The redistribution agenda
Social prosperity cannot be created by policies that lead to the impoverishment of the masses. This dynamic also led to the current stock market turmoil.
At the beginning of August 2024, there was a violent stock market storm on Wall Street. The most important US stocks plummeted by over 7 percent in just a few days. On the bond markets, yields on 10–year US government bonds fell by almost half a percentage point. This raises questions about the reasons behind this and, above all, about what is likely to happen next. Increasing economic concerns are cited as the main reason for the stock market turmoil. For the economy to run, i.e. for the economy to grow, mass demand is necessary. This would require an increase in mass incomes. However, if incomes increasingly flow upwards to a wealthy minority, mass demand will be squeezed in the long run. This is precisely what seems to be happening now.
[This article posted on 8/14/2024 is translated from the German on the Internet, https://www.manova.news/artikel/die-umverteilungsagenda.]
Increasing wealth concentration in the US
According to the US Federal Reserve, wealth in the US has become significantly more concentrated between 1989 and 2023. In the third quarter of 2023, the top 10 percent of income earners in the US owned 66.6 percent of all wealth, up from 60.9 percent in 1989.
The share of the bottom 90 percent decreased accordingly from 39.1 percent to 33.4 percent in the 34 years from 1989 to 2023. In 2023, the top 1 percent owned 30.5 percent of all wealth, up from 22.9 percent in 1989. In the 34 years from 1989 to 2023, there was a significant shift in wealth toward the top 1 percent and away from the “bottom” 99 percent.
Effects of increasing wealth concentration
What are the effects of increasing wealth concentration? Apart from increasing political and social influence by billionaires, rising wealth concentration means that an ever-larger share of capital income flows to the top 10 or 1 percent of the population.
If the top one percent of households own over 30 percent of wealth, then over 30 percent of all dividends, rents, leases, and interest payments also flow to the top one percent of households. How much money is that?
Corporate profits
In the first quarter of 2024, US corporate profits after taxes amounted to an annualized USD 3,168 billion, according to the US Federal Reserve. This corresponds to 11.2 percent of the gross domestic product. From 1947 to 2000, US corporate profits averaged 6 to 7 percent of gross domestic product (GDP). A sharp increase began at the turn of the millennium, with corporate profits averaging just under 11 percent since 2010.
In recent decades, therefore, not only has the share of wealth held by the top one percent increased significantly, but so too has the profit share of the companies that largely own them, meaning that the wealthiest Americans have benefited twice over—at the expense of other US households, whose share has declined accordingly.
Interest income
In the early 1980s, the debt of private households, companies (excluding financial services companies) and the government in the US amounted to around 135 percent of total economic output (GDP). In the first quarter of 2024, it stood at 264 percent of GDP. Debt per dollar of GDP has therefore roughly doubled since 1980. Since the financial crisis, interest rates have been lower than ever before in US history, and the US Federal Reserve has printed large amounts of fresh central bank money—the money supply has increased almost ninefold since the financial crisis. This is also unprecedented in US history.
That is why the sharp rise in debt over the past 15 years has not played a major role — simply because very little interest had to be paid. However, this has changed since spring 2022. The US Federal Reserve has raised interest rates sharply — from zero to a good 5 percent — and long-term interest rates on government bonds have more than doubled — from around 1.5 percent in 2021 to around 4 percent today. Over the next 10 years, interest rates are expected to remain between around 3 percent (3-month rates) and 4 percent (10-year rates).
Assuming average interest rates of around 3.5 percent, a good 9 percent of GDP will flow to the holders of debt securities in the coming years, which essentially means the top 1 to 10 percent of households. For 2024, that would amount to approximately $2.6 trillion. In reality, however, the amount is likely to be considerably higher, probably at least $3 trillion, because interest rates on personal loans and corporate loans are significantly higher than the interest rates the US government has to pay.
Who pays the interest? Government debt is financed through taxes. Even the poorest sections of the population pay taxes, for example through value added tax or gasoline tax. Corporate debt is passed on to customers in the form of product prices. Every time a consumer makes a purchase, they pay the corporate debt.
Ultimately, therefore, all interest, regardless of whether the debt is owed by the government, corporations, or private households, is paid by private households. As mentioned above, this currently amounts to an estimated $3 trillion per year.
Since not only has the share of wealth held by the top one percent increased significantly in recent decades, but interest rates have also risen dramatically in recent times, the wealthiest Americans have benefited twice over—at the expense of other US households who pay the interest.
Rents
A good third of US households do not live in their own homes: 34.3 percent at the end of 2023. US rents have risen sharply over the past four years: from 2020 to 2023, rents demanded for new contracts rose by 30 percent. About one in twelve US households pays more than half of its income on rent.
It is very difficult to estimate the total amount paid for rent and leases in the US. Assuming similar ratios to Germany, where land rents accounted for around 12 percent of GDP in 2017, around $3.5 trillion could be paid for land rents in the US today.
The recent sharp rise in rents has benefited the top one percent of Americans twice over, as their share of wealth has also increased significantly over the last 30 years and, presumably, their share of rental properties as well.
Interim conclusion
Let’s be clear: the share of wealth held by the top one percent of US households is now greater than at any time in recent US history. The share of wealth held by the bottom 90 percent of US households is now significantly lower than a generation ago, at around one-third, compared to just under 40 percent.
What does this mean for the economy? This shift in wealth toward the very wealthy alone is causing an ever-increasing flow of so-called unearned, unworked, or passive income to the upper class.
This trend has been particularly exacerbated by two factors over the past 20 years. First, corporate profits have risen to historic highs since the beginning of the millennium. Second, debt has risen to new historic highs. The dramatic interest rate hikes of the last two years have caused interest payments to rise enormously in a short period of time, so that today a disproportionately higher flow of interest payments is going to the wealthiest households.
Adding up the figures estimated above—$3.2 trillion in corporate profits after taxes, $3 trillion in interest payments, and $3.5 trillion in land rents—we arrive at a volume of approximately $9.7 trillion in unearned, passive, non-labor income from wealth. That is a good third of GDP. About 30 percent of that goes to the top one percent. That would be about $2.9 trillion per year. Per capita, that is about $850,000 per year. Each of the approximately 3.4 million Americans who belong to the top one percent currently receives about $850,000 per year in income without having to work for it, mainly in the form of rent, leases, dividends, and interest.
Who pays this money? Those who have little or no wealth, i.e., essentially the bottom 50 to 90 percent of the population, for example through product prices, taxes, or interest payments on home loans or other household debts.
This means that “normal households” in the US are slowly but surely having to hand over more and more money to the wealthy and upper classes. This also increases income inequality.
Growing income inequality in the US
A comprehensive study by the Pew Research Center in early 2020 shows that in the 48 years from 1970 to 2018, upper-income households, i.e., households earning twice or more than the median income, increased their share of total income from 29 percent in 1970 to 48 percent. The share of middle-income households, which earn 66 to 200 percent of the median income, fell from 62 percent in 1970 to 43 percent in 2018, and the share of lower-income households with less than 66 percent of the median income fell from 10 to 9 percent of all income.
In 1980, the top 10 percent of households earned 9.1 times as much as the bottom 10 percent; in 2018, it was 12.6 times as much. The gap is widening.
In short, the 48-year period from 1970 to 2018 shows an impressive shift in income from the lower and middle to the upper income brackets.
Incidentally, the developments outlined here did not only take place in the US, but in almost all industrialized and many developing countries.
Conclusion
What do these developments have to do with the stock market? A great deal. Due to the increasing inequality in wealth and income distribution, mass incomes have lagged behind economic growth for decades. The resulting demand gap has been filled over the last 50 years by ever-increasing levels of debt. However, this debt-fuelled economic growth is now reaching its limits. Interest rates are now too high to continue in this vein. Further money printing by central banks via quantitative easing and a new round of zero interest rate policy are unlikely to be feasible again due to the poor inflation experience of the last two years and the resulting inflation concerns that exist today.
This means that at some point, a large proportion of US households are likely to run out of steam economically.
It is becoming increasingly difficult to drive consumption and growth. Demand, sales, the economy, and corporate profits are likely to stall. And if corporate profits stop rising or even decline, stock market prices will also have to fall.
The S&P 500 is currently valued at almost an all-time high. The price-earnings ratio is 27.7, which means that earnings over the past 12 months are about 75 percent more expensive than in the last 150 years, while the return on equity investments is 3.6 percent, meaning that earnings over the past 12 months are only half as high as in the last 150 years.
In short, the US stock markets are unusually highly valued from a historical perspective. The same applies to house prices in the US: measured against median incomes, houses are now more expensive than at any time in the post-war period and significantly more expensive than just before the US real estate bubble burst in 2007.
If the economy does indeed slow down in the coming months or stock market (and real estate) valuations return to past levels, there will be a significant need for correction. This could easily lead to economic problems, high unemployment and—given the current high level of international tensions—international turmoil or unrest.
The developments in wealth and income over the last 50 years have not only been antisocial, they are also quite dangerous for society as a whole. We are dancing on a volcano.
Christian Kreiß, born in 1962, studied and earned his doctorate in economics and economic history at LMU Munich. He worked as a banker for nine years, seven of which as an investment banker. Since 2002, he has been a professor of business administration with a focus on investment, finance, and economics. He is the author of seven books. His most recent publication is “Gekaufte Wissenschaft” (Bought Science). He has been invited to the German Bundestag three times as an independent expert (Green Party, Left Party, SPD) and has given numerous television, radio, and magazine interviews, lectures, and published articles. Kreiß is a member of ver.di and Christians for a Just Economic Order. For more information, visit menschengerechtewirtschaft.de.
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