I’ve often wondered how much income we could cram into the top 1 percent before the bottom 90 percent erupts.
I never focused on the 9 percent in between. The folks in this 9 percent, I figured, are too affluent to rock any boats, so I left them out of my calculations.
But I’ve reconsidered. This “affluent 9 percent” may be inequality’s final victims. They may play a pivotal role in determining when our unequal society gets too unequal.
The affluent 9 percent are those households with annual incomes roughly between $100,000 and $400,000, the 30 million Americans both affluent enough and numerous enough to maintain our facade of prosperity.
They fill our restaurants, populate our shopping malls, and fill the coach sections of commercial airplanes. They trade in their cars before running them into the ground, simultaneously propping up our auto industry and creating a used-car market for those unable to buy new.
The question may not be how much income we can cram into the top 1 percent, but how long we can sustain the affluent 9 percent while the income share of the top 1 percent soars. If the affluent 9 percent feel pinched and cut back, our consumption-based economy could implode.
Indeed, data compiled by economists Emmanuel Saez and Thomas Piketty indicate that may be the case, and that another implosion awaits us.
Saez and Piketty have tracked the distribution of income in America over a 100-year period. Their data establish a consistent relationship between the income share of the top 10 percent of the population and the shares of the top 1 percent and top 0.1 percent.
The top 10 percent’s share of the nation’s income typically matches the top 1 percent’s share of the income that goes to the top 10 percent, and the top 0.1 percent’s share of the top 1 percent income follows this same pattern.
Let’s call this statistical phenomenon the “proportionate sharing pattern.”
Is the pattern a precise relationship? Of course not. We’re not talking immutable laws of physics here. But the pattern has been remarkably consistent over time, with the period between 1931 and 1940 the only substantial aberration.
Otherwise, the pattern has held. If 40 percent of the country’s total income is flowing to the top 10 percent, then about 40 percent of that 40 percent, or 16 percent, will be flowing to the top 1 percent, and about 40 percent of that will be flowing to the top 0.1 percent.
Consider what happens to the share of the affluent 9 percent under a mathematically precise proportionate sharing pattern as income concentrates at the top. Early on, the income share of the affluent 9% increases. But as the share flowing to the top 1 percent expands, the rate of increase for the affluent 9 percent slows. Eventually, when the share of the top 10 percent hits 50 percent of total income, the income share of the Affluent 9 percent peaks at 25 percent, after which it declines. At this point, the affluent 9 percent transition from being beneficiaries of increasing inequality to being victims.
How close do actual results in our experiment with extreme inequality match what occurs under a mathematically precise proportionate sharing pattern? Eerily close.
Over the past century, we have had only three occasions when inequality reached a level that impacted the affluent 9 percent adversely — that is, when the income share of the affluent 9 percent peaked and began to decline at a time when the share of the top 1 percent was growing.
The first came in the mid 1920s and the second in the mid 2000s. The income share of the affluent 9 percent in these two periods peaked at between 27 and 28 percent, very close to the 25 percent peak our precise proportionate sharing pattern predicts.
In each of these time periods, the income share of the top 1 percent continued to grow for a few more years, bringing the income share of the top 10 percent in 1928 and then again in 2007 to just about 50 percent.
What happened next? We experienced devastating economic declines, the Great Depression in 1929 and the Great Recession in 2008.
Is the worst behind us? Not quite. After the Great Depression, the income shares of the top 1 percent and top 10 percent began a 40-year decline. After the Great Recession, however, our income immediately began concentrating again. As a result, the share of the affluent 9 percent peaked in 2009 at 28 percent. Then, just three years later, the income share of the top 10 percent reached an all-time high of 50 percent, surpassing the levels reached in 1928 and 2007.
Will history repeat itself? If income continues to concentrate at the top, we’ll soon see.