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Income inequality driven by the stock market

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Richard Drew/AP/File

(Read caption) In this file photo, trader Douglas Glander, center, works on the floor of the New York Stock Exchange. Despite a slow economic recovery over the past two years, the stock market has performed strongly, widening its disconnect with the state of the economy at large.

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Robert Frank points out that while in the past the incomes of the rich in America fluctuated less during cyclical booms and busts than the incomes of the rest, they are now fluctuating a lot more than those of the rest.

The reason for that is that while in the past much of their income came from interest income they now depend more on dividends and capital gains as the top 1% own 50% of stocks. And as the stock market is highly cyclical, this means that the incomes of the rich will also be highly cyclical.

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This also explains why inequality after having fallen during the 2007-09 contraction again has widened despite the fact that the recovery has been anything but impressive. For various reasons, most notably the inflationary policy of the Fed, the stock market has disconnected from the general economy and recovered very strongly despite the weakness of the general economic recovery.