That this extreme inequality is itself the primary threat to both democracy and social stability is poorly understood.
Scraped of pleasantries, the ultimate purpose of any status quo is to 1) distribute most of the economy’s gains to the top tier and 2) offload the sacrifices this requires to the bottom tiers but in stealthy ways that aren’t noticeable enough to spark political revolt.
The basic stealth mechanisms deployed over the past 50 years to offload the sacrifices on the bottom 90% are:
1) Reduce the share of the national income going to wages so the share going to corporate profits and finance could soar.
Unlimited Memory: How ...
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2) Place the tax burden for entitlements (Social Security and Medicare) on the wage earners while reducing the taxes levied on unearned income from the ownership of assets / capital.
3) Understate official inflation.
4) Inflate credit-asset bubbles that enriched the owners of assets at rates far above inflation.
The first dollar of every wage is taxed at 15.3% for entitlements (both the employee and employer pay 7.65%), while numerous forms of capital gains are exempt from tax. Capital is lightly taxed, earned income is heavily taxed. Wage earners lose ground, asset owners get richer. That’s the net result of the taxation system.
Inflation is of course the hidden tax, but the status quo has relieved the wealthiest 10% who own most of the assets from the ravages of inflation by inflating asset bubbles which enrich the already rich at rates far above inflation. Those who own few assets absorb the losses of inflation via a slow-drip reduction in the purchasing power of their wages.
Borrowing money has always been the lowest-friction way to keep everyone happy–or at least onboard. The status quo needs enough money to fund both the gains from monopoly, tax havens, fraud and graft collected by the top few and the entitlements that keep everyone else onboard.
Alas, all good things come to an end. Interest rates fell for 40+ years, enabling more debt to be piled up without increasing the cost of servicing the debt enough to be noticeable. Now rates are rising, and despite the many claims that the Fed and other central banks can easily shove rates back to zero, the recent rise in Japanese sovereign bonds undercuts this breezy assumption that debt can be piled up indefinitely.
Japan’s central bank printed money to buy the government’s bonds to keep yields near zero for 30 years, but that apparently permanent solution has been revealed as impermanent.
Demographics–people living longer and the global Baby Boom retiring en masse–is pushing government spending higher as the workforce of wage earners paying most of the taxes stagnates or shrinks. Now that interest rates are in a long-term up-cycle, it’s no longer possible to just borrow another few trillion dollars every year without increasing the cost of servicing all that debt to the point where the debt service starts squeezing out the spending needed to keep everyone happy.
The net result of all this is: now comes the hard part, distributing the sacrifices in ways that are finally noticeable.
The problem facing the status quo is not easily resolvable: the top few percent (corporations and the wealthiest households) who own most of the wealth have aggregated political power with their wealth, so politicians are under tremendous pressure to keep the immense river of profits, tax breaks, giveaways, graft, etc. flowing to corporations and the wealthiest few lest they throw a temper tantrum and fund a competing politico in the next election.
But the predations of the top few have already shifted most of the losses, costs and risks onto the bottom 2/3 of the populace, and so the buffers of cash, assets and credit this class has to absorb more sacrifices has already been worn thin.
The class that’s doing well due to the current Everything Bubble–those in the 80% to 99% bracket–can afford to absorb some of the sacrifices, but should the bubble pop–and sadly, all bubbles pop despite herculean efforts to keep them inflated–the phantom wealth this class expected to be permanent will dissipate into thin air, leaving them less willing to absorb the scale of sacrifices needed to satisfy everyone: the politically influential top few, the technocratic class that keeps the status quo bureaucracies / institutions functioning and the bottom 2/3 who do the scutwork.
The Roosevelt Myth: 50...
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This chart below (from WSJ.com) shows that wages are still the dominant generator of income even in high-income households. Only the top 1% derive substantial shares of their income from business ownership and ownership of other assets.
In summary: the most politically influential class–those able to buy political protection from sacrifices–is the only class with the means to absorb financial sacrifices.
Politicians are caught in a bind. They need to cut spending and raise taxes lest the Good Ship Status Quo founder, but the class that is most able to absorb sacrifices also funds their campaigns.
The usual tricks that worked for the past 50 years to offload the sacrifices onto the bottom 90% wage-earner class now carry the risk of arousing political revolt.
The conventional “solution” many expect is to reduce the debt load by increasing inflation. But this only works if the bottom 90% wage-earner class receives wage increases sufficient to keep up with inflation. There is little to no evidence to support the assumption that this is likely, or even possible.
Once the Everything Bubble pops, the financial buffers of the bottom 90% wage-earner classes will thin or disappear entirely. Once this happens, their stake in the status quo changes, and they become dry kindling awaiting a spark to erupt in a political firestorm that burns down the status quo’s current distribution of gains, losses, costs and risks.
