From Broadland to Richistan

I’ve written other posts about Winner-Take-All Politics: How Washington Made the Rich Richer And Turned Its Back on the Middle Class by Jacob S. Hacker and Paul Pierson.  But their book is so significant that I believe it is worth revisiting.

The big story of the past 30 to 35 years, according to the two political scientists, is not just how income has been redistributed upward to the top 10 percent of income earners.  It is even more the story of the top 1 percent, the top 1/10th of 1 percent and the top 1/100th of 1 percent.

During the 30 or so years following World War Two, they say, the United States was what they call Broadland.  There was income inquality, but income rose for all groups, rich and poor, at roughly the same rate.  During the past 30 or so years, they say, the U.S. has been Richistan.  The top income groups have progressed, but the majority have stood still or, by some measures, fallen back.

Why?  They claim it is a result of government policy – not just reductions in tax rates for the top income earners, but policies which allowed corporate executives and financiers – managers of other people’s money – to milk the system for their own benefit, while holding down the wages and salaries of the middle class.

They say this has happened under Democratic and Republican administrations, and is going on today under the Obama administration.  The reason is that the leaders of the upper class have been able to organize in their own interests more effectively than the leaders of the working class and middle class. Corporate and Wall Street interests have become increasingly assertive and sophisticated in asserting their interests, moving the Republican Party to the right while neutralizing the Democrats.

Winner-Take-All Politics has brief sketches of the hard-charging Senator Gramm, the Texas Democrat-turned Republican, who pushed aggressively and successfully for deregulation of the financial markets, and of Senator Chuck Schumer, the New York Democrat, who raises millions of dollars for his party from Wall Street, and has quietly derailed reforms, such as ending special tax breaks for hedge fund managers.

Labor unions, the only organized force that represents the economic interests of working people as a whole, have declined in power, partly as the result of laws such as the Taft-Hartley Act, the Landrum-Griffin Bill and state right-to-work laws.

Other organizations broadly representative of the middle class such as the American Legion (which was responsible for the G.I. Bill of Rights) and fraternal and civic organizations such as the Elks, Masons and Eagles.

Information on the wealth of the very rich is hard to come by.  But two young economists, Thomas Piketty and Emmanual Saez, used filings with the Internal Revenue Service to generate the following statistics:

The richest 1 percent of the U.S. population went from just over 9% of U.S. national income in 1974 to 23.5% in 2007, with average incomes rising from $337,100 to $1.2 million. (All these figures are in inflation-adjusted 2007 dollars.)  The only time on record (that is, since 1913) that this share was higher was in 1928, just prior to the Great Depression.

The richest 1/10th of 1 percent of the U.S. population went from 2.7% of the national income in 1974 to 12.3% in 2007, with average incomes rising from $1 million to $7.1 million.

The richest 1/100th of 1 percent of the U.S. population (about 15,000 families) went from under 1% of the national income in 1974 to more than 6% in 2007, with average incomes rising from $4 million to $35 million.

In contrast, the average American household went from $47,900 to $71,900, mostly due to individuals working more hours and more family members in the paid work force.

Here are some explanations offered (some mentioned in the book, some not).

1. Globalization is driving down workers’ incomes.  In a world market, all wages will move to the level of factory workers in India and China.

2. A high tech society puts a greater premium on education, and increases the wage gap between the well-educated and the uneducated.

3. We are moving toward a “free agent” society in which talented players are no longer loyal to their teams, but maximize their incomes by selling their services to the highest bidder.  Thus it cost Eastman Kodak Co. much more to lure George Fisher away from Motorola than it did to promote Colby Chandler and Kay R. Whitmore to CEO from within.

The problem with all that, as Hacker and Pierson note, is that all these forces operate in other countries, and yet no other advanced country has the same degree of inequality as we do.  The ones that come closest are the ones most like us – Britain, Canada, Australia and New Zealand.

Nor do we Americans get greater opportunity as a trade-off for less equality.  You have a greater chance of rising above the economic class into which you were born in Australia, Sweden, Norway, Finland, Germany, Spain, France and Canada than you do in the United States.  Nor have average Americans received greater job security or more benefits in exchange for stagnant incomes.

Nor has greater inequality produced markedly greater productivity and growth, as the Reagan-era supply-side economists hoped.  By most measures, the European economies are growing nearly as fast as ours and, by some measures, such as GDP per hour worked, they outpace us.

The majority of the top 1 percent of income earners are corporate executives (40.8%) and financiers (18.4%).  What they have in common is that they get their income from managing other peoples’ money.  Hacker and Pierson argue that their advocates in Washington have influenced government policy so as to give them free rein to use their positions for their own advantage and against the public interest.

A Princeton political scientist named Larry Bartels studies how the votes of U.S. Senators in the late 1980s and early 1990s compared with the wishes of their constituents, as revealed in public opinion polls.  They did pretty much everything the wealthiest third of their constituents wanted, some of what the middle third wanted, but went against much of what the bottom third wanted.  In other words, if rich people wanted something, it was almost certain to pass; if poor people wanted something, the likelihood of its passing was reduced.

A survey by another political scientist, Martin Gilens, using 2,000 survey questions from the early 1980s, found that a bill supported by a majority of the voters stood a good chance of becoming law only when supported by the top 10 percent of income earners.

Here are some examples of how this works.

1. In 1993, Arthur Levitt, chair of the Securities and Exchange Commission, supported a proposal of the Financial Accounting Standards Board to require estimates of how much stock options given to corporate executives would cost the corporation.  They didn’t seek to limit executive compensation, merely to report it honestly.  There was a firestorm of opposition, and the Senate, passed a bipartisan resolution expressing disapproval by an overwhelming majority.

2.  In 1998, Brooksley Born, chair of the Commodity Futures Trading Corporation, proposed that certain swaps and derivatives – financial securities not backed by any asset – be regulated.  The suggestion was attacked by Treasury Secretary Robert Rubin, his deputy Lawrence Summers and Federal Reserve chair Alan Greenspan.  Rubin sought to reduce the CFTC’s jurisdiction, and in 2000, Senator Phil Gramm slipped an amendment into the Glass-Steagal repeal bill that forbid regulation of derivatives.

Campaign contributions are only one manifestation of corporate influence on policy, Hacker and Pierson say.  There also is the superior ability of corporate interests to mobilize their supporters, and the unity of business interests in supporting each others’ causes.  Another is the revolving door between government and industry, and between congressional staffs and lobbyists.

Wendy Gramm, the wife of Senator Gramm, just before stepping down as chair of the Commodity Futures Trading Commission, put through an order allowing Enron to trade in self-created derivatives free of CFTC supervision.  A few weeks later she joined the board of directors of Enron.  Senator Gramm himself joined USB AG, a Swiss financial services company, immediately after retiring from the Senate in 2002.

Most ex-Presidents become wealthy after they step down by accepting corporate directorships or through lecture fees at corporate-sponsored events.  The last ex-President to return to the life of the middle class was Harry S Truman.

The last chapter of the book describes how President Obama has watered down his program in order to appease and reassure corporate executives and Wall Street financiers that he is not their enemy.  The problem, Hacker and Pierson suggest, is not so much President Obama as an individual as the balance of forces in Washington that he must deal with.

They quote Rahm Emanual, then President Obama’s chief of staff, as saying that trying to rally grass roots support for health care reform would simply not have worked, and would only have irritated the swing voters in the U.S. Senate.  Given the power of lobbyists, he may have been right.

Here’s what Emanuel said about what politicians need to do to get re-elected. “The first third of your campaign is money, money, money.  The second third is money, money and press.  The third part is votes, press and money.”  That’s two-thirds money.

The solution, Hacker and Pierson say, will not come from Washington.  It will come at the grass roots, when working-class and middle-class Americans come to understand what is going on and join to protect their interests.  Then politicians will have to reckon with us as they now have to reckon with the power of money.

Click on Plutocracy Now: What Wisconsin Is Really About to read an article by Kevin Drum for Mother Jones magazine applying Hacker and Pierson’s research to current controversies.

Click on How income has been redistributed upward and How Washington made the rich richer for earlier posts on Winner-Take-All Politics.

Tags: Income Distribution, Income inequality, Jacob Hacker, Paul Pierson, Rich get richer, Richistan, Winner-Take-All Politics