In-Depth Essay

The GNP Machine

by Peter Barnes

Part One

What is wealth, who gets it, why? I write as a relatively privileged onlooker (privileged educationally and occupationally) who has lived only off paychecks, filed income tax returns for a decade, passed through booms and recessions (but not a Great Depression), and, as a journalist, seen poverty and riches. I have biases, and they are in favor of equality—or, to put it another way, against the proposition that great extremes of wealth and privilege are desirable or inevitable. The question that seems paramount to me is this:

Why, despite wars on poverty, progressive income taxation, relatively high employment and widespread educational opportunity, does the American economy so stubbornly perpetuate inequality?

It is perhaps best to begin with our productive capacity. In barely three centuries we have constructed the world's most magnificent GNP machine. It churns out food and clothing in abundance, a choking profusion of automobiles, a dazzling array of airships, spaceships and electronic brains, and mass-produced gadgetry of every description. The machine produces too much junk and not enough good housing it has a tendency to underutilize existing plants and leave millions of potential workers idle. But for the sake of our inquiry, let's leave aside these imperfections and ask not why it doesn't produce better and more, but why it doesn't distribute more fairly what it produces.

Studies back to the 1920s show that the richest fifth of the population has consistently received at least seven times as much annual income as the bottom fifth. The constancy of the ratio is what startles. It improved slightly during the Depression, when many rich lost their fortunes, and during World War II, when rigid price controls and an excess profits tax were imposed on a labor- starved economy.

But since the end of World War lI the GNP machine has returned to its old habits. Everyone's income has risen, but at virtually the same rate. The latest study (by MIT professors Lester C. Thurow and Robert Lucas, published last March by the Joint Economic Committee) shows that the lowest fifth of the population took home 5.6 percent of America's before-tax earnings in 1969, while the top fifth garnered 41 percent.(Another study, published in 1971 by two US Census Bureau economists, Roger A. Herriot and Herman P. Miller, found that the lowest fifth of families and individuals received 3.0 percent of the income distributed in 1968, compared to 48.0 percent for the top fifth. That yields a ratio of 16 to 1. The difference between these and the MIT statistics derives from the broader definition of income used by Herriot and Miller: they include as income such things as realized capital gains, retained corporate earnings, imputed rental value of owner-occupied homes, and under-reported money income.)

In dollar terms, the average income of the top fifth of families in 1969 was $19,071 higher than that of the bottom fifth—a gap that was only $10,565 in 1947. Government taxation, which has a measurable redistributive effect in England and Sweden, does virtually nothing to improve the American before-tax distribution, primarily because the mild progressivity of federal income taxation is all but cancelled by the regressivity of payroll and sales taxes. It is as though a giant wedge were jammed in the GNP machine's distributive mechanism: the machine spews out dollars to the rich, dimes to the poor.

Why? The question cannot be answered without examining the different derivations of income: income from labor (salaries and wages), and income from wealth (dividends, interest, rent, royalties, capital gains). Everybody except the infirm or the disabled has the capacity to derive income from labor; but to derive income from wealth you must first own something.

The distribution of wealth has consistently been more inequitable than the distribution of income. In 1810, according to economist Robert Gallman, the top one percent of families owned 21 percent of America's wealth. A century later, in 1915, the US Commission on Industrial Relations reported:

The ownership of wealth in the United States has become concentrated to a degree which is difficult to grasp. The "Rich," two percent of the people, own 35 percent of the wealth. The "Middle Class," 33 percent of the people, own 35 percent of the wealth. The "Poor," 65 percent of the people, own five percent of the wealth. The actual concentration, however, has been carried much further than these figures indicate. The largest private fortune in the United States, estimated at one billion dollars, is equivalent to the aggregate wealth of 2,500,000 of those who are classed as "poor"...

Today's rich, the top one percent, own roughly 25 percent of all personal and financial assets, according to James D. Smith of Pennsylvania State University, more than eight times the wealth owned by the bottom 50 percent. Again, except during the Depression and World War II, the relative concentration has stayed about the same or worsened.

Even these figures do not show us the whole picture, for the rich and the poor own different kinds of wealth. The great GNP machine has been moderately successful in distributing what might be called inert wealth -- homes, automobiles, personal property -- which, far from producing income, are a drain on the sturdiest pocketbook. (Even here its success has not been phenomenal: 17 percent of families own no appreciable wealth at all, and another eight percent have a negative net worth -- their debts exceed their assets.) Where the GNP machine has failed is in the distribution of income-producing wealth -- stocks, bonds, real estate, etc. According to a study published earlier this year by the Sabre Foundation, the top one percent of wealth-holders in 1962 owned 72 percent of America's corporate stock, 47 percent of outstanding bonds (including virtually all tax-exempt state and local bonds), 24 percent of notes and mortgages, and 16 percent of all real estate (including residences, which is why this figure is relatively low).

End of Part One.

This essay is part of a series written by Peter Barnes for The New Republic magazine in 1971-72. We think you'll be pleased -- and perhaps shocked -- to see how timely and insightful the essays are for today. Each essay will be republished, in installments, by The Progress Report.