The Effect of the Growing Wealth of the Middle Class on the Political Economy

What is the Wealth Effect?

The Wealth Effect, the term used by Jeffrey Chwieroth and Andrew Walter in their book about this topic, is an argument that seeks to justify the growing involvement of the government in the regulation and maintenance of the economy. Thorough research into the facts has shown that there was a correlation between the growing wealth of the middle class and the increasing responsibility to intervene in the economy that the government has found itself to bear.

According to the authors (Chwieroth and Walter) there has been evidence that shows how governments have been given this burden over time. One of these proofs was the tone of reporting on economic action that has evolved over time. In 1873, the New York Times (note: liberal) argued that there was no necessity for the government to protect depositors in banks, should anything happen to harm their state of savings. Yet in 1984, it applauded the nationalisation of the Continental Illinois Bank. What seemed stark to some was that during this period of time the real wealth per capita had increased rather rapidly, and was worth at least some consideration as a reason for the change in the economic tone.

The argument here is that the ownership of wealth has incentivised a larger portion of society (not just the elite) to increase political pressure, in order to ensure that the government keeps economic actors like banks and pension funds in check. This also ensures that governments bail out banks that could be in trouble. Should the government fail to fulfil this responsibility, there could be consequences at the ballot box.

Now this could mean that there would be more safe decisions made, which would protect people financially, but it could worry some people who don't like seeing the government having so much control. That would be another argument altogether.

More recent examples of this argument can be seen in the aftermath of the housing bubble crisis over a decade ago. People suffered from the bubble burst, but instead of turning to blame bankers and credit rating agencies (only 1 guy was put behind bars), people turned on the Republican government.  This could be a reason why the government found it necessary to start blaming other political factors, like immigrants. The 2008 election happened, we got Obama, and the economy started to heal under government leadership. The government introduced an economic stimulus package and an investment program which bought up the "toxic assets" that played a large part in the crisis. Meanwhile, people who were more directly responsible for the problems more or less walked away scot free.

Bottom line: We have given the government more shit to deal with.

Why does this happen?

A reason that caused the growing pressures is the financialisation of wealth. More and more people have found it easier to be involved in markets and trade, and therefore have found it easier to access the broader economy. Job opportunities have generally increased over decades, and more people can access money, and with that money they can be involved in any sector of the economy they can afford. People now are generally more wealthier and have higher living standards. This also means that they are easily connected to markets that are naturally volatile like the housing market, which is connected to unstable prices and debt. 

Furthermore, the financialisation of the economy has led to the democratisation of leverage. It is a lot easier to borrow money now, which increases individual involvement in the economy, and therefore increases the scale of impact that the economy would have on the society.

While those 2 points argue that people have more access to economic risk, financialisation also increases economic risk itself, so people feel the need to pressure the government to keep them secure. Financialisation can be affected by irrational exuberance, which means that a lot of confidence from bankers and investors are misplaced. Financialisation also interlocks different markets, giving the economy a sort of "take you down with me" mentality. 

Another argument is that the government itself has influenced people into thinking that the economy is the government's responsibility. Governments have seemed to commit themselves to ensuring financial stabilisation, and actions like nationalising certain institutions and managing fiscal policies could have given the public a higher expectation of government responsibility.

What are the impacts?

One of the impacts is that there would be a growing alignment between the economic demands of the elites and the wealthier middle-class. While it seems that pro-wealth policies, which used to be thought of as unfair, would gain more popularity, there has to be more thought on the nuances between the middle-class and the elites that would affect them differently. For example, birth privileges and statuses, or business ownership could make differences. Also, more elite people could (with more ease) use a growing popularity to justify certain policies that are economically unjust, like for example lower corporate tax.

Another is that we can almost comfortably expect the government to clean up the mess after. Bailouts are basically guaranteed, and the fiscal decisions are the ones that get the most airtime. There is no real guarantee that independent financial institutions will really make the safest decisions all the time. That ultimately means that the state of our reliance on a financial economy can only seem to grow. Asset prices will continue to grow, and wealth inequality will also increase. Banks won't have to do anything because really, it's the government's job to fix it.

- Paren