax was due. The IRS publishes an income-level summary of these data, with about a 4-year delay. The income levels are reported relative to adjusted gross income (AGI). From these data (6) for 1986 and 1990, the following table has been prepared to show what happened as a consequence of the act. Again, percentages are used to compensate for the increase in the number of returns filed and the 20% decline in the value of the dollar from 1986 to 1990. Tallied are: AGI levels in thousands of 1990 dollars and percentages of the total in each AGI-level group for; returns filed (113,698,000), AGI for all tax payers ($3,406,100,000, of which $2,265,900,000 net was taxable), taxes paid by persons ($447,500,000), taxes paid as a percentage of AGI, and what the change in taxes paid as a percentage of AGI was between 1986 and 1990.
1990 Total % Total % Total Total Tax Change (%) AGI (k$) Returns Group AGI Tax Paid % Total AGI from 1986
0-15 40.7 8.3 2.8 4.5 -1.2 15-25 18.5 12.2 7.4 7.9 -1.6 25-40 17.7 18.8 14.7 10.3 -1.5 40-75 17.4 30.9 29.5 12.6 -2.6 75-100 2.9 8.2 9.9 15.8 -4.1 100-200 2.05 9.0 12.9 18.9 -6.5 200-500 0.6 5.5 9.7 23.1 -9.6 500-1000 0.1 2.6 4.7 24.0 -14.4 1000-up 0.05 4.5 8.4 24.2 -16.2
Because of the way in which the data are reported, the AGI income levels are not exactly the same as for the income/net-worth pyramids above, but they are close. For nearly all of the poor and middle class, AGI and gross income are one and the same. These tax payers, with the exception of alimony, seldom get adjustments such as retirement-plan contributions and self-employment expenses. The rich, however, take advantage of the adjustments available to them.
The first line of the table represents mostly the poor as defined by a poverty-level income of $15,000. In 1990, this group filed 41% of all personal income tax returns, collected 8% of total AGI, and paid 3% of the total personal income taxes. The 41% figure is larger than that for the bottom left bar in Figure 3 because it includes Social Security recipients with $15,000 to $25,000 of additional income and children with a small amount of taxable income. Also, there were 17 million more returns than households due to more than one return coming from some households; mostly couples who filed separate returns.
The last three lines of the table contain the 0.75% with the highest AGIs; close to the richest-1% group described for Figure 1. We see that they collected 13% of total AGI and paid 23% of the total taxes. Note that this 13% of total AGI represents only about a third of the 34% of total wealth held by the richest-1% in 1990 (Fig. 1).
It is clear that the higher a tax payer's AGI, the higher is the percentage of it that is paid in personal income taxes; the maximum being 24% of AGI for the wealthiest tax payers. However, in 1986, the year before the reforms began to take effect, this percentage was 40% of AGI. The change in 1990 from 1986 for taxes paid as a percent of AGI dropped as much as 16% for the rich and less than 2% for the poor and middle class. In 1990 dollars, the tax savings for the average poor tax payer amounted to $102, that for the middle class was $576, while that for the richest averaged $358,098.
But the astonishing disparity in the average 1990 tax savings just cited is not the whole story. This has been going on for 8 years now and the richest households have each saved millions over that time. Meanwhile, social security, state and local taxes have risen sharply. Specific data are not available to present a table like the one above for all taxes. If these data were to be assembled, no one would be surprised to find that the federal tax savings for the poor and middle class were more than erased by increases in taxes other than the personal income tax.
Although the very wealthy have incomes and net worths in the many millions, the richest 1% in 1990 included an annual income of only about $200,000 and/or a net worth of approximately $1 million. Some of these wealthy attained their status honestly by pursuing the American dream. Others are ruthless and greedy collectors of wealth for its own sake. The greedy influence the governing process directly and through their agents.
The richest-1% group also includes the president, nearly every member of Congress, and a majority of the governors, members in state legislatures, and county and city councils. These observations give the reader the first clue to the answers for the questions posed at the beginning of this article.
Why is this going on?
Who are these 2.6 million wealthy people in nearly 1 million households? Most of them are: movie, television, music and sports stars and their handlers; physicians; lawyers; stock brokers; other professionals; and, unfortunately, drug dealers and other criminals. These households primarily exert influence on the governing process indirectly (and often unknowingly) through their investments. The remainder are owners and/or CEOs and vice presidents of large, medium and some small sized corporations, businesses, and institutions. And, there are those with inherited wealth (the idle rich). The greediest among the rich will be called here "the avaricious-rich" with incomes and/or net-worths of millions to billions and with substantial economic and political power.
Now that you have seen generally what is going on, let us go back through the figures and table to make some further observations:
1) The avaricious-rich have the objective of driving the percentage of total wealth curve in Figure 1 as high as it can go (2). However, if they were successful in pushing it substantially above 36%, the result would be a distorted pyramid with most households at the very bottom. In the US economy, history tells us that the curve can be driven no higher than 36% without precipitating a major recession or worse, a full depression (Fig. 1, top). The only way to make the curve go higher is to adopt a political/ economic system like that in developing nations. The avaricious-rich in developed countries have succeeded in doing just that to developing nations by enslaving them with massive foreign debt.
2) The bar graph of Republican verses Democrat control of governing at the bottom of Figure 1 mimics the richest-1% curve, although the ups and downs are not absolutely correlated with the party in control. Economic policy has catered to the rich regardless of Republican or Democrat control of the White House and/or Congress. However, the curve has tended to go up with the Republicans and down with the Democrats.
3) The economic consequences of wealth-concentration are apparent in the inverted bar graph at the top of Figure 1. The depression and major recessions have tended to follow Republican control. This, of course, has left the Democrats holding the receding bag.
4) The avaricious-rich go to great lengths to maintain the pyramid. Although it appears that they are trickling some wealth down to foster economic growth, much more wealth percolates up and accumulates in their accounts. The evidence for this is straightforward; the net-positive return on investments by the rich.
5) The pyramid in Figure 2 for 1970 looks upside down for income (on the left). The avaricious-rich cannot allow pyramid inversion to occur because the flow of wealth into their accounts would be choked off.
6) The middle and upper-middle classes are vanishing and the pyramid is moving toward one with the majority of households at the bottom. The Republican-controlled Congress now has the distribution of wealth perched just below the 36% threshold in Figure 1. The avaricious-rich are hoping for a Republican president in 1997 so that they can push the richest-1% curve higher. We have already seen what the consequences are likely to be.
How do the avaricious-rich exert their control? Although the answer to this question seems obvious, it turns out to be complicated. Consider just the following aspect. Did you know that there are about 11,300 registered lobbyists in Washington DC and many others that are not registered? An additional 3,500 are registered foreign agents representing other governments and international businesses (4). Many lobbyists are former office holders and government officials. Former congressmen have unrestricted access to the House and Senate floors at any time. Lobbyists represent all sorts of special interests, including citizen organizations, but 90% of them are associated with the avaricious-rich.
Now that you understand the net consequences of the process, you can see why rational social, economic, tax, environment and energy policy is impossible to obtain. Even at the local level, the same process is at work in state capitols, county seats, and city halls. The avaricious-rich have a stranglehold on the process at all levels of government.
The avaricious-rich are now poised to make another move. Tax reform is again before a Republican-controlled congress. What they are talking about is replacing the current graduated tax on taxable income with a flat-rate tax on AGI (13% on personal AGI would be revenue neutral). The next to last (fifth) column in the table clearly shows what the result would be. The percent of AGI paid in taxes would go down to 13% for the rich and up to 13% for the poor and middle class.
The Republicans protest mightily that they are not the party of the rich. To justify their position, they are fond of quoting a statistic which says that the 2% of tax payers with the highest incomes ($140,000 AGI and up in 1990) pay more than half of the total federal taxes. As you can see in the bottom four rows of the fourth column in the table (% Total Tax Paid), this is not true. The actual figure is 30% of the total. It was only 32% in 1986, before tax reform. How did they come up with the 50% figure? The answer is that they included the taxes paid by corporations ($93,507,000,000 in 1990) as well as other tax revenues and then neglected to mention that the data had been fudged. This was done to fool you into believing that the rich were bearing such an unreasonable burden. The data presented here indicate that the Republicans are indeed the party of the rich.
Another argument that the rich advance to support their view is that they invest their tax savings in the economy, thereby creating economic growth, capital improvements and jobs. The fact of the matter is that what they really do, as they have in the past, is funnel their tax savings into profitable paper investments which create neither economic growth nor jobs.
The wealth data presented in Figures 1 - 3 are extremely difficult to get. Most of them were acquired from STATISTICAL ABSTRACTS OF THE UNITED STATES (6) and other publications from the Department of Commerce and academic publications which relied on the same sources. To close the door on access to these data (and get rid of offending regulations on businesses), the Republican-controlled Congress is now attempting to abolish the Commerce Department. The avaricious-rich just do not want you to know what they are up to. They will not be happy either about what has been presented here for all to see. The avaricious-rich will, no doubt, launch a confusion attack in an attempt to hide the facts that these data clearly document.
What can we do about this?
By now, the reader should be getting a clear answer to the original questions posed above. Despite Lincoln's Gettysburg Address, a government "of the people, by the people, for the people" did perish. What we actually have is a government "of the rich, by the rich, for the rich" (2). Before you draw the conclusion that this presentation is leading to some sort of socialistic agenda, let me assure you that it is not. There have always been rich and poor and there always will be. The Democratic/Capitalistic system, with all its faults, is still better than any other one that has been devised. However, we all expect that everyone is competing fair and square. The fact is that this is not the case (1-5). Complaints abound about the international playing field being far from level. What our citizens do not realize is that the field within our own borders is just as tilted.
The point of this essay is to make clear who is in control so that we the people can understand what must be done to get it back and what we will be up against. Unfortunately, part of what we are up against is ourselves. Although we have been lied to, our own ignorance, laziness and short-term greed underlies the fact that we are the ones who repeatedly vote the representatives of the avaricious-rich into power.
So, what can citizens do about this? The first thing is not to believe what politicians and the avaricious-rich tell you. Be suspicious of their pseudo-science front organizations and conservative talk-show hosts. They are masters at arranging a little data to support their contentions and ignoring overwhelming and unbiased data to the contrary. The avaricious-rich are not stupid. They know that they must keep the masses pacified in order to hide what they are up to. In your own self interest, do your homework, stay informed, and get at the facts. Join together with others in information networks which can be trusted to acquire and disseminate unbiased data.
To rein in the avaricious-rich, nothing would be more effective than manipulating their greed. If we are not buying what they are selling, they would quickly change their tune in order to survive. The avaricious-rich will go, as they always have, where the money is. Thus, we the consumers have the ultimate power. It takes just a little extra effort and homework to reduce our resource consumption and pollution production without lowering our standards of living. For example, energy not consumed or wasted produces savings which can be used elsewhere in our budgets. Our pocket books can produce social, economic and environmental reform. That is, choose not to buy from avaricious sources and instead make purchases from fair vendors. These kinds of purchases, in the end, are in all of our own best interests.
Campaign finance reform is critical. This (and lobbyists) is where the avaricious-rich exert their greatest influence. Maybe term limits would cut long-established connections, but new ones always appear within a short time after a new congress person's arrival. We also need a "dirty politics" watch-dog in every jurisdiction to clear away mud-slinging, propaganda, and half-truth campaign tactics.
Those citizens who exercise their constitutional right to petition their government should have no problems with any of these requirements. Unfortunately, the avaricious-rich are in control of the process whereby these changes would be made. It is in their best interest to see that they never happen.
We have now seen how the avaricious-rich get their way. Thus, if we do not get it together and take control back directly, the only alternative is for concerned citizens to document specific cases of abuse and take them to court. Perhaps the third branch of government can help us regain control of the other two. It would be ironic to see a bunch of lawyers in a feeding frenzy upon other avaricious-rich.
Above all, nothing will change unless each of us gets actively involved in the reacquisition of control. If we the people do not, a major recession (depression) and a distorted income and wealth distribution pyramid are likely in store for us.
1 Donald L. Bartlett and James B. Steele, AMERICA: WHAT WENT WRONG?, Andrews and McMeel, 235 pgs.
2 Ravi Batra, 1988, SURVIVING THE GREAT DEPRESSION OF 1990, Dell, New York, 367 pgs. Note: These predictions were substantially correct, but fortunately (with the possible exception of the State of California), precipitated a major recession rather than a full depression.
3 William Greider, 1992, WHO WILL TELL THE PEOPLE: THE BETRAYAL OF AMERICAN DEMOCRACY, Simon and Schuster, New York, 464 pgs.
4 Martin L. Gross, 1993, A CALL FOR REVOLUTION: HOW WASHINGTON IS STRANGLING AMERICA - AND HOW TO STOP IT, Ballantine, New York, 206 pgs.
5 Martin L. Gross, 1992, THE GOVERNMENT RACKET: WASHINGTON WASTE FROM A TO Z, Bantam Books, New York, 270 pgs.
6 STATISTICAL ABSTRACTS OF THE UNITED STATES, 1975 - 1993, US Department of Commerce.
7 Daniel Yergin, 1992, THE PRIZE: THE EPIC QUEST FOR OIL, MONEY & POWER, Simon & Schuster, 885 pgs.
Postscript
After this article was written (about 2 years ago), further information on annual income for the world was found. In 1991, the richest 20% of the world's population collected 85% of total world income (in US dollars). The poorest 20% of the population collected just 1% of that income, which left 14% for the middle 60% of the population (See: HOW MANY PEOPLE CAN THE EARTH SUPPORT? by Joel E. Cohen, Norton 1995, pg. 52). In 1970, the richest 20% collected 74% of world income and the poorest 20% of the population got 2%. At this rate of income growth for the rich over the past two decades, within the next 2 decades, the richest 20% will have 96% of the income and everone else will be living in abject poverty.
Copyright © 1995 by Gary W. Harding
Last Updated 7 July 1996
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