Recently, there have been a couple of Wall Street Journal blog posts by Robert Frank dealing with income and wealth disparity in relatively recent U.S. history: The Wealthiest 5% Grabbed Most of the Americaâ€s Gains and Are the Rich Grabbing More of the Income Pie?

The second of those posts includes this fascinating graph of the percent of total income that goes to the top 1% of earners:

As you can see, the percentage of income going to the top 1% was high before the Great Depression but then hovered at about 10% for many years, before the long-term trend upward in recent decades. The precipitous fall of 2008 and 2009 is directly related to the financial crisis — hedge fund managers and other top earners saw steep declines in some cases. I’d look for that line to bounce back up for both 2010 and 2011, since the stock market has recovered significantly (although it’s still well below the 2007 peak).

Frank’s post about wealth disparity includes this graph:

Note that the data is for increases in wealth, not for the overall amount of wealth. Still, it’s a striking graphic that shows clearly where gains in overall wealth are going.

Frank writes:

According to the Federal Reserveâ€s Surveys of Consumer Finance, the top 5% controlled 60% of the nationâ€s wealth as of 2007 (the latest period available), up from 54.2% in 1987. So their total share of wealth only went up by 6 percentage points , or a little over 10% in relative terms.

The share of the bottom 50% declined from 3% to 2.5%.

That’s right: 50% of Americans hold just 2.5% of our wealth, while the top 5% have 60%. That last number probably slipped a little with the collapse in stocks, but is likely going to continue on the long-term upward trend.

Again, from Frank:

This is dismal news, of course, and highlights once again the rise in inequality and the increasingly top-heavy nature of the global economy. Itâ€s also hard to label it as a “Republican” phenomena, since the time frame includes Clinton administrations.

As long as we have such a “top-heavy” economy, we’re going to be fighting uphill battles in terms of education, quality of life, neighborhood revitalization, infrastructure spending, and on and on and on. Frank uses the word “global” here, but there are allies of ours who do not have such radical disparities.

Looking at this hard data, it seems very difficult to argue that ordinary workers’ wages are too high or that we need lower taxes on wealthier Americans. A consumer-based economy seems like it will be facing a tough future if so many Americans have so little of the nation’s wealth to spend, save, and invest.

So I missed the big run-up of the last 15 months, and I missed the big declines of the last few weeks.

But stocks right now are about where I jumped out, and the markets appear to be on the verge of a big selloff in the first part of the day Tuesday. Meanwhile, my fixed income and bond funds have increased by about 8% since I got out of the markets.

Some friends good-naturedly (I think) refer to me as Mr. Doom and Gloom, but does anyone think in this economy that the recent peaks in the markets made any sense? Really?

A few posts lately about the underlying weakness in the economy and about this entirely predictable slide in stocks:

• Thoughts on the Wall St./Main St. disconnect from July 11th
• Lack of demand — not uncertainty over debt — is biggest obstacle to recovery from July 17th
• Markets do not like what they see in debt deal, current data, and future policies from August 2nd

The Eurozone has been dithering while the sovereign debt crisis deepens. Unemployment in the U.S. remains high and the opposition party, which has a powerful faction who seem eager to drive the entire economy over a cliff, has even fewer credible ideas for reducing it than the party in power. China is about to dampen its growth. The U.S. Federal Reserve is winding down its second round of quantitative easing because . . . well, because why exactly?

Stocks were under severe pressure before Standard & Poor’s downgrade on Friday, but it’s worth noting that Moody’s did not downgrade U.S. debt and treasuries are still seen as a safe haven — perhaps the “tallest of the midgets” as one commentator suggested today on NPR, but in the land of the blind the one-eyed man is king. Sorry for the mixed metaphors.

So stocks were going south no matter what S&P said; it’s just that the timing might have played out differently without Friday’s downgrade.

Stocks could bounce around their current level for some time. Or they could fall considerably farther — and they will for sure if we embrace bad policies at this point.

We’re capable of doing this right, and I’m actually cautiously optimistic that the American public is becoming better educated about the unsustainable path we’ve been on for the last forty years, especially the last decade.

In the short run:

• Congress could extend the most recent payroll tax cuts pushed through by Obama at the end of last year even though they will increase the deficit in the short run.
• Congress can give tax breaks to employers for new hires, even though that too would increase the deficit in the short run.
• Congress can extend unemployment benefits — that money prevents loss of homes in some cases and is generally recycled right back into the economy.
• With interest rates so achingly low, we can borrow for infrastructure projects that we know must be done. That too will hurt the deficit in the short run, but we have to get people working and get paychecks flowing.
• The Federal Reserve can get rolling with QE 3.
• I read an interesting suggestion today that Fannie Mae and Freddie Mac encourage all mortgage holders — no matter their current status — to refinance at the current low rates. That would mean vast savings each month for many homeowners.

None of these ideas are magic bullets, but they will all help spur growth in modest ways. If we do nothing, or if we insist on austerity cuts or massive government layoffs, we’ll either see the current stagnation continue or we’ll enter another spiral downward.

It’s going to be a long slog even if we get it right. Which means: make moves that are likely to boost economic activity in the short term and at the same time lay out a clear plan involving modest cuts and modest tax increases to achieve long term debt reduction.

Then the stock markets will do what they should.

In terms of percentage drops for the S&P 500, we actually had 11 days with worse declines in 2008 and 2 more in the opening weeks of 2009.

Previous economic post today: Ezra Klein: “Where will the recovery come from?”
A relevant post from three weeks ago: Thoughts on the Main Street/Wall Street disconnect

From Calculated Risk:

Thoughts on the Main Street/Wall Street disconnect

In today’s Washington Post, in a typically thoughtful piece, Ezra Klein outlines some of the bad global trends (almost all of which are outside the control of American policymakers) and asks, “Where will the recovery come from?”

It wonâ€t come from the United States. Our recovery has slowed, and updates to the Commerce Departmentâ€s growth figures have shown that the hole weâ€re in is significantly deeper than we realized. Thursdayâ€s news only underscored that conclusion, as the early signs suggest that Fridayâ€s job numbers report will be disappointing.

It wonâ€t come from Europe or Japan. The debt crises in Greece, Spain, Portugal and Italy have quieted any conversation about recovery and raised the question of whether the Eurozone can survive. And Japan is still trying to rebuild after the horrific earthquake and tsunami that ripped across its coastline back in March.

For some time, the hope was that recovery could come from the worldâ€s emerging economies, driven by China. But after years in which the Asian giant managed to defy global economic trends and post one incredible growth number after the other, the Chinese government is admitting that the economy has overheated and they need to begin tapping the brakes. That doesnâ€t simply suggest the emerging economies wonâ€t drive a global recovery; it also raises a new source of concern: What if the Chinese government fails to engineer a soft landing for its economy?

The impoverished and reckless economic policy conversation in Washington isnâ€t helping to cope with these trends, but even if we got our act together, the reality is that we have limited influence over what happens in China or in the Eurozone and Japan. And itâ€s not even clear how much an ideal policy response would do to speed Americaâ€s recovery.

I’ve been asking some of these exact questions for a long time now.