“Just as the commandment ‘Thou shalt not kill’ sets a clear limit in order to safeguard the value of human life, today we also have to say ’thou shalt not’ to an economy of exclusion and inequality,” wrote Pope Francis in an apostolic exhortation published on Sunday by the Vatican Press. “Such an economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?”
The necessary inequality of the marketplace is nothing new to Americans. Every economy produces a fixed amount of wealth that is distributed among its participants, and in a capitalist economy, we expect some degree of inequality in this distribution. Those who produce more should be rewarded more than those who produce less — welcome to Incentives 101. The distribution of wealth in a capitalist economy is implicitly unequal.
While it is true that unequal distribution of wealth does not necessarily mean unfair distribution of wealth, it is hard to ignore enormous and growing wealth gaps, elevated poverty rates, and an apparent evaporation of the middle class.
“This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation,” writes Pope Francis.
Francis’s statement on the global economic condition is poignant and timely. In the days after the Vatican published his exhortation, the markets did not lose a few points but gained several, setting fresh multiyear and all-time highs across the major U.S. equity indexes, and headlines were dense with the news. Ongoing monetary stimulus by the Federal Reserve has buoyed equity valuations while doing desperately little to help Main Street.
“Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness to the world,” said Pope Francis. “This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”
At a glance, Pope Francis’s perspective may seem extreme, but economic reality is equally extreme. This is evident even in the United States, the world’s economic leader. According to a report from the University of California, Berkeley, average real income per family declined by 17.4 percent between 2007 and 2009, the largest two-year drop in income since the Great Depression. This average decline among all American households is a product of a 36.3 percent decline for the top 1 percent and an 11.6 percent decline for the bottom 99 percent.
It may appear as if the rich got the short end of the stick in this situation — given their higher exposure to equities and other financial instruments, it makes sense that they would lose more — but the recovery has been enormously lopsided.
Pew Research data show that just 15 percent of those with family income of less than $30,000 per year are invested in the stock market, while 80 percent of those who earn $75,000 or more are. Keep in mind that those who earn more than $114,000 per year qualify for the top 10 percent of earners. The top 1 percent earn more than $394,000 per year.
This means that the vast majority of the new wealth created by the recovery of the stock market has gone to those at the higher end of the income scale, allowing the people at the top to regain their pre-crisis status. As much as 95 percent of the new wealth created between 2009 and 2012 has gone to the wealthiest 1 percent.
Meanwhile, there’s everyone else. Incomes at the bottom 99 percent grew just 0.4 percent between 2009 and 2012. Between 2007 and 2011, the share of working families considered low income — meaning their earnings are 200 percent of the official poverty threshold — increased from 28 percent to 32 percent nationally.
“The labor market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains,” according to the UC Berkeley report. “A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II — such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality.”
Pope Francis wrote in his exhortation: “As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems.”