Below The Beltway

The opening paragraphs of another one of it’s profiles of the not-quite-as-rich-as-they-used-to-be demonstrate that they don’t even have a basic understand how the economy works:

The rich have been getting richer for so long that the trend has come to seem almost permanent.

They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. The recent news about resurgent Wall Street pay has seemed to suggest that not even the Great Recession could reverse the rise in income inequality.

But economists say — and data is beginning to show — that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.

For every investment banker whose pay has recovered to its prerecession levels, there are several who have lost their jobs — as well as many wealthy investors who have lost millions. As a result, economists and other analysts say, a 30-year period in which the super-rich became both wealthier and more numerous may now be ending.

The relative struggles of the rich may elicit little sympathy from less well-off families who are dealing with the effects of the worst recession in a generation. But the change does raise several broader economic questions. Among them is whether harder times for the rich will ultimately benefit the middle class and the poor, given that the huge recent increase in top incomes coincided with slow income growth for almost every other group. In blunter terms, the question is whether the better metaphor for the economy is a rising tide that can lift all boats — or a zero-sum game.

Except for the fact that the economy isn’t a zero-sum game. If it were, the fact that these “super-rich” have lost wealth would mean that someone lower down on the economic rung had gained wealth, but that’s not what happens. If the rich become poorer, we all become poorer. Their wealth doesn’t go somewhere else, it disappears. Conversely, when they become richer it benefits the economy as a whole as the use that additional wealth to make purchases or invest.

We got an object lesson in how that works back in the 1990s when Congress, as part of the tax increase package the George H.W. Bush signed despite his 1988 pledge, imposed a massive luxury tax on the purchase of yachts. Within only a few months, it was clear that the increased tax, combined with the recession, was having a devastating impact on boat sales and was, in turn, hurting the boating industry. Within a year, the tax was repealed and, not too long after, the boating industry recovered from the devastating impact of the tax.

The lesson of the yacht tax fiasco is clear. The tax was imposed in 1991 largely because it was seen as something the rich could “afford.” Rather than just rolling over and paying the tax, though, people responded by drastically cutting pack on boat purchases. This led to thousands of people losing their jobs.

It’s no doubt the case that much the same thing has happened as a result of the wealth destruction that the current recession has brought about. The rich got poorer, but the middle class and the poor got poorer too. Conversely, when the rich get richer, the economy as a whole benefits. Ridicule it is “trickle down” economics if you must, but we’ve seen more than once that it’s reality.