How Washington made the rich richer

The dominant economic trend in the United States of the past 30 or so years has been the upward redistribution of income to the wealthiest 1 percent and 1/10th of 1 percent of Americans.  In their new book, Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned Its Back on the Middle Class, political scientists Jacob S. Hacker and Paul Pierson say this is the result not of impersonal economic trends, but of the balance of political power in the United States.

      This is a sharp break from the 30 years following World War Two, when the incomes of all social classes increased more or less in tandem.  The rich got richer, the middle class got richer and the working class got richer.  Since then the bottom 90 percent of the American public have made hardly any economic gains, and those came mainly from working longer hours and having more family members in the work force.

It is not a question, Hacker and Pierson say, of the haves versus the have-nots.  Rather it is both these groups versus the have-it-alls.  About 36 percent of the gains Americans’ incomes from 1979 to 2007 went to the top 1 percent of the population, of which 20 percent went to the top 1/10th of 1 percent.

While there was growth in inequality in other industrialized nations during that period, it was much more extreme in the United States.  Why?  Hacker and Pierson say the explanation lies not in economic trends, but in public policy.

Since the mid-1970s, marginal tax rates on the wealthiest taxpayers have been dramatically lowered, while property taxes, payroll taxes and sales taxes have gone up and government services to the poor have been reduced.  More importantly, they say, changes in corporate governance and financial regulation give corporate executives and financiers more opportunity to milk the system for their own benefit, while making it more difficult for workers to organize labor unions.

President Obama and his Republican opponents are not the deciders. Hacker and Pierson say.  Rather the Democratic and Republican politicians are like horses in horse races.  A horse may win or lose, but it is not the one who determines the nature, rules and stakes of the race.

The United States Chamber of Commerce, the National Association of Manufacturers, the National Federation of Independent Business and other interest groups are the real deciders. They are the ones who shape the legislative and regulatory processes.  They set the limits of what can and can’t be done.The Republicans historically were the party of business, and the Democrats a coalition of all the groups who sought to limit the power of business.  This rough balance was upset in the 1970s when business interests neutralized the Democrats.

President Nixon appealed to white working people based on resentment of college-educated radicals, but he never risked attacking Social Security, Medicare or labor rights.  The turning point came during the Carter administration, when a Democratic Congress reduced capital gains taxes by 60 percent and rejected major pro-labor and pro-consumer proposals.  President Reagan’s deregulation of many industries was a continuation of initiatives begun under President Carter.

That is largely because business in the 1970s started to organize politically with great determination and effectiveness.  But it also is partly because liberals started to care more about  “post-materialist” issues, such as civil liberties, environmentalism, feminism and later gay rights than they did about bread-and-butter issues such as jobs and wages.  I have known self-identified liberals who are anti-labor because they think of white blue-collar workers as conservatives.  The AFL-CIO is the only organization that represents the broad economic interests of American workers, but, within the Democratic Party, it has become just one of a number of claimants, and not necessarily the most influential one.

Government’s tilt toward wealth and business accelerated during the Clinton and Bush administrations and has not changed during the Obama administration.  The trend during both Democratic and Republican administrations has been to protect corporations from liability for their actions, to gave financial institutions free rein to speculate with other people’s money and to allow corporate and financial executives free rein to extract income from their organizations and protect themselves from loss.

An example of how this works is the invitation in 1998 by Brooksley Born, the chair of the Commodity Futures Trading Commission, for comments on whether certain swaps and derivatives (securities not backed by assets) should be regulated.  She was reprimanded by Treasury Secretary Robert Rubin, his deputy Lawrence Summers and Federal Reserve Board chair Alan Greenspan for even raising the subject.  Rubin moved to curb the CFTC’s authority, and, in 2000, Congress enacted a bill by Rep. Phil Gramm to exempt derivatives from regulation.

Speculation in derivatives were a big factor in the Wall Street bubble of the past 10 years, which enriched certain speculators at the expense of many ordinary Americans.  If I was aware of any of this when it was going on, I have forgotten it now; I certainly didn’t realize its importance at the time.

Wealth continues to exert its political power.  Hedge fund managers continue to receive special tax breaks and the bonuses of bailed-out Wall Street banks are untouchable, while letter carriers, VA hospital nurses and park rangers have had their pay frozen.  Right now, it seems more likely that Social Security benefits will be cut than that taxes on $250,000-plus incomes will revert to their 1990s level.  And the incoming class of Republicans is even more hard-line than the George W. Bush administration.

It is true that the fact that a measure benefits the top 1 percent or top 1/10th of 1 percent of the population doesn’t necessarily mean that it is bad for me or other middle-class Americans.  I wouldn’t favor continuation of the Nixon administration’s wage and price controls or a top income tax bracket of 70 percent.  And sometimes laws are passed or actions taken which benefit the middle class.  But the cumulative effect of the changes of the past 30 or so years has been to redistribute income upwards.

The title of the book is somewhat misleading.  It is a reference to a 1995 book, The Winner-Take-All Society, which argued that society’s rewards are being increasingly concentrated among a few superstars.  Publishers give higher royalties to best-selling authors and less to the rest; broadcasters hire million-dollar anchor-people while reducing the size of their news staffs; and so on.  I think this is a bad thing, but at least the winners are chosen through a free and fair competition.

In the case of the superrich, about 40 percent come from the ranks of top corporate executives, and nearly 20 percent more from high finance.  I would agree that some executives and financiers have earned their enormous wealth, but I don’t find it plausible that as a class, they are contributing so much more today than their counterparts in earlier eras.  I attribute their wealth as a class to what economists call “rent-seeking” – leveraging their positions in organizations for their own benefit. Any challenge to their power to do this, such as setting limits on bonuses in bailed-out Wall Street firms, meets with strong resistance.

Hacker and Pierson say that if reformers wish to change the situation, they will have to organize as they did in the Progressive and New Deal eras in the first half of the 20th century.  This could take decades.

Reformers will have to work not only on the substance of legislation and regulation, but on changing the way the system is stacked against them.  The new 60-vote majority requirement in the Senate is one example; Medicare was passed with 55 votes.  The Supreme Court’s Citizens United Decision is another.   Jan Crawford Greenburg in her 2007 book, Supreme Conflict, wrote about how it took more than 40 years of sustained effort to pack the court with a reliable conservative majority (she is a conservative who thinks this is a good thing).  Who knows how long it will take to change things back?

[2/16/11]  Click on Reclaiming Middle-Class America for an article by Jacob S. Hacker on The American Prospect web log.

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Here are some links to some of my earlier posts on related subjects.

The ultra-rich, the rich and the rest of us

Money power and people power

Tough times: wage theft and other crimes

The financialization of America

Graef Crystal and the question of CEO pay

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Here are links to reviews and comments on Hacker’s and Pierson’s book

Kevin Drum in Mother Jones

James Kwak on the Baseline Scenario

Ed Kilgore in The Washington Monthly

Henry Farrell on Obsidian Wings

Robert C. Lieberman in Foreign Affairs [Added 12/30/10]

Ezra Klein for Democracy Journal [Added 4/11/11]

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