http://www.npr.org/templates/story/story.php?storyId=130189031
The two years when the richest 1% of Americans controlled the most wealth in the US (~23% of all income) were 1928 and 2007. Coincidence? Reich argues that this wealth gap leads to recessions for two reasons: first, the middle class has less purchasing power and can't afford to keep up with standard of living gains (or rising costs of living partly due to Wall Street profit taking), so they resort to credit until it dries up, and then consumer spending just plummets. Second, the rich and those who control the factors of production are reaping huge earnings from financial and technological innovations, which encourages them to invest in more risky, speculative ventures. Obviously this is a recipe for problems. The wealth concentration before the Depression was partly due to the mechanization expansion of US industry at the turn of the century (Ford and Rockefeller types). New consumer goods like cars and radios became more affordable for the middle class, and credit flowed freely until the crash and the failure of 25% of US banks. During the New Deal and WWII, everyone was put to work for the war effort, and FDR enacted labor rights laws and social security, which helped the middle class recover and thrive.
During the Baby Boom, the richest 1% only controlled just 9% of America's wealth. I think they were still doing well, but the middle class was doing great, and there were more of them. But the OPEC embargo, rising unemployment, and stagflation in the 1970's eroded some of the gains. What partially prevented the recessions of the '70s through '90s from being longer was the entry of women into the workforce, and an expansion of the US work week (not by law, but by corporate edict). The US work week was ridiculously long (with only Sunday off) during our Industrial Revolution, then gradually shortened as we entered the Baby Boom, but started to lengthen again in the '70s, to the point when Americans now work much longer than Europeans and even longer than Japanese. This increased productivity and earning power, because back then they still paid for overtime and more workers were unionized. Though extra productivity only translated to so much extra disposable income as inflation and interest rates reached double-digits, so the middle class was pinched again and resorted to credit to make ends meet. During the Carter Era (though it got worse during the Reagan and Clinton years), the government enacted policies to promote a decades-long real estate boom fueled by tax breaks and credit (maybe with good intentions of raising living standards and making the American Dream more accessible, but was ultimately unsustainable). Financial deregulation also removed many Depression-era barriers to riskier speculation, so the construction industry and Wall Street fed off each other. The 1980's signaled another era of capitalist dominance, as computers, automation, globalization, and exotic finance gave them new powerful tools for the rich to grow their wealth, coupled by drastically lower taxes and gradual erosion of worker rights. The trend worsened into the 21st Century, and we know the rest.
Our economy is not dependent on the rich, but on the consumption of a secure and confident middle class. They may control a quarter of total wealth, but there are fewer of them, and they'd rather earn a "reasonable rate of return" than buy that 20th toaster. If the lower classes didn't matter, then why did Wall Street seek to exploit their buying power in the last decade through the expansion of subprime/payday loans and "no hassle" credit cards? I don't buy the contrary argument, though it is true that the rich pay a lot of taxes (that's the whole point, unless we are living in an undemocratic plutocracy, as some Citi analysts concluded in a leaked letter to their VIP clients: http://www.scribd.com/doc/6674234/Citigroup-Oct-16-2005-Plutonomy-Report-Part-1). But companies and the rich pay much less taxes than they should in fairness. Higher taxes don't have to hurt business as they allege, because hopefully the government would use that revenue on smart spending to spur growth of sustainable commerce (though their spending record is not great, but again it's partly due to policies favoring the rich and condoning waste).
The basic GDP equation is the sum of household consumption (C), investments (I), government spending (G), and net exports (NE). C is over 2/3 of our GDP, and the rich contribute a lot, but it's mostly powered by the sheer number of middle class families. So when the rich and the companies they lead enjoy preferential treatment, they take away from G (by paying less taxes, which leads to deficits) and really only help to increase I, but during recessions I loses value, so they'd rather hoard cash than lend or hire: http://abcnews.go.com/Business/hoarding-hiring-corporations-stockpile-mountain-cash/story?id=10250559. And when they do spend, they may choose overseas investments which aren't taxable and don't help US GDP (remember the IRS probe into UBS? http://www.usatoday.com/money/perfi/taxes/2008-06-30-irs-swiss-bank-ubs_N.htm). So in my (biased) view, they rich are a net drag on the economy and society. If the rich didn't exist, the rest of us would have more purchasing power to grow GDP, and the government would have a smaller deficit. Maybe we'd still consume frivolously and get into credit trouble, but at least wealth wouldn't be so concentrated, so our boats would rise and sink together.
[Former Fed Chairman Mariner] Eccles had nagging concerns that by tightening credit instead of easing it [during the Depression], he and other bankers were saving their banks at the expense of community — in "seeking individual salvation, we were contributing to collective ruin." ... Economists... sought to reassure the country that the market would correct itself automatically, and that the government's only responsibility was to balance the federal budget. Lower prices and interest rates, they said, would inevitably "lure 'natural new investments' by men who still had money and credit and whose revived activity would produce an upswing in the economy." Entrepreneurs would put their money into new technologies that would lead the way to prosperity. But Eccles wondered why anyone would invest when the economy was so severely disabled. Such investments, he reasoned, "take place in a climate of high prosperity, when the purchasing power of the masses increases their demands for a higher standard of living and enables them to purchase more than their bare wants. In the America of the thirties.... people hadn't enough purchasing power for even their barest needs."
Eccles knew Wall Street wanted a tight money supply and correspondingly high interest rates, but the Main Streets of America — the real economy — needed a loose money supply and low rates. Roosevelt agreed to support new legislation that would tip the scales toward Main Street. Eccles took over the Fed.
- Robert Reich
So isn't that grand: the rich help cause market crashes and recessions with their speculation and loose lending, then make recovery even harder by choking off credit to the middle class when it's critically needed (despite the government's best monetary policy efforts to lower borrowing rates and such). Then they skirt blame and say "natural investments" should spur growth even if commercial banks aren't lending (which is their whole purpose of existence). Even if interest rates are lower, so are costs and they're still making money aren't they? Most average Joes would be content with 5% during a recession, but not Wall Street.
