The Great Recession's Phony New 'Silver Lining'

Hard times, a rash of new media reports now assures us, are significantly narrowing the gap between the rich and everybody else. So why are so many super rich still smiling?

Job worries have you down? Bills piling up? Nothing left in your retirement stash? You need a reason to feel a bit better about the Great Recession, and major media outlets, over the last few weeks, have been energetically endeavoring to give one to you.

This new cascade of media retrospection began with a front-page Wall Street Journal article [1], picked up steam with a front-page Washington Post piece [2], and revved into worldwide overdrive this past week after a top wealth management consulting firm released a new report [3] on the impact of the global economic crisis on the world’s rich.

The basic message that all this coverage is shouting: The Great Recession hasn’t been all bad. Inequality, the claim goes, is finally easing. The gap that divides the rich from the rest is shrinking — because the rich, amid the worst economic times since the 1930s, are losing significant money and power.

The wealthy are losing money, the story continues, as asset bubbles pop and crash the value of their investments. And they’re losing power as angry lawmakers move to rein in rich people’s capacity to rebuild their grand fortunes.

Unequivocally worded headlines, the world over, are propagating this narrative of rapidly ebbing inequality: Recession hits super rich hard [4], Wealth inequality shrinks during financial crisis, study says [5], World's wealthy pay a price in crisis, Nations raise taxes, tighten regulations [2]. The narrative, in fairly quick order, seems to be hardening into a global consensus.

[6]“If the financial crisis has achieved one small goal,” as one Australian daily summed up [7] last Thursday, “at least it has slightly narrowed the gap between rich and poor.”

So do we now have, at long last, a real reason to stop worrying and love the Great Recession?

Not hardly. Inequality isn’t ebbing. It’s regrouping — for a nasty upsurge. The world’s affluent have certainly lost net worth. But that loss — for the super rich — has been far more inconvenience than calamity. Average working families in the United States and throughout the world have lost far more that matters.

The rich, as Yale School of Management senior faculty fellow Bruce Judson observed [8] last week, are “suffering relative to the past.” But average households are undergoing wrenching life changes.

“With each job loss or foreclosure,” Judson points out in a powerful critique of the Wall Street Journal’s new take on the Great Recession, “another family joins the ranks of the former middle class.”

And the actual losses the super rich have “suffered” remain inconsequential. The Boston Consulting Group study on global wealth released [3] last week does report that households worth at least $5 million saw their net worths drop 21.5 percent in 2008. But this hefty figure mixes in together merely rich worth $5 million and super rich who consider $5 million just an ordinary year’s income.

To get a more accurate picture of what’s happening to super rich fortunes, we need to look deeper into the data, to the Boston Consulting Group study’s stats on assets held in “offshore” tax havens like Switzerland. 

The merely rich don’t stuff much cash in offshore tax havens. The super rich do. In 2007, offshore accounts held $7.3 trillion. In 2008, the new Boston Consulting Group data show, the value of the wealth “stowed away [9] in money-havens” only dropped 8 percent.

Average working people,don’t have “money-havens” at their disposal. They have homes, and homes, not financial investments, make up the bulk of their household net worth. Home values, notes [10]former labor secretary Robert Reich, have “taken a far bigger beating than stocks and bonds.”

On average, U.S. home prices have fallen by a third since the housing bubble popped, and, Reich adds, they're “still falling.” Stocks, meanwhile, have rallied considerably since they “hit bottom earlier this year.”

That rally has been good news for the top 1 percent of Americans — who own over one-third [10] of the nation’s shares of stock — but not much solace to average families struggling through hard times. And you don’t have to have had your home foreclosed or your job eliminated to feel how hard these times can be.

Seventeen percent of U.S. employers, as the Economic Policy Institute reports [11], have recently “imposed furloughs on their workers,” and 20 percent “have suspended their contributions to 401(k)s and similar pension plans.”

“The Great Recession,” suggests Yale analyst Bruce Judson, “may be creating an even less economically equal society.”

But what about the worldwide tax-the-rich offensive major media outlets are reporting? Are governments, as the Washington Post contends [2], “helping themselves” to wealthy people's wallets “in a manner not seen in years”? Are financial industry movers and shakers, as the Post adds, witnessing a “government scrutiny of bankers' pay considered unthinkable before the crisis”?

On one level, these observations might possibly rate as accurate. Since the meltdown, the rich in the United States and elsewhere have come under greater pressure. But this pressure in no way amounts to “piling on when it comes to the rich.”

In fact, the real news here seems to be not how much governments have done to go after the wealth of wealthy but how little.

In the United States, lawmakers have so far this year made not one move to undo the George W. Bush tax cuts for America’s wealthy. In 2009, these tax cuts for the wealthiest 1 percent alone — average income, $1.3 million — will cost [12] the federal treasury $74 billion.

Nor have lawmakers yet moved to end the widely criticized tax loophole that lets hedge fund kingpins — the Wall Streeters who've profited the most from the “bubble economy” of recent years — pay taxes on their windfalls at a bargain-basement 15 percent.

The Obama administration, to be sure, has proposed to end both this loophole and the Bush tax cuts in 2010. But even if the White House succeeds, America’s awesomely affluent will face a top tax rate no higher than 39.6 percent. In 1980, before Ronald Reagan’s election, rich Americans faced a 70 percent tax rate on income over $400,000.

But all these numbers actually understate the gentleness of the treatment America’s wealthy — especially in the financial industry —have been receiving.

[13]We need to keep our eye, as Laurence Grafstein noted [14] last week in the New Republic, on the outrageous big picture: Last fall, as taxpayers poured hundreds of billions into the financial industry, the power suits who run that industry took hundreds of millions out.

The outrage goes even further than the bonuses these power suits pocketed, stresses Grafstein, a veteran Wall Street financial executive. Wall Street’s biggest banks also awarded their elites “new grants of restricted stock at historical stock-price troughs," shares now worth fortunes thanks to the taxpayer subsidies that have stabilized the stock market.

Indeed, the Institute for Policy Studies revealed [15] last month, just 40 executives at JPMorgan Chase, Wells Fargo, and six other U.S. high-finance powerhouses have already seen the stock rewards they received early in 2009 increase in value by just under $90 million.

In the face of all this continuing — and largely unchecked greed — how should average Americans be reacting? Should we be despairing? Have we missed a once-in-a-lifetime opportunity to trim the wealthy down to democratic size?

Not yet. These things take time. The last time average Americans had an opportunity to undo enormously concentrated wealth at the top, during the Great Depression, progress didn't come quickly. The first big Depression tax hike on the rich didn’t come until three years after the Depression began.

In short, we haven’t — yet — missed any historic opportunity. We have time. We just need the will.

Sam Pizzigati edits Too Much [16], the online weekly on excess and inequality.