The black and Hispanic top 1 percent

The disparity in wealth between black and Hispanic Americans on the one hand and non-Hispanic whites is striking.    The disparities in wealth within each racial group also are striking.

How rich is Donald Trump, really?

Many multi-billionaires would just as soon not call attention to their wealth.  But Donald Trump thinks it important to not only be rich, but seem rich.  He regards his reputation for being rich as an important business asset.

He once sued a biographer for $5 billion for underestimating his net worth.  Tim O’Brien, author of Trump Nation, estimated Trump’s net worth at $150 million to $250 million in 2005.  Trump said his true net worth was $5 billion.

O’Brien and his publisher won the lawsuit, but legal costs probably ate up any profit they might have made from the book, and then some.

He once sued a biographer, Tim O’Brien, author of Trump Nation, for $5 billion for unde estimating his net worth in 2009 at $150 million to $250 million.  TrumpHe lost the lawsuit, but legal expenses ate up any profit the author of publisher may have made on the book.

But how rich is he, really?

Source: Bloomberg Politics.

Trump is on record as favoring “truthful hyperbole”.   Whatever that means, I suppose it applies to his net worth along with everything else.

How the rich are getting richer

Chart from Wolf Street.

This chart gives an indication as to why the U.S. economy is dragging and why income is flowing upward.

Over the eight years ending in 2012, Americans with incomes of $150,000 a year and up spent, as a group, roughly the same amount of money that Americans with incomes of less than $30,000 a year spent, as a group.

But the spending of the $150,000-plus group was well under their total income, so they were able to save and add to their total wealth.  The spending of the $30,000-minus group was above their income, and had to be supporting by borrowing.  That’s why the upper brackets generally get richer, and the lower brackets seldom do.

Piketty on the power of inherited wealth

In Balzac’s story Pere Goriot, set in the early 1800s, the struggling law student Rastignac lives in the same boarding house as the master criminal Vautrin and the impoverished former millionaire Goriot.   Vautrin explains to Rastignac the odds against his ever achieving success sufficient to earn a life with dignity, and advises him to woo and wed a rich heiress instead.

In the charts above and below, Thomas Piketty, in his book Capital in the Twenty-First Century, showed the gap in those days between inherited wealth and wealth achieved through one’s own efforts.   He didn’t have comparable data for the United States, and doesn’t think the flow of inherited wealth was as great in the USA.

That gap has narrowed, Piketty warned that there is nothing to prevent those days from returning.  A Sam Walton may build a retail empire through his own efforts, but all his children and grand-children have to do in order to be rich is simply to mess up.  His research indicates that great wealth compounds faster than moderate wealth, because the ultra-rich can diversify their investments and call upon the best expert advice.

Protecting wealth vs. promoting growth

There’s no single principle that explains everything, but there is great explanatory power inn the French economist Thomas Piketty’s idea that inequality always increases whenever the rate of return on investment exceeds the rate of growth of the economy, that is, when r > g.

This is not something that results from impersonal economic forces.  During the past 30 years, the policy of the U.S. government, and of governments that follow the U.S. lead, has been to prioritize return on investment over economic growth.

The U.S. Congress and many state governments are in the process of cutting back scientific research, education, maintenance of public works and other things that are needed for our nation’s economic future, in order to keep tax rates low for corporations and upper bracket taxpayers.

These are the same “austerity” policies being enforced by the World Trade Organization, International Monetary Fund and European Central Government on vulnerable governments, which are forced to sacrifice the well-being of their citizens in order to satisfy powerful financial institutions.   In both cases, there is a tradeoff to sacrifice economic growth in order to maintain returns on investment.

One part of austerity is to sell off government property at bargain rates and delegate public services to corporations.  Most of the time this amounts to a transfer of wealth from taxpayers to well-connected business owners, who have no financial incentive to maximize service.

Some other ways that government policy fosters investor income at the expense of economic growth are (1) bailing out banks that have failed due to reckless financial speculation, (2) refusal to prosecute financial fraud by the “too big to fail” banks or claw back profits due to fraud, (3) expansion of patent and copyright monopolies, (4) failure to regulate cable and telecommunications laws, (5) failure to enforce antitrust laws, (6) the ban on student loan refinancing or bankruptcy …. The list goes on.

Increasingly corporate management seeks profit not by increasing the size of the economic pie, but by giving investors and executives a larger part of the pie — through financial manipulation and excess fees in the case of banks, through driving down wages and increasing executive compensation in the case of corporations in general.  I don’t say all corporate managers behave in this way.  I say that this has become common and acceptable.

The result has been a concentration of wealth and income in a tiny minority of the population, and economic stagnation for everybody else.   So the first step in reducing inequality is to stop promoting it.

Piketty’s preferred solution to undue concentration of wealth is a progressive tax on capital, sufficient to prevent the wealth of the economic elite from expanding at a faster rate than the economy as a whole, along with progressive taxes on income and inheritance.  I don’t object to any of these, but higher taxes on the rich do not, in and of themselves, benefit the middle class, wage-earners or the poor.   I think it is more important to  strengthen labor unions, raise the minimum wage, maintain essential public services and invest in the future.

Defenders of wealth push back against Piketty

Source: Thomas Piketty, Capital in the 21st Century

If things go on as they are now, there’s nothing to prevent wealth from becoming more and more concentrated and economic inequality returning to the levels of England and France 200 years ago, according to French economist Thomas Piketty in his new book, Capital in the Twenty-First Century.

But many economists say this is not a problem.  They say concentration of wealth is a good thing, not a bad thing, and benefits us all in the long run, not just a tiny elite.   In this post, I will consider this argument, and state it as fairly as I can, then explain what I think the argument leaves out.

Concentrations of wealth are necessary to a capitalist free-enterprise economy.  They provide the means to invest in machinery, technology, education and the other things that increase society’s total wealth.   Capitalism has generated more economic growth than any alternative system and, without capital, there is no capitalism.

The chart above is illlustrates Piketty’s conclusion, based on his research,  that, most of the time, r > g – that is, the rate of return on investment exceeds the rate of growth of the economy, which, as a matter of logic, means that the income of investors grows faster than the income of wage-earners.

Now the chart should be read with discretion.  The parts prior to 1820 are no more than an educated guess; the parts from 1820 to the present are blends of different national economies; the future projection is possibility, not a prediction.  That’s no criticism of Piketty.  He did the best he could with the data available, and what he shows is reasonable.

According to the chart, r > g by a great deal on average prior to 1913.   Nevertheless there was an increasing rate of economic growth.  Inequality was just as extreme in 1913 in France and Britain and more extreme in the USA compared to 1820 or 1700, but that doesn’t mean the average person got no benefit from that growth.  It just meant there was just as much of a gap between rich people and the rest of us.

Not all rich people did things that promote economic growth, but the famous economist Friedrich Hayek argued that an idle rich class is of benefit to society.  They are pioneers in consumption, he said.   Once automobiles were a luxury for the upper class, for example, but now almost every family in North America owns one.  If rich people hadn’t provided an initial market, automobiles would never have developed.   Medical treatments which once were affordable only to rich people are now available to the general public.

Rich philanthropists finance good works, including, as economist Tyler Cowen pointed out, Belknap Press of Harvard University, publisher of the English translation of Piketty’s book.

A final argument is that the problem of excessive returns on capital is self-correcting.  When you have too much capital, the rate of return on capital falls.  If too many houses are built, rent falls.  If capitalists invest too much in building railroads or making personal computers, railroad tickets or computers become a glut on the market, and profits fall.  The economist Joseph Schumpeter called this “creative destruction,” and he said this is how the capitalist system renews itself.

I don’t think these arguments are completely wrong, but they leave a lot out.   Let me explain.

Piketty’s Capital21: why is inequality rising?

Thomas Piketty’s Capital in the Twenty-First Century is a great book.  It consists of the working out of the implications of a simple principle, namely, that if the return on investment is a higher percentage rate than economic growth, wealth and income will become more and more concentrated in the hands of a tiny minority.

He said there is nothing to prevent wealth from becoming as concentrated in the hands of a tiny elite as it was in France and England in the 18th and 19th centuries — which is not the same thing as saying this is certain to occur.   I’m now re-reading Piketty’s book, from which I’m learning a lot, but l think it is important to be clear on what he’s saying and not saying,

He says that historically return on investment has exceeded the rate of economic growth, or, as he puts it, r > g,ut, like most economists, he writes of this as if it were the impersonal workings of the economy.  He lumps all income-producing forms of property together, which is legitimate for his purposes, but I make a distinction between (1) innovators who create value, (2) inheritors and passive investors and (3) usurers and manipulators.  The first deserve rich rewards, the second deserve average rewards, the third deserve to be unemployed or maybe in prison.   I think the rise of people in the third category is a big reason for the upward distribution of income in the USA.

Extreme inequality of income is a bad thing because it gives a small group of people too much power over the rest of us.  But curbing the excessive power of the top 0.1 percent or top 0.01 percent of income earners will not, in and of itself, create economic growth or end poverty.   These are not Piketty’s topics.

His preferred solution to excessive concentration of wealth is a progressive tax on capital along with progressive taxes on incomes and inheritances.  I’m not opposed to this, but I think there are other, better ways to change the r > g equation.  Promoting economic growth is one way.  Empowering wage-earners, such as by stronger labor unions or higher minimum wage laws, is another.

Below are links for those who want to know more, but don’t have time to read the 585 pages of his book and 78 pages of end notes.

Piketty’s formula: its scope and limits

http://www.hup.harvard.edu/features/capital-in-the-twenty-first-century-introduction.html

http://www.yjs.fi/wp-content/uploads/2013/12/Thomas-Piketty-pres..pdf  [Thomas Piketty’s Power Point presentation]

Click to access SaezZucman2014Slides.pdf

http://www.slate.com/blogs/moneybox/2014/04/02/wealth_inequality_is_it_worse_than_we_thought.html

The brilliant French economist Thomas Piketty has an economic formula which shows why, most of the time, the wealthy elite captures a larger and larger share of a nation’s income, and also why, some of the time, the rest of the nation catches up.

While my previous post about Piketty and his great book was long, I didn’t really explain his formula and how it works.

His formula, which he calls the fundamental law of capitalism, is as follows:

The capital income ratio (a) equals the rate of return on capital (r) times the national wealth (beta*),

That is, if the national wealth – every form of property that can produce an income for its owner, which is what Piketty calls capital – is six times, or 600 percent, of the nation’s annual output, and the average rate of return on capital is 2 percent, then owners of capital will receive 12 percent of the nation’s income in that year.

If a nation’s annual income is static and the owners of capital reinvest some of their income, then capital will be a larger multiple of the national income the following year, and the owners of capital will receive a larger share of national income.  If a nation’s annual income is growing, but the return on investment is a higher percentage than the growth rate, the owners of capital will get a larger share of national income the following year.

Once this is explained, it seems obviously true – at least to me.   And it seems to be a problem – at to me.   The graph above, prepared by Emmanuel Saez of the University of California (Piketty’s long-term collaborator) and Gabriel Zucman of the London School of Economics, shows how unequally wealth is distributed in the USA.  More than 1/5th of U.S. wealth is owned by 1/1000th of the population.  It is easy to see how the normal working of Piketty’s formula could cause them to suck up more and more of the nation’s income.

Thomas Piketty

What do you do about it?   Piketty proposed graduated taxes on income, inheritance and wealth itself, sufficient to bring return on investment down to the rate of economic growth. 

I don’t see anything wrong in principle with a wealth tax.   I pay a property tax on my house.  Why shouldn’t a billionaire pay taxes on his investment portfolio?    But this is going to take a long time to bring about, even if everybody agrees.  For one thing, it will require the elimination of all the tax havens where the super-rich hide their money, which will require international agreement.  For another, increasing the government’s revenue does not necessarily benefit the public – if taxes are used to finance aggressive war, for example.

There are other possible solutions, because there are other factors in the equation.  If strong economic growth can be restarted, if the economic growth rate exceeds the return on investment rate, that would solve the problem.   Strong labor unions and minimum wage laws would increase the income share of working people and the middle class.   There are many possible approaches.

In theory, the solution could be wider ownership of capital by the public, such as by ESOPs (employee stock ownership plans) or by pension funds.  Back in the 1970s, the management analyst Peter Drucker noticed that pension funds were acquiring a bigger and bigger share on the U.S. stock market.  Eventually, he predicted, this would accomplish the Marxist dream of worker ownership of the means of production!

This didn’t happen because the corporations that controlled the pension funds didn’t allow it to happen.  But if workers controlled their pension funds, it would be a different story.  This would not be a practical reality any time soon, or perhaps ever.  The point is that tax policy is not the only means to deal with hyper-concentration of wealth.

Money really is a root of evil

My mother always thought that in an election, all other things being equal, you should vote for the richest candidate.  Her idea was that if somebody already was rich, they would have less reason to steal.

But studies by Paul Piff, a social psychologist at the University of California at Berkeley, contradict this.  He found that people in upper economic classes were more likely that ordinary people to cheat, lie and break the law.

Seven studies using experimental and naturalistic methods reveal that upper-class individuals behave more unethically than lower-class individuals. In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.  Mediator and moderator data demonstrated that upper-class individuals’ unethical tendencies are accounted for, in part, by their more favorable attitudes toward greed.

via Higher social class predicts increased unethical behavior.

 Just feeling wealthy, even with Monopoly money, gives people a greater sense of entitlement and lessens consideration for others, Piff found.

The old Stoics believed that wealth and good fortune were as at least as great a test of character as poverty and misfortune.  They were right.

Click on Rich More Likely to Behave Unethically and Yes, Virginia, Rich People Are Not the Same as You and Me for more.

How equal should we be?

During the past 30 or 40 years, wealth in the United States has been redistributed upward.  I think this is a bad thing.  But if you ask me how I think wealth should be distributed among income groups, I don’t have a good answer.  In fact, I would rather avoid the question.

For years I thought that inequality, as such, didn’t matter.  I believed there should be a social safety net, and I favored policies to promote a high-wage, full-employment economy, but I wasn’t concerned with the size of the gap between rich and poor.  If I have all I need, and the people on the bottom rungs of the economic ladder have the necessities of life, what difference does it make how much more other people have?  If I have a house to live in, how does it hurt me if someone such as John McCain owns so many houses he can’t remember how many they are?

The philosopher John Rawls, in  A Theory of Justice, acknowledged that a certain degree of inequality of income can benefit everyone, including the worst-off members of society.  It is right (my example, not his) that physicians be paid more than newspaper reporters, because physicians have a scarcer skill, require more years of schooling to learn their job and arguably are more necessary to society.  It is right that entrepreneurs be richly rewarded, because of the high risk and the many entrepreneurs who fail, and because if someone gets rich by creating a business that produces valuable goods and services, there is a good chance the person will use the riches to produce more valuable goods and services.

The theory of the  free enterprise system is that capitalists grow rich when they do a good job of serving the wants and needs of the public, and are thus enable to expand at the expense of competitors who serve the public less well.  When the system works this way, Rawls’ criterion is met.   The problem is in distinguishing the wealth that is acquired from creating value from the wealth that is created from what economist Joseph Stiglitz in The Price of Inequality called “rent-seeking”—leveraging your position in society to extract wealth from others.

I like to see people being richly rewarded for their achievements, such as starting or managing a successful business, or writing a best-selling novel.  I have no objection to people being richly rewarded for success in competition, such as high-stakes poker or trading on the stock market, provided their winnings come from other players and they don’t expect to be bailed out by the public.  I realize that there is always a certain amount of luck in success, but that is all the more reason to reward success.  The winner of a lottery has no more merit than anyone who bet on the lottery, but nobody would participate if the rewards were all equal.

What I have a problem with is the emergence of a privileged class, who are rewarded for attending elite schools, belonging to elite organizations and networking with other members of the elite.  They gain access to top jobs in corporations, government, academia and the so-called non-profit sector.   Christopher Hayes in Twilight of the Elites pointed out members of this class regard themselves as a “meritocracy,” but their merit consists of their credentials, not their achievements or their contributions to society.   I think the average partner in Goldman Sachs is smarter than I am, at least about how to acquire money, but having superior intelligence does not give you a right to manipulate government, commit financial fraud or swindle the so-called “losers.”

What we should be concerned about is not how much money people have (although I doubt the world would be worse off if the fortunes of the world’s richest people were measured in nine figures instead of 11 figures), but how it is acquired.  Instead of trying to redistribute wealth back downward, we should change the rules to reward producers rather than rent-seekers.  I am not concerned about how much can be earned honestly.  By “honestly,” I mean not just technically within the law, but giving actual value in return for value received.

To be clear, I do advocate that federal income taxes on rich people be returned to 1990s levels, but that is in order to cover the expenses of government, not in order to change the distribution of income in society.  Taxes at 1990s rates will not prevent rich people from being rich.  And if certain governmental measures, such as provision of public parks or public libraries, happens to benefit the public more than the upper 1 percent, I regard that as a plus, not a minus.  One of the problems with the emergence of a privileged class is that they have the power to distort the economic and political system so that it serves their desires, which are disconnected from the needs of the general public.

Notice that the top chart in this post deals with the top 20 percent of income owners, while the lower chart is about the top 10 percent.  My real concern is with the top 1 percent and top 1/10th and 1/100th of 1 percent.

Do you have a philosophy of distributive justice?  If so, how do you think wealth should be distributed?

Who are the richest billionaires?

Randall Munroe, creator of the web comic xkcd, is a great creator of infographics.  The chart above is a section of his new poster about money and its distribution.  The list of billionaires is from last year’s Forbes.  A lot of the names were unfamiliar to me, so I looked them up on Wikipedia.

Carlos Slim made his billions by buying the Mexican government telephone system at a bargain rate and jacking up phone rates.

Bill Gates, as almost everyone knows, is a founder of Microsoft.

Warren Buffett is an extremely successful investor/speculator in the stock market.

Bernard Arnault is a Frenchman who owns Louis Vuittron and other luxury goods companies.

Larry Ellison is founder of the Oracle software company.

Laksimi Mittai is CEO of the world’s largest steel company, which is based in India.

Amancio Ortega is a Spanish merchandiser of luxury clothing.

Eike Batista is a Brazilian mining and oil-and-gas magnate.

Mukesh Ambani is CEO of India’s Reliance Industries, who expanded the family textile business back into polyester fibers and then into the oil and gas industry.

Christy Walton is one of the heirs of Sam Walton, founder of the Wal-mart store chain.

An obituary for the age of mass affluence

Advertising Age reported that the only American income group that increased its spending last year were those earning more than $100,000 a year.  Everybody else is economizing and cutting back.  Consumer demand, according to Advertising Age, is being driven by “a small plutocracy of wealthy elites.”

A recent research report by a firm called Digitas, self-described as “the leading global integrated brand agency,” writes off two-thirds of the people even within the $100,000-plus category.  Unless you are taking in $200,000 or more by age 35, you’re not worth bothering about, Digitas says.  And if you aren’t taking in $100,000 or more a year in your 20s, you have little chance of reaching the $200,000 level.

Digitas recommends that business should concentrate on selling only to the Affluent, Wealthy and Rich, and to the Emerging Affluent, since they have a chance of becoming Affluent, Wealthy or Rich.  The rest don’t count.

During most of the 20th century, it was a proud boast of the United States that the vast majority of the population had access to the same kinds of goods and services as the very rich.  They all could afford similar, though not identical, goods and services – automobiles, refrigerators, TVs, annual vacations at the seashore or in the mountains.  You could not tell the difference between a wealthy person and a middle-class or working-class person by looking at them.

This is still true to an extent.  But unless something changes, we’re moving toward an economy more like that of France in the age of Louis the Fourteenth, in which the vast majority of the population labored at low wages to serve the desires of a wealthy minority.

A John Galt thought experiment

In Ayn Rand’s novel Atlas Shrugged, the people on whom the nation depends to keep functioning – mainly entrepreneurs and their best middle managers – went on strike.  Led by the mastermind John Galt, they hid out in a secret place called Galt’s Gulch until the economy and society crumbled and the people were willing to give them their due.

I propose a thought experiment.  Make up your own list of indispensable people and then match it against the Forbes magazine list of the world’s richest people.  Or go down the Forbes 400 list and decide what would be lost if each of the members “went Galt.”

Norman Borlaug

One of my heroes is Norman Borlaug, the architect of the Green Revolution in Asia.  He of course did not produce the genetically improved crops by himself.  He was the head of a team of geneticists and agronomists.  But I think it is safe to say that without him the Green Revolution would not have happened when it did.  The environmental writer Gregg Easterbrook said that Borlaug’s work may have saved the lives of as many people as Hitler and Stalin murdered.

He had many of the qualities of an Ayn Rand hero – competence, determination, original thinking, indifference to public opinion.  His work was strongly opposed by neo-malthusians who thought saving the lives of people in overpopulated Third World countries was an exercise in futility.  But in one important respect, he did not fit the John Galt mold.  He did not get rich, or attempt to get rich, from his work.

Or, if you are not a fan of the Green Revolution, consider Jonas Salk, the creator of the Salk vaccine, or Tim Berners-Lee, the creator of the software that makes possible the World Wide Web.  They made their discoveries freely available to the public, without charging a licensing free and without trying to determine who deserved their help and who didn’t.  This is in contrast to the fictional John Galt, who withheld his perpetual energy source until the world paid him tribute.  By Ayn Rand’s standard, Jonas Salk and Tim Berners-Lee were lacking in self-esteem.

The new global elite and the rest of us

My friend Marie Sidoti e-mailed me a link to an article in the Atlantic Monthly which drew a disturbing group picture of the new global elite of wealth.  They are not an elite of hereditary wealth, Chrystia Freeland wrote; most of them rose from the middle class through their enterprise and intelligence.  They are not content do sit back and enjoy lives of luxury; they use philanthropy as a means to reshape the world as they think it should be.

They meet at places like the World Economic Forum in Davos, Switzerland, where they hear presentations by people such as Desmond Tutu or Bill Clinton as medieval kings once heard theological disputes of medieval philosophers.

They have wealth beyond the dreams of most people.

[Novelist Holly Peterson] described a conversation with a couple at a Manhattan dinner party: “They started saying, ‘If you’re going to buy all this stuff, life starts getting really expensive. If you’re going to do the NetJet thing’”—this is a service offering “fractional aircraft ownership” for those who do not wish to buy outright—“‘and if you’re going to have four houses, and you’re going to run the four houses, it’s like you start spending some money.’”

The clincher, Peterson says, came from the wife: “She turns to me and she goes, ‘You know, the thing about 20’”—by this, she meant $20 million a year—“‘is 20 is only 10 after taxes.’ And everyone at the table is nodding.”

They have more in common with each other than with ordinary people in their own countries.  In other worlds, they are class conscious.

As Glenn Hutchins, co-founder of the private-equity firm Silver Lake, puts it, “A person in Africa who runs a big African bank and went to Harvard might have more in common with me than he does with his neighbors, and I could well share more overlapping concerns and experiences with him than with my neighbors.” The circles we move in, Hutchins explains, are defined by “interests” and “activities” rather than “geography”: “Beijing has a lot in common with New York, London, or Mumbai. You see the same people, you eat in the same restaurants, you stay in the same hotels. But most important, we are engaged as global citizens in crosscutting commercial, political, and social matters of common concern. We are much less place-based than we used to be.”

They have little sympathy for the American middle class.

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”

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]

Top 5 wishes that won’t make you happy

What follows are excerpts from longer pieces on the Cracked,com web site.

5.  FAME.

Studies show nothing is more stressful for a human than when their goals are tied to the approval of others. Particularly when those “others” are an enormous crowd of fickle strangers holding you up to a laughably unrealistic ideal built by publicists, thick makeup and heavily Photoshopped magazine covers.

You could seek comfort from your circle of friends, only now your friends have been replaced Invasion of the Body Snatcher’s-style with hangers-on, vultures, unscrupulous characters and plain dumbasses who only want a piece of the spotlight. . . even if it means selling you out later.

Click on Fame, Wealth and Beauty for more.

4.  WEALTH,

… As social creatures, we compare ourselves to our neighbors. This is why executives can cry about the $500,000 salary cap that comes with taking government bailout money. Their friends are making $3 million a year and live in igloo made out of cocaine. We can laugh at their complaints, but of course then you’re giving the Nigerian permission to laugh at yours. That guy made 100 times more than you, you make 100 times more than the Nigerian.

Once you start hanging around the other high earners, you’ll want all the stuff they have.  No, that’s not right–you’ll want the stuff that’s so much better than their stuff that they’ll vomit with envy. As one magazine for Wall Street bigshots put it, you want the stuff that will be “a huge middle finger to everyone who enters your home.”

Click on Fame, Wealth and Beauty for more.

Was it merit? Or was it luck?

Is Bill Gates one of the world’s richest men because he is smarter and harder-working than everybody else? Or is his wealth due to luck?

Malcolm Gladwell in Outliers points out the advantages Bill Gates had.  First, like many of the pioneers of the computer industry, he was born in the 1950s. He came of age just when Altair introduced the first do-it-yourself personal computer kit was introduced in 1975.  Moreover, as a teenager, he attended one of the few private schools with its own state-of-the-art computer, and graduated from high school with thousands of hours of experience in programming – an opportunity that very few people had in that era.

Microsoft Corp. took off when IBM Corp. commissioned him to provide an operating system for its new PC and neglected to require Gates to sign an exclusive contract.  If IBM had done so, Gates would never have been able to make the MS-DOS operating system a standard for the whole computer industry.

So, yes, Bill Gates had opportunities that nobody else had, but he had the intelligence and determination to use these opportunities in ways that not everybody would have done.  And, yes, somebody else would have created a standard computer operating system if Microsoft hadn’t done so, but it was Bill Gates who would have done so.  Yes, success depends on good luck, but, as Louis Pasteur said, chance favors the prepared mind.

Even when success is wholly a matter of luck, as in a lottery, you need to offer a prize if entice people to enter the lottery.

I don’t begrudge Bill Gates his billions.  He helped create something of value.  The only people I resent are those who got rich not by creating something of value, but by milking the system to enrich themselves at others’ expense.  Unfortunately we don’t have good ways of distinguishing between the two.