This theory has a lot more wrong about it than right:

First, changes in tax policies since 1980 allowed the rise of leveraged buyouts and mergers, or simply sitting on passive investments. This destroyed any correlation between the super wealthy and a building a more robust economy. Now, the rich could make money by destroying companies and selling the pieces, or merging them in the hopes of increasing profitabily by eliminating thousands of jobs.

Secondly, with fewer jobs, there was downward pressure on wages and benefits. We have seen this result in stagnant wages for the last 30 years.

Third, the stock market has enjoyed between 9–12% annualized returns since 1980, while wages have been completely stagnant. Combine those income returns with lower capital gains taxes, and the self perpetuating increase in wealth is just simple mathematics.

Fourth, a huge number of middle class people count on their house as the their nest egg. Without stable or rising real estate values, a large part of the population would find themselves in serious financial trouble. But these people are in no way part of the top 1%.

The one area where the theory has some validity in explaining income inequality is by examining the percentage of income most people pay for their housing. In the 1960’s people could rent an apartment for a much smaller percentage of their monthly income, leaving more money to save or invest. Today, low income workers are paying one-third to one half of their income toward rent and transportation costs because the only affordable housing may be 30–50 miles away. For these people, there is almost no way to save or invest, so they have no upward mobility.

Ad agency creative director, writer & designer at https://guttmanshapiro.com. Former pro tennis player and peak performance coach for professional athletes.

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