How Everyone Getting More Equal Slices of the Economic Pie Can Curb the 'Velocity of Wealth'

Back in the 1980s, eagle-eyed economists began reporting out a pair of phenomena you actually didn't need eagle eyes to see: America's most affluent were becoming richer much faster than Americans of modest means. And many of those Americans of modest means weren't becoming richer at all.

These new trends were essentially turning the economic patterns of postwar America upside-down. In the years right after World War II, Americans of modest means led the economic way. Their incomes grew appreciably faster than the incomes of the nation's most affluent. The United States would see in these postwar decades the emergence of the modern world's first mass middle class.

Our nation's political leaders, naturally, celebrated this most glorious development. Americans, they could rationally claim, were all doing better economically -- and average Americans were doing the best of all!

How much redistribution do we need to see before we can avoid future Gilded Ages? But the data that started emerging in the 1980s told a different story. Only the rich, the new stats showed, were now getting richer. Don't-rock-the-boat economists reacted predictably. They rushed to dismiss and dispute the new stats. Nothing fundamental had changed, they insisted.

By the 1990s, that insisting had mostly petered out. Aside from a few hired guns at right-wing think tanks, few analysts were denying that only the rich were getting substantially richer. The rest of the don't-rock-the-boat community essentially acknowledged the nation's growing concentration of income and wealth -- and then went on to deem that concentration absolutely essential. The more wealth in the pockets of the wealthy, the argument went, the more the wealthy would invest. The more they invest, the greater our prosperity. Everybody ends up be better off.

Most Americans today -- in real life -- are definitely not feeling better off. They're feeling squeezed. They're hurting. Watching the wealthy revel in their good fortune makes the hurting even worse.

Some of today's eagle-eyed economic thinkers, meanwhile, are realizing that they need to go beyond tracing and explaining how furiously wealth is concentrating -- and beyond exposing the latest fantasies of the trickle-down set. They need to be exploring as well, analyst Steve Roth suggests, "the economic effects of wealth concentration," the real-life impact of trickle-up. What actually happens, in other words, when wealth keeps concentrating among "fewer people, families, and dynasties, in larger and larger fortunes"?

Roth has a fascinating new paper out that does this sort of exploring. He's combined the latest available data on wealth distribution with newly available historical data that go back to 1960 and fine-tuned a new economic measure he's calling the "velocity of wealth."

Roth's theory in a nutshell: The bottom 80 percent of our population economically "turns over its wealth in annual spending three or four times as fast" as our richest 20 percent. So the greater the share of wealth that goes to the bottom 80 percent, the more spending in the economy, the more vibrant the economy becomes, the greater the resulting prosperity -- for everybody.

Economic theories only become worth our time when they can help us predict what the future will -- or could -- bring. Roth has tested how helpful his "velocity of wealth" theorizing can be against the history of our last three decades. He starts with two actual hard numbers from 1989: the wealth of the top 20 percent and the wealth of the bottom 80 percent. Then he "extrapolates forward" with the formulas in his "velocity of wealth" theory "to predict levels of wealth, spending, and shares of wealth and spending, thirty years later."

The levels Roth predicts off his formulas turn out to be "almost identical" to the levels that our deeply unequal U.S. economy in real life has produced over the past three decades.

Roth doesn't stop there. He's added in "counterfactuals" to his modeling: What would have happened between 1989 and 2019, he asks, if the nation had redistributed down to the bottom 80 percent some modest percentage of top 20 percent wealth? If we had taken that share-the-wealth course, his calculating finds, the U.S. economy would have actually generated more total wealth over the past 30 years, not less.

Suppose that redistribution had annually shifted down to the bottom 80 percent some 1.5 percent of the top 20 percent's wealth. In that case, Roth details, "2019's total consumption spending -- a pretty good index or proxy for GDP -- would have been 52 percent higher." Over the course of the 30 years from 1989 to 2019, he goes on, most of the new wealth created would have gone to the bottom 80 percent, but the top 20 percent would have seen its collective fortune grow as well.

Roth's modeling has its limitations. His work, he acknowledges, doesn't differentiate between the really rich within the top 20 percent and the rest of that bracket's affluent. The fortunes of our super rich will continue to increase in absolute terms, Roth suspects, until we put in place much higher rates of redistribution.

"Absent quite extreme redistribution, the rich keep getting richer as the economy grows," Roth explains. "But with adequate redistribution to counter the ever-present trend toward economy-crippling wealth concentration, everybody else prospers as well."

In the middle of the 20th century, we had this "adequate redistribution" in the United States, thanks largely to income tax rates that soared to just over 90 percent on incomes over $400,000, about $4 million in today's dollars. Over the course of these years, the share of the nation's wealth the nation's super rich held declined, but the amount of their wealth increased.

What happened then? The rich put huge chunks of their still ample fortunes to work politically. They rigged the nation's economic rules in their favor. They turned the bite of the IRS into a nibble. They broke the back of America's unions and started grabbing an ever greater share of the new wealth the economy was generating. The resulting "prosperity" never trickled down. We found ourselves in a new Gilded Age.

How much redistribution do we need to see before we can avoid future Gilded Ages? In exact terms we just don't know yet. But analysts like Steve Roth are moving us closer to some answers.