Among the many illusions swept away by Thomas Piketty’s surprise best-seller, “Capital in the Twenty-First Century,” is the long-held belief that deregulating the American economy brought about a democratization of capital – at least from the investor’s point of view.
Speaking on the Senate floor in 2004, then-Senator Joe Lieberman (D-Conn.) rhapsodized about a “revolutionary democratization of capital” that had occurred during the previous two decades, “putting more options and more wealth in the hands of more working Americans.” This “revolution in corporate ownership,” Forbes wrote in 2006, “has the potential to reshape how corporations are run.”
“Shopping for investments,” Joe Nocera observed in his excellent 1994 book “A Piece of the Action,” “is an activity that has insinuated itself into the rhythms of middle-class life.” And so it had (though mostly for the upper-middle class). The Great Inflation of the 1970s persuaded many Americans to move their cash out of savings accounts, where interest rates were heavily regulated, and into money market mutual funds, which had a higher rate of return. In 1975, the New York Stock Exchange ended fixed brokerage commissions, which led to vast growth in storefront discount brokerages like Charles Schwab & Co. Most important, in 1974 and 1978 Congress created the Individual Retirement Account and the 401(k), tax-deferred pension plans that drew vast hordes of workers into the financial markets (and sounded the death knell for defined-benefit pensions).
The result was that the number of pension plans in the U.S. more than doubled between 1975 and 1985, while the number of people participating in such plans nearly tripled, from about 45 million in 1975 to about 130 million today. The percentage of U.S. households invested in the stock market rose from about one-third in the 1970s to 65% at the peak of the housing bubble before falling to about about half today.
But this expansion in the number of middle class Americans who own capital should not be mistaken for an egalitarian shift in the distribution of American wealth. If that had occurred, the share of total wealth allocated to the top 10% or the top 1% would have decreased. But it didn’t. It increased, according to Piketty’s calculations – from nearly 65% in 1970 to more than 70% in 2010 for the top 10%, and from not quite 30% to nearly 35% for the top 1%. (Piketty’s wealth definition includes real estate, but the rate of home ownership today – 65% – is just a whisker higher than in 1970, when it was 64%.)
The Economic Policy Institute calculates that in 1979 the share of wealth-derived income that went to the top 1% (33.5%) was actually lower than the share of wealth-derived income that went to the bottom 90% (36.2%). Three decades later, after government deregulation and financial innovation had “democratized” the market, the top 1%’s share had risen to 54% and the bottom 90%’s share had fallen to 22.9%. Some revolution!
What explains this strange outcome? Mainly that, while a lot of people entered the stock market, not many acquired significant holdings. Half the nation’s households may be in the market, but only one third of that half (i.e., one-sixth of the nation’s households) own stock holdings worth $7,000 or more. Nearly 70% of all stocks are held by the top 5%.
Examining Piketty’s figures, one is struck by the fact that, since 1810, the only period during which wealth distribution grew more egalitarian was between 1910 and 1950, during the reign of the old elitist white-shoe investment firms. Credit belongs not to the old WASP hierarchy but to a series of cataclysmic world events (World War I, the Great Depression, World War II) and the more egalitarian government policies they brought about (a rise in the newly-established income tax, minimum wage and maximum hour laws, wage and price controls, etc.).
To be fair, many people, when they talk about the “democratization of capital,” aren’t really talking about stockholders. They’re talking about the people to whom the capital was distributed. Thus Michael Milken, the onetime junk-bond king (who served 22 months in prison for securities violations), wrote in 2000 that bank deregulation allowed “noninvestment-grade companies” to grow much more than would have been possible before. But banking deregulation also created two banking crises—the Savings & Loan crisis of the 1980s and the sub-prime crisis from which the economy is still struggling to recover.
If capital wasn’t democratized over the past three decades, was capitalism? Yes, in one limited sense: Debt went from being a luxury item favored by the wealthy to a mass-produced item marketed to the many. Back in 1983, the top 5% possessed 76 cents’ worth of debt for every dollar they earned. The bottom 95%, by contrast, had only 62 cents’ worth of debt per dollar. In other words, the bottom 95% were thriftier than the top 5%. By 2007, though, the two groups had changed places. The top 5% now had only 64 cents’ debt per dollar, while the bottom 95% had significantly more debt than income – $1.48 debt per dollar. The middle class didn’t get a bigger slice of the capital. It got a bigger slice of the debt.
Workers of the world, unite. You have nothing to lose but your MasterCard!