The Great Deformation: 50 Years of Regressive Redistribution and the Future of Capitalism in the US Economy

Since 1970, the US economy has undergone a "great deformation," characterized by a profound regressive redistribution of income and wealth. A central finding is the steady increase in the profit share of income, growing at approximately 0.4% per year for five decades, resulting in a 20 percentage point rise. This substantial shift, coupled with capital gains and share buybacks, has disproportionately benefited the top 1% of households, whose share of total GDP now approaches 20%. This trend signifies a significant departure from historical economic patterns and challenges the traditional view of stable distributive shares, indicating a relapse towards an older, highly unequal system. The analysis further details how consumption patterns have evolved, with the overall consumption-to-GDP ratio increasing, largely driven by the bottom 60% of households. This group often exhibits negative saving rates and has seen a movement of labor into low-wage sectors such as education, health, accommodation, and food services. This dynamic represents a reversal of traditional economic development models, like the Arthur Lewis model, where surplus labor is absorbed into high-productivity sectors. Concurrently, the middle class (61st to 99th percentile) finds itself squeezed from both ends: by the growing capital income share of the top 1% and by the increasing reliance of the bottom 60% on fiscal transfers. A key institutional factor contributing to these trends is the generalized wage repression over the past 50 years, primarily due to the weakening of the labor movement and a consequent loss of bargaining power. This suppression of nominal wage increases has played a significant role in maintaining low inflation, which in turn has allowed central banks to keep interest rates low. While seemingly beneficial, low interest rates have fueled a sharp increase in asset prices, further benefiting the top 1% through enhanced capital gains. The podcast highlights the Palma ratio as a more effective measure for capturing inequality at the extremes of the distribution compared to the Gini coefficient, which tends to smooth out the middle. The discussion also addresses the alarming concentration of wealth, which has rebounded to levels last seen in the 1920s, with the richest 1% now holding approximately 40% of total wealth. Mechanisms such as share buybacks, frequently financed by increased business debt, are identified as crucial channels for transferring corporate profits to households, predominantly those at the top. The speaker concludes that reversing these deeply entrenched trends would necessitate sustained "intrinsic dynamics," such as real wages consistently outpacing productivity growth over several decades, rather than relying on short-term policy interventions like minimum wage hikes or increased transfer programs, underscoring the need for fundamental systemic reforms.

the title of the piece is a great deformation 50 years of regressive redistribution in the US economy

beginning in 1970 there has been a steady increase in the profit share of income at about 0.4% per year

the top one percent that is on the order of 1.2 1.3 million households now gets pretty close to 20 percent of total GDP total income

the bottom 60 if you look at the household consumption data have negative saving rates in the in the record of data

not only has Palani been reversed but lewis has been reversed and that that's a major trend

the middle class in a way has been squeezed from above by the top one percent and from below by the bottom 60% who have received a fair number of transfers

this is mostly due to institutional changes which is essentially defamed the labor movement to a large extent and their labor is simply not as lost so much bargaining power that they can't push back against against the guests the forces the if you like the corporate forces that tend to push down wages

Palma ratios are interesting because they focus on the extremes of the distribution as opposed to Gini coefficients which tend to smooth out stuff in the middle

there has to be some dynamics built into that that is there has to be some dynamics built into that alright so what you have here is a so-called social accounting matrix which really is an attempt to combine incan distributional data with national accounts data

the US economy is a transfer Union to use the European phrase but the transfers go mainly through fiscal and financial

the richest 1% of the households had roughly half of total wealth thanks to the New Deal the share went down to 1/4 in the 1960s and now it's come back up to around 40%

firms get the hands-on cash by borrowing use the cash to buy back shares