How Wealth Is Distributed

The New Republic, September 30, 1972

The association of poverty with progress is the great enigma of our times.
— Henry George (1880)

WHAT IS WEALTH, who gets it, and why?  I write as a rela­tively privileged on­look­er (privileged educationally and occupationally) who has lived only off pay­checks, filed income tax returns for a decade, passed through booms and recessions (but not a Great Depression), and, as a journalist, seen poverty and riches.  I have biases, and they are in favor of equality or, to put it another way, against the propo­sition that great ex­tremes of wealth and privilege are desirable or inevit­able.  The question that seems paramount to me is this: why, despite wars on poverty, pro­gressive income taxation, relatively high em­ployment and widespread educational opportunity, does the American economy so stubbornly perpetuate inequality?

It is perhaps best to begin with our productive capacity.  In barely three cen­tu­ries we have constructed the world’s most magnificent GNP machine.  It churns out food and clothing in abundance, a choking profu­sion of automobiles, a dazz­ling array of airships, spaceships and electronic brains, and mass-produced gad­getry of every description.  The machine produces too much junk and not enough good housing; it has a tendency to underutilize existing plants and leave millions of poten­tial workers idle.  But for the sake of our inquiry, let’s leave aside these im­perfections and ask not why it doesn’t produce better and more, but why it doesn’t distribute more fairly what it produces.

Studies back to the 1920s show that the richest fifth of the population has con­sistently received at least seven times as much annual income as the bottom fifth.  The constancy of the ratio is what startles.  It im­proved slightly during the Depression, when many rich lost their fortunes, and during World War II, when rigid price controls and an excess profits tax were im­posed on a labor-starved economy.  But since the end of World War II the GNP machine has returned to its old habits.  Everyone’s income has risen, but at virtu­ally the same rate. 

The latest study (by MIT professors Lester Thurow and Robert Lucas, pub­lish­ed last March by the Joint Economic Committee) shows that the lowest fifth of the population took home 5.6 per­cent of America’s before-tax earn­ings in 1969, while the top fifth garnered 41 percent.[i]  In dollar terms, the average in­come of the top fifth of families in 1969 was $19,071 higher than that of the bot­tom fifth— a gap that was only $10,565 in 1947.  Government taxation, which has a meas­urable redistributive effect in Eng­land and Sweden, does vir­tu­ally nothing to improve the American before-tax distribution, primarily be­cause the mild progressivity of feder­al income taxation is all but cancelled by the regress­iv­ity of payroll, sales and property taxes.  It is as though a giant wedge were jammed in the GNP machine’s distributive mecha­nism: the machine spews out dollars to the rich, dimes to the poor.

WHY?  The question cannot be answered without examining the different deri­vations of income: income from labor (salaries and wages), and income from wealth (dividends, interest, rent, royalties, capital gains).  Everybody except the infirm or the disabled has the capacity to derive income from labor; but to derive income from wealth you must first own some­thing.

The distribution of wealth has consistently been more inequitable than the dis­tribution of income.  In 1810, according to economist Robert Gallman, the top one percent of families owned 21 percent of America’s wealth.  A century later, in 1915, the US Co­m­mission on Industrial Relations reported:

The ownership of wealth in the United States has become concentrated to a degree which is difficult to grasp.  The “Rich,” two percent of the people, own 35 percent of the wealth.  The “Middle Class,” 33 percent of the people, own 35 percent of the wealth.  The “Poor,” 65 percent of the people, own five percent of the wealth.  The actual concentra­tion, however, has been carried much further than these figures indicate.  The largest private fortune in the United States, estimated at one billion dol­lars, is equivalent to the aggregate wealth of 2,500,000 of those who are classed as “poor”.

Today’s rich, the top one percent, own roughly 25 percent of all personal and financial assets, according to James D. Smith of Pennsylvania State Univer­sity — more than eight times the wealth owned by the bottom 50 percent.  Again, except during the Depression and World War II, the relative concen­tration has stayed about the same or worsened.

Even these figures do not show us the whole picture, for the rich and the poor own dif­ferent kinds of wealth.  The great GNP machine has been moderately success­ful in dis­tributing what might be called inert wealth — homes, automo­biles, personal pro­per­ty which, far from producing income, are a drain on the sturdiest pocketbook.  (Even here its success has not been phe­nomenal: 17 per­cent of families own no appreciable wealth at all, and another eight percent have a nega­tive net worth — their debts exceed their assets.)  Where the GNP machine has failed is in the distribution of income-producing wealth: stocks, bonds, real estate, etc.  According to a study published earlier this year by the Sabre Foundation, the top one percent of wealth-holders in 1962 owned 72 per­cent of America’s corpo­rate stock, 47 percent of out-standing bonds (including virtually all tax-exempt state and local bonds), 24 percent of notes and mort­-gages, and 16 per­cent of all real estate (including residences, which is why this figure is relatively low).

Income, which derives from labor and wealth, is distributed unequally in part be­cause some types of labor are better rewarded than others, but to a great de­gree because income-generating wealth is concen­trated in the hands of a few.  An analogy might be drawn to the nuclear fission process.  The top five per­cent of American families, who own virtually all the productive wealth, are benefi­ci­aries of a kind of mone­tary chain reaction.  Their wealth splits and divides and multiplies all by itself.  The rest of the population owns little else but its labor, and labor deteriorates rather than multiplies in earning capacity.  Every so often a lucky labor-owner accumulates a critical mass of wealth and then he, too, can enjoy a monetary chain reaction.  But because they are chronically in debt, or earning barely enough to survive, few laborers come near to possessing a critical mass.

David Ricardo, John Stuart Mill, Pierre Proudhon and of course Karl Marx gave con­siderable thought to this phenomenon.  Marx contended that the root cause of inequal­ity under capitalism was the appropriation by capital-owners of the surplus value created by la­bor.  Henry George came to a different conclu­sion: he argued that pov­erty persisted in America because land-owners appro­priated from labor and capital owners the fruits of material progress.  Public opinion around the turn of the century, nurtured by Populist and Progressive spokesmen, generally accepted the notion that hardship for the many was at least partly attributable to the accumulation of vast for­tunes by a few.

THEN a curious thing happened.  In the 1920s, partly as a reaction to the Pro­gressive era and partly as a re­sult of World War I, business became America’s busi­ness, and any suspicion that some patriotic entrepre­neur might be appro­pri­ating something from some­body else was considered to be in bad taste.  There took hold the doctrine of the infinitely expansible pie: no sense fighting over the slices as long as the whole pie is getting bigger.  The Depression of the 1930s rein­forced this way of looking at the economy, though for different rea­sons.  The prime task of the New Deal was to put people and capital to work making the pie.  Pro­duction, not distribution, was the obses­sion, and so it remained during World War II.

Postwar liberals perpetuated this fixation on pro­duction; their great fear was that a new depression would put millions out of work.  Except for rarae aves like Leon Keyser­ling, who argued that equitable in­come distribution was a prere­qui­site of stable growth, most liberal economists were content to jiggle the levers of fiscal and monetary policy, letting income trickle down as it might.  Public de­bate centered around such short-range dilemmas as whether to raise aggre­gate taxes or lower them, loosen the money sup­ply or tighten it.  The distribution of wealth was ac­cepted as an unalterable given.

By 1958 John_, Kenneth Galbraith was able to proclaim in The Affluent Society:  “It has become evident to conserva­tives and liberals alike that increasing aggregate output is an alternative to redis­tribution or even to the reduction of inequality.  The oldest and most agitated of social issues, if not resolved, is at least largely in abeyance, and the dis­putants have concentrated their attention, instead, on the goal of increased producti­vi­ty.”

Given an intellectual consensus that the distribution of wealth was a dead issue, it’s not surprising that a number of myths — many inherited from previous dec­ades — took hold.  Among the most popular were: profits are good for the poor; hard work can still get you rich; the poor are poor because they won’t work hard or can’t; by spending more on education the government can promote economic equality; widespread stock ownership has created a true “people’s capitalism”; antitrust laws are a barrier to excessive concentration of wealth.

John Kennedy believed the economic wellbeing of workers would be improved by granting tax breaks to capital-owners; whence the investment tax credit and other tax changes that did help stimulate growth but also distributed income up­ward rather than down­ward.  Sargent Shriver believed that poverty could be eradicated by helping the poor overcome their per­sonal inadequacies.  He stated in 1971: “This program [the War on Poverty] was conceived of as a program not to distribute welfare, not to give handouts to peo­ple, but to give them the capacity to get themselves out of poverty….The object was to transform the poor people themselves so that they became able to stand on their own feet and earn their own living.”

Building on that philosophy, the poverty program em­phasized early childhood education, vocational train­ing and legal services.   It was never a war on inequality of wealth or income, only on unequal access to the lowest paying jobs.  Its principal beneficiaries, some have argued, were not the poor but the bureaucrats and social scientists who ministered to them, and the capital-owners (ITT, Litton Industries, RCA, et. al.) who won the anti-pov­erty government contracts.  The same could be said of urban renewal: its major bene­ficiaries were not slum dwellers but land-owners and real estate develop­ers.

Perhaps the most revered belief of liberals was that education could be an econ­omic leveler.  While it is true that education has helped many to improve their economic status (myself included), it is a logical fallacy to conclude that education can uplift everyone simultaneously.  The labor market rewards those who are better educated than their fellows, not simply those who are educated.  If large numbers of people get edu­cated, as has happened in America since World War II, the result is better educated steel workers, journalists and drop­-outs — not a more equitable distribution of income or wealth.  Education is, in itself, a good thing, but it’s not an economic leveler.

THIS LEADS us back to our original question: why, despite prolonged prosperity and massive public in­vestments in education, job training, etc., does our econ­omy continue to distribute inequitably what it produces?  The underlying causes of economic inequal­ity, it seems to me, are related to the different deri­va­­tions of income, their characteristics and manner of distribution.

Of the two fundamental sources of in­come in America — labor and wealth — the latter is by far superior.  Think for a moment of the advantages of wealth.  It is not subject to old age, illness and other human frailties.  It can reproduce itself in five or 10 years (most corporate capital returns about 20 percent on equity before taxes) and even gets a subsidy, in the form of depreciation allowances, for doing so.  It can reap profit from the efforts of others, whereas labor can only earn for itself.  Through capitalization of an­ticipated gains, it can get paid for today and tomor­row, while labor gets paid only for today.  It is inherently organized, whereas labor must struggle, often unsuc­cessfully, for the equivalent organizational strength.  It has the upper hand in the marketplace, and, more of­ten than not, first claim on government favors.  And it has the one kind of power that really counts in Amer­ica: the power to pass on to others (i.e., workers) the costs that others are trying to shift to you.[ii]

These advantages would be of little consequence were wealth as widely distri­buted as is labor.  But this is not the case.  Our economy has long remained such that the inferior source of income is spread among the many, while the superior source is concentrated among the few.

What we are left with is a diagnosis of the American economy that is not far from that made by the classical economists.  Productive capacity steadily (some­times not so steadily) grows, but the fruits of increased pro­duction are not equitably shared.  These fruits have been, and continue to be, appropriated in dis­propor­tionate degree by a small minority.  This minority may not consist solely of Marx’s capitalists or George’s land-owners, but it is a minority none­the­less.  Its mem­bers are essentially the owners of productive wealth.  Any genuine remedy for economic inequality in Amer­ica must come to terms with that reality.