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The New Gilded Age
In the first sentence of one of the greatest works of modern po liti cal science, Robert Dahl posed a question of profound importance for democratic theory and practice: “In a po liti cal system where nearly every adult may vote but where knowledge, wealth, social position, access to officials, and other resources are unequally distributed, who actually governs?”1
Dahl’s answer to this question, for one American city in the late 1950s, was that po liti cal power was surprisingly widely dispersed. Examining politics and policy making in New Haven, Connecticut, he concluded that shifting, largely distinct co ali tions of elected and unelected leaders influenced key decisions in different issue areas. This pluralistic pattern was facilitated by the fact that many individuals and groups with substantial resources at their disposal chose not to devote those resources to political activity. Even “economic notables”—the wealthy property own ers, businessmen, and bank directors constituting the top tier of New Haven’s economic elite—were “simply one of the many groups out of which individuals sporadically emerge to influence the policies and acts of city officials.”2
The significance of Dahl’s question has been magnified, and the pertinence of his answer has been cast in doubt, by dramatic economic and po liti cal changes in the United States over the past half- century. Economically, America has become vastly richer and vastly more unequal. Perhaps most strikingly, the share of total income going to people at the level of Dahl’s “economic notables”—the top 0.1% of income- earners—has more than tripled, from 3.2% in the late 1950s to 10.9% in 2005. The share going to the top 1% of income- earners—a much broader but still very affluent group—more than doubled over the same period, from 10.2% to 21.8%.3 It seems natural to wonder whether the pluralistic democracy Dahl found in the 1950s has survived this rapid concentration of vast additional resources in the hands of America’s wealthiest citizens.4
Meanwhile, the political process has evolved in ways that seem likely to reinforce the advantages of wealth. Politi cal campaigns have become dramatically more expensive since the 1950s, increasing the reliance of elected officials on people who can afford to help finance their bids for reelection. Lobbying activities by corporations and business and professional organizations have accelerated greatly, outpacing the growth of public interest groups. Membership in labor unions has declined substantially, eroding the primary mechanism for or ga nized repre sen ta tion of working people in the governmental process.
How have these economic and po liti cal developments affected “who actually governs?” In 2004, the Task Force on In equality and American Democracy, convened by the American Politi cal Science Association, concluded that po liti cal scientists know “astonishingly little” about the “cumulative effects on American democracy” of these economic and po liti cal changes. However, based on what we do know, the task force members worried “that rising economic in equality will solidify longstanding disparities in po liti cal voice and influence, and perhaps exacerbate such disparities.”5
This book provides a multifaceted examination of the po liti cal causes and consequences of economic in equality in contemporary America. Politi cal scientists since Aristotle have wrestled with the question of whether substantial economic in equality is compatible with democracy. My evidence on that score is not encouraging. I find that elected officials are utterly unresponsive to the policy preferences of millions of low- income citizens, leaving their po liti cal interests to be served or ignored as the ideological whims of incumbent elites may dictate. Dahl suggested that democracy entails “continued responsiveness of the government to the preferences of its citizens, considered as po liti cal equals.”6 The contemporary United States is a very long way from meeting that standard.
Economic in equality clearly has profound ramifications for democratic politics. However, that is only half the story of this book. The other half of the story is that politics also profoundly shapes economics. While technological change, globalization, demographic shifts, and other economic and social forces have produced powerful pressures toward greater in equality in recent decades, politics and public policy can and do significantly reinforce or mitigate those pressures, depending on the po liti cal aims and priorities of elected officials. I trace the impact of public policies on changes in the U.S. income distribution over the past half- century, from the tripled income share of Dahl’s “economic notables” at the top to the plight of minimum wage workers at the bottom. I find that partisan politics and the ideological convictions of po liti cal elites have had a substantial impact on the American economy, especially on the economic fortunes of middle- class and poor people. Economic in equality is, in substantial part, a political phenomenon.
In theory, public opinion constrains the ideological convictions of po liti cal elites in democratic po liti cal systems. In practice, however, elected officials have a great deal of political leeway. This fact is strikingly illustrated by the behavior of Democratic and Republican senators from the same state, who routinely pursue vastly different policies while “representing” precisely the same constituents. On a broader historical scale, political latitude is also demonstrated by consistent, marked shifts in economic priorities and perfor mance when Democrats replace Republicans, or when Republicans replace Democrats, in the White House. In these respects, among others, conventional democratic theory misses much of what is most interesting and important about the actual workings of the American po liti cal system.
My examination of the partisan politics of economic in equality, in chapter 2, reveals that Democratic and Republican presidents over the past half-century have presided over dramatically different patterns of income growth. On average, the real incomes of middle- class families have grown twice as fast under Democrats as they have under Republicans, while the real incomes of working poor families have grown six times as fast under Democrats as they have under Republicans. These substantial partisan differences persist even after allowing for differences in economic circumstances and historical trends beyond the control of individual presidents. They suggest that escalating in equality is not simply an inevitable economic trend— and that a great deal of economic in equality in the contemporary United States is specifically attributable to the policies and priorities of Republican presidents.
Any satisfactory account of the American political economy must therefore explain how and why Republicans have had so much success in the American electoral arena despite their startling negative impact on the economic fortunes of middle- class and poor people. Thus, in chapter 3, I examine contemporary class politics and partisan change, testing the popu lar belief that the white working class has been lured into the Republican ranks by hot-button social issues such as abortion and gay marriage. Contrary to this familiar story, I find that low- income whites have actually become more Democratic in their presidential voting behavior over the past half-century, partially counterbalancing Republican gains among more affluent white voters. Moreover, low- income white voters continue to attach less weight to social issues than to economic issues—and they attach less weight to social issues than more affluent white voters do. The familiar image of a party system transformed by Republican gains among working- class cultural conservatives turns out to be largely mythical.
Then why have Republican presidential candidates fared so well over the past half- century? My analysis in chapter 4 identifies three distinct biases in politi cal accountability that explain much of their success. One is a myopic focus of voters on very recent economic perfor mance, which rewards Republicans’ surprising success in concentrating income growth in election years. Another is the peculiar sensitivity of voters at all income levels to high- income growth rates, which rewards Republicans’ success in generating election- year income growth among affluent families specifically. Finally, the responsiveness of voters to campaign spending rewards Republicans’ consistent advantage in fundraising. Together, these biases account three times over for the Republican Party’s net advantage in presidential elections in the post- war era. Voters’ seemingly straightforward tendency to reward or punish the incumbent government at the polls for good or bad economic perfor mance turns out to be warped in ways that are both fascinating and politically crucial.
In chapter 5, I turn to citizens’ views about equality; their attitudes toward salient economic groups such as rich people, poor people, big business, and labor unions; and their perceptions of the extent, causes, and consequences of economic in equality in contemporary America. My analysis reveals considerable concern about in equality among ordinary Americans and considerable sympathy for working- class and poor people. However, it also reveals a good deal of ignorance and misconnection between values, beliefs, and policy preferences among people who pay relatively little attention to politics and public affairs, and a good deal of politically motivated misperception among better-informed people. As a result, political elites retain considerable latitude to pursue their own policy ends.
Chapters 6, 7, and 8 provide a series of case studies of politics and policy making in issue areas with important ramifications for economic in equality. Chapter 6 focuses on the Bush tax cuts of 2001 and 2003, which dramatically reduced the federal tax burdens of wealthy Americans. I find that public opinion regarding the Bush tax cuts was remarkably shallow and confused, considering the multitrillion- dollar stakes. More than three years after the 2001 tax cut took effect, 40% of the public said they had not thought about whether they favored or opposed it, and those who did take a position did so largely on the basis of how they felt about their own tax burden. Views about the tax burden of the rich had no apparent impact on public opinion, despite the fact that most of the benefits went to the top 5% of taxpayers; egalitarian values reduced support for the tax cut, but only among strong egalitarians who were also politically well informed.
Chapter 7 focuses on the campaign to repeal the federal estate tax. As with the Bush tax cuts more generally, I find that repeal of the estate tax is remarkably popu lar among ordinary Americans, regardless of their political views and economic circumstances, and despite the fact that the vast majority of them never have been or would be subject to estate taxation. Moreover, the strange appeal of estate tax repeal long predates the efforts of conservative interest groups in the 1990s to manufacture public opposition to the estate tax. Thus, the real political mystery is not why the estate tax was phased out in 2001, but why it survived for more than 80 years—and will likely return when the phaseout expires in 2011. The simple answer is that the views of liberal elites determined to prevent repeal have been more consequential than the views of ordinary citizens.
In chapter 8, I turn from wealthy heirs to working poor people and the eroding minimum wage. Here, too, the views of ordinary citizens seem to have had very little impact on public policy. The real value of the minimum wage has declined by more than 40% since the late 1960s, despite remarkably strong and consistent public support for minimum wage increases. My analysis attributes this erosion to the declining political clout of labor unions and to shifts in partisan control of Congress and the White House. As with the estate tax, the politics of the minimum wage underscores the ability of determined elites in the American political system to postpone or prevent policy shifts. However, in this case the determined elites have not been liberal Democrats intent on taxing the bequests of millionaires, but conservative Republicans intent on protecting the free market (and low- wage employers) from the predations of people earning $5.15 per hour.
My case studies of the Bush tax cuts, estate tax repeal, and the eroding minimum wage shed light on both the political causes and the political consequences of escalating economic in equality in contemporary America. In chapter 9, I attempt to provide a more general answer to Dahl’s fundamental question: Who governs? I examine broad patterns of policy making across a wide range of issues, focusing on disparities in the responsiveness of elected officials to the views of their constituents. I find that the roll call votes cast by U.S. senators are much better accounted for by their own partisanship than by the preferences of their constituents. Moreover, insofar as constituents’ views do matter, political influence seems to be limited entirely to affluent and middle- class people. The opinions of millions of ordinary citizens in the bottom third of the income distribution have no discernible impact on the behavior of their elected representatives. These disparities in repre sen ta tion persist even after allowing for differences between high- and low- income citizens in turnout, political knowledge, and contact with public officials.
Writing in the 1980s, at an early stage in the most recent wave of escalating in equality, political scientists Sidney Verba and Gary Orren depicted an ongoing back- and- forth between the powerful forces of economic in equality and political equality: “political equality . . . poses a constant challenge to economic in equality as disadvantaged groups petition the state for redress. Egalitarian demands lead to equalizing legislation, such as the progressive income tax. But the continuing disparities in the economic sphere work to limit the effectiveness of such laws, as the eco nom ical ly advantaged groups unleash their greater resources in the political sphere. These groups lobby for tax loopholes, hire lawyers and accountants to maximize their benefit from tax laws, and then deduct the costs.”7
In the long run of American political history, Verba and Orren’s depiction seems apt. However, in the current economic and political environment it is easy to wonder whether the “constant challenge to economic in equality” posed by the ideal of political equality is really so constant or, in the end, so effective. This book provides strong evidence that economic in equality impinges powerfully on the political process, frustrating the egalitarian ideals of American democracy. The countervailing impact of egalitarian ideals in constraining disparities in the economic sphere seems considerably more tenuous.
ESCALATING ECONOMIC IN EQUALITY
Most Americans have only a vague sense of the contours of the nation’s income distribution—especially for parts of the income distribution that extend beyond their personal experience. Annual tabulations published by the U.S. Census Bureau provide a useful summary of the incomes of families at different points in the distribution. For example, in 2005 (the most recent year for which such tabulations are available), the typical American family had a total pre- tax income of $56,200. More than 15 million families—one out of every five—earned less than $25,600. A similar number earned more than $103,100. Even higher in the distribution, the richest 5% of American families had incomes of more than $184,500.8
The Census Bureau provides parallel annual family income tabulations going back to 1947 for families at the 20th, 40th, 60th, 80th, and 95th percentiles of the income distribution. These tabulations constitute the longest consistent data series included in the Census Bureau’s Historical Income Tables.9 Although they do not reflect the economic fortunes of very poor families at one extreme or very wealthy families at the other extreme, they do represent a broad range of economic circumstances, encompassing working poor families at the 20th percentile, middle- class families at the 40th and 60th percentiles, affluent families at the 80th percentile, and even more affluent families at the 95th percentile. Thus, they provide an invaluable record of the changing economic fortunes of American families over a period of almost six de cades.10
The distribution of income in American society has shifted markedly in that time. The broad outlines of this transformation are evident in figure 1.1, which shows how the real pre- tax incomes (in thousands of 2006 dollars) of families at various points in the income distribution have changed since 1947. It is clear from figure 1.1 that the period since World War II has seen substantial gains in real income for families throughout the income distribution, but especially for those who were already well off. The average rate of real income growth over the entire period covered by the figure increased uniformly with each step up the income distribution, from about 1.4% per year for families at the 20th percentile to 2% per year for families at the 95th percentile.
The difference between 1.4% and 2% may sound small, but it has compounded into a dramatic difference in cumulative real income growth over the past half- century: 118% for families at the 20th percentile versus 199% for families at the 95th percentile. Of course, the contrast in economic gains between poor families and rich families is much starker in absolute terms than it is in percentage terms. Mea sured in 2006 dollars, the real incomes of families at the 20th percentile increased by less than $15,000 over this period, while the real incomes of families at the 95th percentile increased by almost $130,000.
These figures convey a striking disparity in the economic fortunes of rich and poor American families over the past half- century. However, they fail to capture another important difference in the experience of families near the bottom of the income distribution and those near the top: poor families have been subject to considerably larger fluctuations in income growth rates. For example, families at the 20th percentile experienced declining real incomes in 20 of the 58 years represented in figure 1.1, including seven declines of 3% or more; by comparison, families at the 95th percentile have experienced only one decline of 3% or more in their real incomes since 1951.
Although it may not be immediately apparent in figure 1.1, the pattern of income growth in the past three de cades has differed sharply from the pattern in the first half of the post- war era. In the 1950s and 1960s families in every part of the income distribution experienced robust income growth. Since the mid- 1970s income growth has been a good deal slower and a good deal less evenly distributed. These differences are evident in figure 1.2, which compares cumulative rates of real income growth for families in various parts of the income distribution from 1947 to 1974 and from 1974 to 2005.11
From the late 1940s through the early 1970s American income growth was rapid and remarkably egalitarian, at least in percentage terms. Indeed, the real incomes of working poor families (at the 20th percentile of the income distribution) and affluent families (at the 80th percentile) both grew by the same 98% over this period. Income growth was slightly higher for middle- class families and slightly lower for families at the 95th percentile, but every income group experienced real income growth between 2.4% and 2.7% per year.
Over the past three de cades, income growth has been much slower and much less evenly distributed. Even for families near the top of the income distribution, the average rate of real income growth slowed substantially (from 2.4% per year to 1.6% per year for families at the 95th percentile). For less affluent families, real income growth slowed to a crawl. Families at the 60th percentile experienced real income growth of less than 1% per year—down from 2.7% in the earlier period. The real incomes of families at the 20th percentile grew by only 0.4% per year—down from 2.6% in the earlier period. Much of the income growth that did occur was attributable to increases in working hours, especially from the increasing participation of women in the workforce.
Even the disparities in income growth for affluent, middle- class, and poor American families charted in figures 1.1 and 1.2 understate the extent of escalating in equality over the past 30 years, since much of the real action has been concentrated at the very top of the income distribution. While the Census Bureau figures document the experience of families affluent enough to have reached the 95th percentile of the national income distribution, they shed no light on what has happened to people with much higher incomes. As it turns out, income gains among the ultra- rich have vastly outpaced those among the merely affluent.
Economists Thomas Piketty and Emmanuel Saez have used information collected by the Internal Revenue Ser vice to track the economic fortunes of people much higher up the economic ladder than the Census Bureau tabulations reach. Figure 1.3 presents their tabulations of the real incomes (in millions of 2006 dollars) of taxpayers at the 95th, 99th, 99.5th, 99.9th, and 99.99th percentiles of the income distribution since 1947.12
What is most striking in figure 1.3 is that, even at this elevated income level, income growth over the past 25 years has accelerated with every additional step up the economic ladder. For example, while the real income of taxpayers at the 99th percentile doubled between 1981 and 2005, the real income of taxpayers at the 99.9th percentile nearly tripled, and the real income of taxpayers at the 99.99th percentile—a hyper-rich stratum comprising about 13,000 taxpayers—increased fivefold. The real income cutoff for this hyper-rich stratum (not the average income but the lowest income of taxpayers in this group) was virtually constant for three de cades following the end of World War II; but around 1980 it began to escalate rapidly, from about $1.2 million to $6.2 million by 2000. Although the real incomes of people in this group declined significantly in the stock market slump of 2000–2002, by 2005 they were once again in excess of $6 million.
In 2005, the New York Times published a 20- year retrospective on the list of the 400 wealthiest Americans produced annually by Forbes magazine. The Times noted that the average net worth of these 400 economic luminaries increased more than fourfold over that period (from $600 million in 1985 to $2.81 billion in 2005) and that their combined net wealth in 2005 exceeded the gross domestic product of Canada. “The median house hold income of Americans has been stuck at around $44,000 for five years now. The poverty rate is up. Members of the Forbes 400, meanwhile, are richer than Croesus, and every hour they are getting richer.”13
Another illuminating way to look at Piketty and Saez’s tabulations is in terms of the shares of total income going to people in different economic strata. Figure 1.4 shows these income shares for the top 5% of taxpayers (the solid line) and the top 1% (the dotted line) over a period of almost 90 years. For the period since World War II the picture here is quite consistent with the picture presented in figures 1.1 and 1.3. The share of income going to the rich remained remarkably constant from the mid- 1940s through the 1970s and then began to escalate rapidly. For example, the top 5% of taxpayers accounted for 23.0% of total income in 1981 but 37.2% in 2005. The top 1% accounted for 10.0% of total income in 1981 but 21.8% in 2005; after declining gradually over most of the twentieth century, their share of the pie more than doubled in the course of a single generation.14
Two other features of the historical trends in income shares stand out in figure 1.4. One is that the increasing share of income going to people in the top 5% of the distribution is entirely accounted for by the increasing share going to the top 1%; the distance between the solid and dotted lines, which represents the share going to people between the 95th and 99th percentiles, remained virtually constant. As in figure 1.3, it is clear here that the really dramatic economic gains over the past 30 years have been concentrated among the extremely rich, largely bypassing even the vast majority of ordinary rich people in the top 5% of the income distribution. Indeed, economists Frank Levy and Peter Temin have used Piketty and Saez’s data to show that more than four- fifths of the total increase in Americans’ real pre- tax income between 1980 and 2005 went to the top 1% of taxpayers. As a front-page story in the New York Times put it, “The hyper-rich have emerged in the last three de cades as the biggest winners in a remarkable transformation of the American economy.”15
Because Piketty and Saez’s tabulations go back to the advent of the federal income tax system, they also provide important historical perspective on the absolute magnitude of in equality in the contemporary American income distribution. Although it is impossible to compare current levels of in equality with those prevailing in the original Gilded Age in the late nineteenth century, it is possible to compare the position of today’s economic elite with their counterparts in what most economic historians consider the other notable highpoint of economic in equality in American history, the 1920s. Whether we focus on the share of income going to the top 5% of taxpayers or the share going to the even richer top 1%, figure 1.4 suggests that current levels of in-equality rival those of the Roaring Twenties, before the Great Depression wiped out much of the financial wealth of the nation’s reigning upper class. By this metric, America’s New Gilded Age is a retrogression of historic scope.16
INTERPRETING IN EQUALITY
What are we to make of these economic trends? For some people,they reflect an era of economic dynamism and expanding opportunity. Others are made uneasy by the sheer magnitude of the gulf between the rich and the poor in contemporary America, even if they cannot quite pinpoint why. Still others are less concerned about in equality per se than about the absolute living standards of the poor or about the extent of their opportunity to work their way up the economic ladder.
For the most part, discussions of escalating in equality have focused on four related issues: economic growth, economic mobility, fairness, and inevitability. One crucial—and highly contentious—question is whether dramatic income gains among the hyper-rich “trickle down” to middle- class and poor people, increasing the size of everyone’s piece of the pie. After all, even the influential liberal political theorist John Rawls argued that in equality is just insofar as it contributes to the well- being of the least well- off members of society.17
Many ordinary Americans believe that “large differences in income are necessary for America’s prosperity,” as one standard survey question puts it.18 However, economists who have studied the relationship between in equality and economic growth have found little evidence that large disparities in income and wealth promote growth.19 There is not even much hard evidence in support of the commonsense notion that progressive tax rates retard growth by discouraging economic effort. Indeed, one liberal economist, Robert Frank, has written that “the lessons of experience are downright brutal” to the notion that higher taxes would stifle economic growth by causing wealthy people to work less or take fewer risks.20
Much of the economic argument for in equality hinges on the assumption that large fortunes will be invested in productive economic activities. In fact, however, there is some reason to worry that the new hyper-rich are less likely to invest their wealth than to fritter it away on jewelry, yachts, and caviar. According to one press report, the after-tax savings rate of house holds in the top 5% of the income distribution fell by more than half from 1990 through 2006 (from 13.6% to 6.2%), while real sales growth in the luxury retail industry averaged more than 10% per year.21
Even if in equality does promote overall economic growth, that does not necessarily imply that it contributes to the well- being of the least well- off members of society. The benefits of economic growth may or may not “trickle down” to the poor. Although it is common for Americans to suppose that the nation’s collective wealth makes even poor people better off than they otherwise would be, the reality is that poor people in America seem to be distinctly less well off than poor people in countries that are less wealthy but less unequal. A careful comparison of the living standards of poor children in 13 rich democracies in the 1990s found the United States ranking next to last, 20% below Canada and France and 35% below Norway, despite its greater overall wealth.22 Moreover, even holding constant the absolute economic status of the least well- off, there is some reason to worry that in equality itself may have deleterious social implications in the realms of family and community life, health, and education.23
Another important strand of debate focuses on the extent of economic mobility and the relationship between in equality and mobility. As one journalistic account put it, “Mobility is the promise that lies at the heart of the American dream. It is supposed to take the sting out of the widening gulf between the have- mores and the have- nots. There are poor and rich in the United States, of course, the argument goes; but as long as one can become the other, as long as there is something close to equality of opportunity, the differences between them do not add up to class barriers.”24
The dynamism of the modern economy is certainly reflected in the extent of turnover at the pinnacle of the income distribution. For example, the New York Times’ 20- year retrospective on the Forbes list of the 400 richest Americans counted 255 “self- made fortunes” in 2005, up from 165 in 1985. The number of people on the list with undergraduate degrees from Harvard or Yale declined (from 37 to 25), while the number from California nearly doubled (from 49 to 96).25
Of course, the composition of the Forbes 400 may or may not reflect patterns of economic mobility in American society as a whole. Leaving aside this handful of billionaires, to what extent are the economic fortunes of ordinary Americans determined by their starting points in the economic hierarchy? One commentator, Michael Kinsley, warned that “immobility over generations is what congeals financial differences into old- fashioned, Eu ro pe an- style social class.”26 However, recent evidence suggests that the United States already has “significantly less economic mobility than Canada, Finland, Sweden, Norway, and possibly Germany; and the United States may be a less eco nom ical ly mobile society than Britain.”27 These comparisons suggest—contrary to the fervent beliefs of many Americans— that the contemporary United States outclasses Eu rope in the rigidity of its hidebound Eu ro pe an- style class structure.
Comparisons of intergenerational mobility over time within the United States also provide some evidence that mobility has declined over the past three de cades, at least for men. One study mea suring the impact of a wide range of family background factors (including family structure, race and ethnicity, parental education and income, and region) found that “the economic gap between advantaged and disadvantaged men increased because economic in equality increased” during the 1970s, 1980s, and 1990s, while “the gaps in women’s outcomes remained constant.” Another study found that the effect of parental income on men’s economic fortunes “declined between 1940 and 1980 but increased during the 1980s and 1990s.”28
A detailed analysis of income mobility across de cades rather than generations also suggests that there has been at least a modest decline in mobility since the 1970s. The probability of any given family rising from the bottom quintile of the income distribution into the top quintile over the course of a de cade increased slightly (from 3.3% in the 1970s to 4.3% in the 1990s). However, the proportion of families in the top quintile of the income distribution who remained there a de cade later also increased, while the proportion of families falling from the top quintile into the bottom quintile, or from the top two quintiles into the bottom two quintiles, declined.29
Another key point of contention is the extent to which escalating in equality reflects the just rewards accruing to education and skills in the modern economy. According to one conservative observer, New York Times columnist David Brooks,
the market isn’t broken; the meritocracy is working almost too well. It’s rewarding people based on individual talents. Higher education pays off because it provides technical knowledge and because it screens out people who are not or ga nized, self- motivated and socially adept. But even among people with identical education levels, in equality is widening as the economy favors certain abilities. . . . What’s needed is not a populist revolt, which would make everything worse, but a second generation of human capital policies, designed for people as they actually are, to help them get the intangible skills the economy rewards.30
On the other hand, Brooks’s liberal counterpart on the Times op- ed page, Paul Krugman, attacked “the notion that the winners in our increasingly unequal society are a fairly large group—that the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization are pulling away from the 80 percent who don’t have these skills.” Noting that the real incomes of college graduates have risen by less than 1% per year over the past three de cades, Krugman argued that “the big gains have gone to a much smaller, much richer group than that.” Nevertheless, the “8020 fallacy,” as he called it, “tends to dominate polite discussion about income trends, not because it’s true, but because it’s comforting. The notion that it’s all about returns to education suggests that nobody is to blame for rising in equality, that it’s just a case of supply and demand at work. . . . The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of in equality may have as much to do with power relations as it does with market forces.”31
Krugman cited economists Ian Dew- Becker and Robert J. Gordon’s detailed analysis of productivity and income growth over the past four de cades. According to Dew- Becker and Gordon, “most of the shift in the income distribution has been from the bottom 90 percent to the top 5 percent. This is much too narrow a group to be consistent with a widespread benefit from SBTC [skill- biased technical change].” They found that some of the occupations that should have flourished if the dynamic economy of the 1990s was simply rewarding technical skills actually saw very modest income growth. For example, the earnings of mathematicians and computer scientists increased by only 4.8% between 1989 and 1997, while the earnings of engineers actually declined by 1.4%. In contrast, the earnings of CEOs increased by 100%.32
Evidence of a serious mismatch between skills and economic rewards seems likely to fan concerns about the “fairness” of recent changes in the U.S. income distribution. So, too, does the juxtaposition of rapid productivity growth with stagnant middle- class wages. Dew- Becker and Gordon found that economic productivity had increased substantially over the period covered by their analysis, but that “the broad middle of working America has reaped little of the gains in productivity over the past 35 years. . . . The micro data tell a shocking story of gains accruing disproportionately to the top one percent and 0.1 percent of the income distribution.” They characterized the first five years of the twenty- first century as “an unpre ce dented dichotomy of macroeconomic glow and gloom.” On one hand, labor productivity and output growth exploded; on the other hand, median family income fell by 3.8 percent from 1999 to 2004.33
The “unpre ce dented dichotomy” noted by Dew- Becker and Gordon between booming output and stagnant or declining incomes for ordinary workers has been a recurrent political problem for the Bush administration. On the eve of the 2004 presidential campaign, the New York Times announced “A Recovery for Profits, But Not for Workers.” A similar headline in the midst of the 2006 midterm campaign asked, “After Years of Growth, What about Workers’ Share?” Press reports noted that the president was making little headway in convincing the American public that the economy was prospering, despite robust output growth and increasing average wages. The “strange and unlikely combination” of “strong and healthy aggregate macroeconomic indicators and a grumpy populace,” one report said, was “a source of befuddlement to the administration and its allies.”34
Faced with this “grumpy populace” and an imminent election, Trea sury Secretary Henry Paulson acknowledged that “amid this country’s strong economic expansion, many Americans simply aren’t feeling the benefits.” Paul-son blamed that fact on “market forces” that “work to provide the greatest rewards to those with the needed skills in the growth areas.” Paulson’s pre de ces sor as trea sury secretary, John Snow, spoke in similar terms about the “long- term trend to differentiate compensation.”
According to one observer, “ ‘Long- term,’ when used this way by this sort of official, tends to mean ‘fundamentally unstoppable.’ And, in this case, inexplicable, like a sort of financial global- warming process that may be man-made or (who knows?) a natural cycle that we would welcome if only we knew its function. Snow, a trained economist and former corporate C.E.O., doesn’t pretend to be able to explain what’s causing this whole compensation differential. Nor does he seem tortured by his ignorance. ‘We’ve moved into a star system for some reason,’ he said, ‘which is not fully understood.’ ”35
The notion that economic in equality is an inevitable, purely natural phenomenon has been given a pseudo- scientific patina by a self- proclaimed “econophysicist” at the University of Maryland, Victor Yakovenko. Yakovenko noted that, aside from a long upper tail, the dispersion of U.S. incomes closely approximates an exponential distribution—the same kind of distribution characteristic of many natural phenomena. According to an account of Yakovenko’s work published in the New York Times Magazine’s 2005 survey of “The Year in Ideas,” “To an econophysicist, the exponential distribution of incomes is no coincidence: it suggests that the wealth of most Americans is itself in a kind of thermal equilibrium. . . . Yakovenko told New Scientist that ‘short of getting Stalin,’ efforts to make more than superficial dents in in equality would fail.”36
ECONOMIC IN EQUALITY AS A political ISSUE
Interpretations of economic in equality are politically consequential because they shape responses to in equality. If the differences between rich and poor in contemporary America “do not add up to class barriers,” if “the market isn’t broken” and “meritocracy is working,” or if “efforts to make more than superficial dents in in equality” are doomed to failure, then in equality is unlikely to rise to the top of the political agenda. Many observers have been perplexed by the modest salience of in equality as a political issue in America. For example, Dahl wrote that, “For all the emphasis on equality in the American public ideology, the United States lags well behind a number of other Democratic countries in reducing economic in equality. It is a striking fact that the presence of vast disparities in wealth and income, and so in political resources, has never become a highly salient issue in American politics or, certainly, a per sis tent one.”37 Is that because Americans assume that “efforts to make more than superficial dents in in equality” would fail?
The fact that most other rich democracies are considerably less unequal than the United States provides some reason to think that political arrangements short of Stalinism might not be entirely futile in mitigating economic in equality. For that matter, even the limited range of policies implemented in the United States over the past half- century has had substantial effects on prevailing levels of economic in equality. In short, politics matters.
If this claim seems controversial, that is probably because so much public discussion of economic in equality in the New Gilded Age ignores its political dimension. Journalists and commentators may not dwell on the “econophysics” of thermal equilibrium as reflected in the exponential distribution, but they often frame discussions of in equality in a curiously passive, technical, and distinctly apolitical way. The standard perspective is typified by a 2006 cover story in The Economist on “In equality in America.” The report summarized trends in the American economy over the preceding de cade:
Thanks to a jump in productivity growth after 1995, America’s economy has out paced other rich countries’ for a de cade. Its workers now produce over 30% more each hour they work than ten years ago. In the late 1990s everybody shared in this boom. Though incomes were rising fastest at the top, all workers’ wages far outpaced inflation.
But after 2000 something changed. The pace of productivity growth has been rising again, but now it seems to be lifting fewer boats. . . . The fruits of productivity gains have been skewed towards the highest earners, and towards companies, whose profits have reached record levels as a share of GDP.38
The report provided no hint of what “something” might have changed after 2000. Nor did it offer any explanation for why “America’s income disparities suddenly widened after 1980,” nor why “during the 1990s, particularly towards the end of the de cade, that gap stabilized and, by some mea sures, even narrowed.”
Hello? George W. Bush? Ronald Reagan? Bill Clinton? In 3,000 words, the report offered no suggestion that any policy choice by these or other elected officials might have contributed to the economic trends it summarized. Rather, “the main cause was technology, which increased the demand for skilled workers relative to their supply, with freer trade reinforcing the effect.” The report also suggested that “institutional changes, particularly the weakening of unions,” might have “made the going harder for people at the bottom” and that “greedy businessmen” might be “sanction[ing] huge salaries for each other at the expense of shareholders.”
Reports of this sort obviously do little to make “the presence of vast disparities in wealth and income” noted by Dahl “a highly salient issue in American politics.” Indeed, the authors of the Economist’s cover story began by assuring their readers that “Americans do not go in for envy. The gap between rich and poor is bigger than in any other advanced country, but most people are unconcerned. Whereas Eu ro pe ans fret about the way the economic pie is divided, Americans want to join the rich, not soak them. Eight out of ten, more than anywhere else, believe that though you may start out poor, if you work hard, you can make pots of money. It is a central part of the American Dream.”39
The political economy of in equality might be very different if, contrary to Dahl’s observation, the presence of vast disparities in wealth and income was a highly salient issue in American politics. How likely is that, and how might it happen?
One admittedly unsystematic barometer of the popu lar zeitgeist is the annual “What People Earn” issue of Parade Magazine, a popu lar Sunday newspaper supplement claiming 71 million readers. For several years, Parade has published annual “Special Reports” including dozens of Americans’ names, photos, occupations, and salaries. Most are ordinary people with five- figure incomes; some are im mensely wealthy celebrities like Michael Jordan, Donald Trump, and SpongeBob Squarepants. (Interestingly, more conventional affluent professionals and businesspeople seem to be distinctly underrepresented.40) The stories accompanying these “salary surveys” have attempted to summarize the current economic climate and job prospects. In doing so, they have also provided some insight into the shifting resonance of economic in equality in contemporary American culture.
In early 2002, Parade depicted “the mood of the nation” as “resolutely confident despite wage freezes, benefit reductions and shrinking job security.” An accompanying essay by financial writer Andrew Tobias put the gulf between the incomes of the rich and famous on one hand and ordinary people on the other in reassuring perspective, noting that in “Uganda or Peru . . . plumbers and librarians earn a whole lot less” than in the United States. “Yes. Life is unfair,” Tobias wrote. “But for most of us, it could be a lot worse. And in America there’s at least a fighting chance that, if you work at it, you—or your kids anyway—can close the gap.”41
The following year, Tobias’s essay “How Much Is Fair?” revisited the issue of economic in equality, but in a rather different tone. Tobias remained sanguine about the millions earned by Ben Affleck, Madonna, and Stephen King. (“I don’t mind a bit. This is America! More power to them.”) However, he was more skeptical about the earnings of CEOs, acknowledging that “most would agree it is best left to the free market to decide” how much they should be paid, but adding that in some cases “the market isn’t really free and the CEO largely sets his own pay.” Noting that one modestly paid CEO earned more than “the Joint Chiefs of Staff and the presidents of Harvard, Yale and Princeton—combined!” Tobias concluded, somewhat defensively, that “it is not class warfare to face these facts, observe these trends and raise these questions. Many will conclude that all is as it should be. Others will say things have gotten out of whack. The ability to confront, debate and occasionally course- correct is one of our nation’s greatest strengths.”42
By 2004, Parade headlined that “The economy’s growing again, and we’re spending more—but jobs and wages aren’t keeping pace.” Some 30 paragraphs later, the report mentioned that “The gap between America’s highest-and lowest- paid workers . . . got wider last year” and that the latter “lost ground to inflation.” In 2005, the Parade report noted that productivity “has risen steadily; but economists say that, so far, the resulting benefits have gone into corporate profits.”43
By 2007, the disparity between “government statistics” and the “daily experience” of workers had become a major theme of Parade’s annual report on the state of the U.S. economy. One prominent subhead announced that “most Americans didn’t see the long economic boom reflected in their paychecks”; another reported that “the salary gains of the last five years have gone to the highest- paid workers.” The body of the story reported that “many Americans are troubled by the income gap between the nation’s highest earners and everyone else—a gap that has grown dramatically in recent de cades.”44
Meanwhile, in a very different segment of the Sunday magazine market, the New York Times Magazine in 2007 published a special “Money Issue” titled “Inside the Income Gap.” Lengthy articles focused on class disparities in schooling, John Edwards’s “poverty platform” in the 2008 presidential race, and the implications of an increasingly global labor market. However, the impact of these weighty examinations of the sociology and politics of economic in equality was diminished by the distracting interspersion of colorful advertisements for investment companies, exotic consumer goods, and high- end real estate. One three- page article on “The In equality Conundrum” (“How can you promote equality without killing off the genie of American prosperity?”) was woven around advertisements for a private bank and financial planning company (“an entire team of wealth experts”), high definition flat- screen tele visions (“the ultimate TV experience”), the national airline of the Cayman Islands (“Endless beauty. Non- stop flights”), and luxury apartments on New York’s Fifth Avenue (“From $10.25 million”).45
The lifestyles of New York Times Magazine readers are emblematic of a striking social gulf between the people who are most likely to read lengthy articles (or books!) on the subject of in equality and the people who have themselves been on the losing end of escalating in equality in the past 30 years. That social gulf has been exacerbated by the economic trends of the New Gilded Age; and it constitutes a significant obstacle to political progress in responding to those trends. One can only wonder how many affluent readers will get around to pondering “The In equality Conundrum” as soon as they return from the Cayman Islands.
If the juxtaposition of social concern and conspicuous consumption in the New York Times Magazine symbolizes the ambivalent resonance of the New Gilded Age among its winners, the various conflicting themes in the Parade reports on “What People Earn” underscore the complexity of cultural norms and values shaping thinking about economic in equality among the people whose economic fortunes have stagnated. American workers are suffering from wage freezes, benefit reductions, and shrinking job security; but they are better off than their counterparts in Uganda or Peru. Celebrities are entitled to their millions; but perhaps there is something troubling about CEOs earning more than the combined salaries of the Joint Chiefs of Staff and the presidents of Harvard, Yale, and Princeton. The income gap between the rich and the rest has grown dramatically; but in America, you—or your kids anyway—can close the gap. Or maybe not.
IN EQUALITY AND AMERICAN DEMOCRACY
To a famously perceptive foreign observer of nineteenth- century America, Alexis de Tocqueville, the spirit of equality was the hallmark of American culture: “Any man and any power which would contest the irresistible force of equality will be overturned and destroyed by it.” However, Tocqueville recognized that equality in the social and political realms could coexist with a great deal of economic in equality. “There are just as many wealthy people in the United States as elsewhere,” he observed. “I am not even aware of a country where the love of money has a larger place in men’s hearts or where they express a deeper scorn for the theory of a permanent equality of possessions.”46
Tocqueville’s juxtaposition of social equality and economic in equality has been a recurrent theme in commentary on the place of equality in American political culture. According to Verba and Orren, for example, ordinary Americans have complex views about the value of equality:
Their sentiments are far more egalitarian in some areas than in others. They assign different goods to different spheres of justice. There are spheres for money, political power, welfare, leisure time, and love. . . . The aim of egalitarianism is not the elimination of all differences, which would be impossible, nor even the elimination of differences within any one of these spheres, which might also be impossible unless the state continually intervened. Rather, the goal is to keep the spheres autonomous and their boundaries intact. Success in one sphere should not be convertible into success in another sphere. Politi cal power, which is the most dangerous social good because it is the easiest to convert, must be constrained against transmutation into economic power, and vice versa.47
One of the most important questions explored in this book is whether politi cal equality can be achieved, or even approximated, in a society marked by glaring economic inequalities. When push comes to shove, how impermeable are the boundaries separating the economic and political spheres of American life?
At some points in American history, at least, those boundaries have been remarkably permeable. The original Gilded Age in the late nineteenth century is a dramatic case in point. Rapid economic expansion and transformation coexisted with intense partisan conflict and political corruption. Social Darwinism provided a powerful ideological rationale for letting the devil take the hindmost. The mordant novel by Mark Twain and Charles Warner that gave the era its name portrayed a political process in which the greedy and cynical preyed on the greedy and gullible.48
In Wealth and Democracy: A Politi cal History of the American Rich, political analyst Kevin Phillips called attention to a variety of striking economic and politi cal parallels between the “capitalist heydays” of the Gilded Age, the Roaring Twenties, and the contemporary era. Eco nom ical ly, he argued, all three periods were marked by “major economic and corporate restructuring,” “bull markets and rising, increasingly precarious levels of speculation, leverage, and debt,” “exaltation of business, entrepreneurialism, and the achievements of free enterprise,” and “concentration of wealth, economic polarization, and rising levels of in equality.” Politi cally, all three periods featured “conservative politics and ideology,” “skepticism of government,” “reduction or elimination of taxes, especially on corporations, personal income, or inheritance,” and “high levels of corruption,” among other factors.49
Having surveyed the rise and fall of great economic fortunes through more than two centuries of American history, Phillips emphasized the regularity with which concentrations of wealth in new industries, regions, and families have been spurred, subsidized, and supported by government policies: “From the nursery years of the Republic, U.S. government economic decisions in matters of taxation, central bank operations, debt management, banking, trade and tariffs, and financial rescues or bailouts have been keys to expanding, shrinking, or realigning the nation’s privately held assets. . . . Occasionally public policy tilted toward the lower and middle classes, as under Jefferson, Jackson, and Franklin D. Roo se velt. Most often, in the United States and elsewhere, these avenues and alleyways have been explored, every nook and cranny, for the benefit of the financial and business classes.”50
In the same vein, Paul Krugman has emphasized the importance of social and political forces in shaping the economic trends of the past 75 years:
Middle- class America didn’t emerge by accident. It was created by what has been called the Great Compression of incomes that took place during World War II, and sustained for a generation by social norms that favored equality, strong labor unions and progressive taxation. Since the 1970’s, all of those sustaining forces have lost their power.
Since 1980 in partic u lar, U.S. government policies have consistently favored the wealthy at the expense of working families—and under the current [George W. Bush] administration, that favoritism has become extreme and relentless. From tax cuts that favor the rich to bankruptcy “reform” that punishes the unlucky, almost every domestic policy seems intended to accelerate our march back to the robber baron era.51
While economists have spent a good deal of scholarly energy describing and attempting to explain the striking escalation of economic in equality in the United States over the past 30 years, they have paid remarkably little attention to social and political factors of the sort cited by Krugman. For example, one comprehensive summary of the complex literature on earnings in equality attempted to ascertain “What shifts in demand, shifts in supply, and/or changes in wage setting institutions are responsible for the observed trend?” The authors pointed to “the entry into the labor market of the well educated baby boom generation” and “a long- term trend toward increasing relative demand for highly skilled workers” as important causal factors. Their closest approach to a political explanation was a passing reference to a finding that “the 25 percent decline in the value of the minimum wage between 1980 and 1988 accounts for a small part of the drop in the relative wages of dropouts during the 1980s.”52
It probably should not be surprising, in light of their scholarly expertise and interests, that economists have tended to focus much less attention on potential political explanations for escalating economic in equality than on potential economic explanations. In a presidential address to the Royal Economic Society, British economist A. B. Atkinson criticized his colleagues’ tendency to ignore or downplay the impact on the income distribution of social and political factors, arguing that “we need to go beyond purely economic explanations and to look for an explanation in the theory of public choice, or ‘political economy’. We have to study the behaviour of the government, or its agencies, in determining the level and coverage of state benefits.”
Atkinson went on to criticize economists who have considered political factors for their uncritical reliance on the rather mechanical assumption that government policy responds directly to the economic interests of the so-called median voter—the ideological centrist whose vote should be pivotal in any collective decision arrived at, directly or indirectly, by majority rule. He urged them to go beyond this simple framework, to gauge the extent to which redistributive policies are shaped “by the ideology or preferences of political parties, or by political pressure from different interest groups, or by bureaucratic control of civil servants or agencies.”53
Atkinson’s criticism seems apt, since political economists wedded to the familiar majoritarian model have remarkable difficulty even in explaining why the numerous poor in Democratic political systems do not expropriate the unnumerous wealthy. If taxes are proportional to income and government benefits are distributed equally, for example, everyone with below- average income—a clear majority of the electorate in any Democratic political system with enough capitalism to generate a wealthy class—has an economic incentive to favor a tax rate of 100%.54 Even if redistribution entails some waste, most people should favor some redistribution, and poorer people should prefer more. Furthermore, increases in economic in equality should result in higher taxes and more redistribution.55
Of course, the reality is that very few people—even very few poor people— favor aggressive redistribution of the sort implied by these simple economic models. Nor is aggressive redistribution anywhere in sight. Writing 25 years ago, before most of the substantial increase in economic in equality documented in figures 1.1 and 1.3, Dahl noted that, “After half a century of the American welfare state . . . the after-tax distribution of wealth and income remains highly unequal.”56 Now, after three- quarters of a century of the American welfare state, the distributions of wealth and income are even more unequal than they were when Dahl wrote. Moreover, systematic analyses suggest that the extent of economic in equality has little impact on the extent of redistribution, either across nations or within the United States.57 Certainly, recent American experience amply demonstrates that escalating economic in equality need not prevent the adoption of major policy initiatives further advantaging the wealthy over the middle class and poor. The massive tax cuts of the Bush era, whose gains went mostly to people near the top of the income distribution, are a dramatic case in point.58
In the following pages, I explore these glaring disjunctions between the predictions of simple majoritarian models and actual patterns of policy making in the United States over the past half- century. As Atkinson surmised, the disjunctions turn out to have a great deal to do with “the ideology or preferences of political parties” and with “political pressure from different interest groups.” For example, I find in chapter 8 that although Americans have strongly and consistently favored raising the federal minimum wage, their elected representatives have allowed the real value of the minimum wage to decline by more than 40% since the late 1960s. Moreover, my analysis in chapter 9 shows that elected officials voting on a minimum wage increase paid no attention at all to the views of people poor enough to be directly affected by that policy change. My broader analysis indicates that this sort of unresponsiveness is no anomaly, but a very common pattern in American policy making.
The gap between the predictions of conventional political- economic models and the actual workings of American democracy also reflects the profound difficulties faced by ordinary citizens in connecting specific policy proposals to their own values and interests. Economic analyses often take such connections for granted; but for many people on many issues they are misconstrued or simply missing. Egalitarian impulses often fail to get translated into policy because ordinary citizens do not grasp the policy implications of their egalitarian values. For example, in chapter 7, I show that almost two-thirds of the people who say the rich pay less than they should in taxes nevertheless favor repealing the federal estate tax—a tax that only affects the richest 1–2% of taxpayers. Any serious attempt to understand the political economy of the New Gilded Age requires grappling with the political psychology of American voters and with the real limitations of public opinion as a basis for Democratic policy making.
Escalating economic in equality poses a crucial challenge to America’s democratic ideals. The nature of that challenge has been nicely captured by Michael Kinsley: “According to our founding document and our national myth, we are all created equal and then it’s up to us. In equality in material things is mitigated in two ways: first, by equal opportunity at the start, and, second, by full civic equality despite material differences. We don’t claim to have achieved all this, but these are our national goals and we are always moving toward them.”59
It is a nice sentiment—but is it true? For partisans of American democracy the evidence is far from reassuring.
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