WASHINGTON: Once upon a time, the American economy worked for everybody, and even the middle class got richer.

But this story has been only a fairy tale for almost 30 years now. The new, harsh reality is that the bottom 90 per cent of households are poorer today than they were in 1987.

This is a much more dramatic statement than it sounds. While the Federal Reserve has told us that the median household is worth less now than it was in 1989 — that’s the household right in the middle — it turns out that everybody but the richest 10pc of Americans are worse off. That includes the poor, the entire middle class and even what we would consider much of the upper class.

You can see this troubling finding in a new paper from Emmanuel Saez and Gabriel Zucman on US wealth inequality, which is based on tax data.

Taking each group’s inflation-adjusted net worth from 1945 and indexing it to 100 makes it easier to compare how wealth has grown for people with lots or little of it. The bottom 90pc actually did very well during the first few decades of the post-war period — adding more wealth, in percentage terms, than those at the top.

But the days of shared prosperity have come to an end, gradually and then suddenly. It started in the 1980s when the top 1pc awoke from a long post-war slumber, thanks to the combination of lower taxes, financial deregulation and new technology. It wasn’t a total disaster for the bottom 90pc. Even as most Americans saved much less, accumulating far less wealth, stock markets and housing prices continued to rise — until they didn’t, crashing down in 2007 and 2008.

The problem was that the middle class didn’t own that much in stocks but went into debt to buy lots of housing. So the housing crash turned their biggest financial asset into an albatross, wiping out their equity but not their debt. And the housing recovery hasn’t done much to fix this, since it has struggled to move beyond the “nascent” stage.

Stocks, meanwhile, collapsed during the crisis but came back soon after. The middle class missed out on the big bull market in stocks but not on the even bigger bear one in housing. That’s why the recovery has restored so little of the wealth that the recession destroyed. In fact, the bottom 90pc have kept losing net worth the past few years, in large part because of rising student-loan debt.

By arrangement with The Washington Post-Bloomberg

Published in Dawn, October 26th, 2014