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Friday, 30 May 2014 07:09

Economy Shrunk in the First Quarter of 2014: A Bad Sign for Income Inequality

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aendincome(Photo: quinn.anya)The US economy shrunk (according to just released revised figures) for the first time in three years. TIME online reports:

The U.S.' Gross Domestic Product contracted by 1 percent in the first quarter of 2014, marking the first contraction in years as government economists revised earlier figures by taking stock of additional glum measures

The U.S. economy shrunk by 1% in the first quarter of 2014, according to government data released Thursday, marking the first economic contraction in three years.

The figure, from revised estimates released by the Commerce Department, was revised downwards from an earlier estimate of 0.1% growth in gross domestic product, as government economists took stock of additional glum measures. The Commerce Department noted that on top of a winter wallop to retail and construction, real GDP was dragged down further by a rise in imports and a marked decline in inventory growth. The last time real GDP contracted was in the first quarter of 2011 at the tail end of a punishing recession.

Even though many mainstream media reports quote "analysts" who claim that the downturn was an anomaly - and that consumer demand should increase in the second quarter - the anemic performance of the Gross Domestic Product has implications for an increase in equality.

That is the outlook if you agree with the one of the basic tenets in economist Thomas Piketty's widely discussed new book: "Capital in the Twenty-First Century."

One of the key findings in Piketty's book is that when the growth in profits and earning of concentrated capital (think the 1%) far outpaces the increase (or in the first quarter of 2014 the decrease) in GDP, income inequality is bound to increase.  Indeed, that is what has been occurring at an accelerating pace in the United States.

In fact, no less than the Wall Street Journal covered a study awhile back that found:

According to the latest version of “Striking it Richer: The Evolution of Top Incomes in the United States,” by Emmanuel Saez, of the University of California, Berkeley, the income inequality gap has been expanding, rather than narrowing, as the 2007-2009 recession recedes. That trend has been unfolding for more than 30 years, with the highest earners only temporarily set back by the most recent downturn...

Among the highlights:

–All told, average inflation-adjusted income per family climbed 6% between 2009 and 2012, the first years of the economic recovery. During that period, the top 1% saw their incomes climb 31.4% — or, 95% of the total gain — while the bottom 99% saw growth of 0.4%.

–Last year, the richest 10% received more than half of all income — 50.5%, or the largest share since such record-keeping began in 1917. Here is how the top earners break down: Top 1%: incomes above $394,000 in 2012; Top 5%: incomes between $161,000 and $394,000; Top 10%: incomes between $114,000 and $161,000.

Although the expected salvos against Piketty's findings by the financial press have recently been launched, the economic reality of a long-term trending of the wealthy experiencing unprecedented financial gains while the gross domestic product struggles is ominous for the vast majority of the US population.  The Financial Times or the Economist can quibble with a bit of Piketty's data, but petty criticism cannot disprove what is happening in the economic world that we actually live in.

In NextNewDeal.net, Mike Konczai breaks down Piketty's contention about why a growth in return on capital in the hands of a few that exceeds a sluggish GDP is worrisome to a fair distribution of income that stabilizes society:

1. The return on capital is greater than the growth rate. The infamous "r > g" inequality. Meanwhile growth begins to slow, perhaps because of demographics.

2. The amount of capital, or private wealth, relative to the size of the economy will begin to grow rapidly as growth slows. This is the “past tends to devour the future” line. The size and role of wealth of the past will take on a greater relevance to the everyday economy.

3. If the rate of return doesn't fall, or doesn't fall that quickly, the capital share of income will increase. More of our economic pie will go to people who own capital.

4. The ownership of capital is very concentrated, historically and across a wide variety of countries. It is unlikely to fall quickly, much less spontaneously democratize itself, in response to these trends. So the income and power of capital owners will skyrocket.

When there is a sustained period that the top 1% receive "95% of the total [income] gain — while the bottom 99% saw growth of [only] 0.4%," the viability of democracy is jeopardized. That is an implication of Piketty's findings that concern him about the radical growth in income inequality.

Another way to view this is that our "national security" in terms of being an ostensible democracy may be more threatened by the current economic structure in the US than an external enemy.

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