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Why the Rich Are Getting Richer

Posted by hkarner - 12. Januar 2011

   Date: 11-01-2011
  Source: Foreign Affairs

 American Politics and the Second Gilded Age

ROBERT C. LIEBERMAN is Professor of Political Science and Public
Affairs at Columbia University and the author of Shifting the Color
Line: Race and the American Welfare State.

The U.S. economy appears to be coming apart at the seams.
Unemployment remains at nearly ten percent, the highest level in
almost 30 years; foreclosures have forced millions of Americans out
of their homes; and real incomes have fallen faster and further than
at any time since the Great Depression. Many of those laid off fear
that the jobs they have lost — the secure, often unionized,
industrial jobs that provided wealth, security, and opportunity –
will never return. They are probably right.

And yet a curious thing has happened in the midst of all this misery.
The wealthiest Americans, among them presumably the very titans of
global finance whose misadventures brought about the financial
meltdown, got richer. And not just a little bit richer; a lot richer.
In 2009, the average income of the top five percent of earners went
up, while on average everyone else’s income went down. This was not
an anomaly but rather a continuation of a 40-year trend of ballooning
incomes at the very top and stagnant incomes in the middle and at the
bottom. The share of total income going to the top one percent has
increased from roughly eight percent in the 1960s to more than 20
percent today.

This is what the political scientists Jacob Hacker and Paul Pierson
call the “winner-take-all economy.” It is not a picture of a healthy
society. Such a level of economic inequality, not seen in the United
States since the eve of the Great Depression, bespeaks a political
economy in which the financial rewards are increasingly concentrated
among a tiny elite and whose risks are borne by an increasingly
exposed and unprotected middle class. Income inequality in the United
States is higher than in any other advanced industrial democracy and
by conventional measures comparable to that in countries such as
Ghana, Nicaragua, and Turkmenistan. It breeds political polarization,
mistrust, and resentment between the haves and the have-nots and
tends to distort the workings of a democratic political system in
which money increasingly confers political voice and power.

It is generally presumed that economic forces alone are responsible
for this astonishing concentration of wealth. Technological changes,
particularly the information revolution, have transformed the
economy, making workers more productive and placing a premium on
intellectual, rather than manual, labor. Simultaneously, the rise of
global markets — itself accelerated by information technology — has
hollowed out the once dominant U.S. manufacturing sector and
reoriented the U.S. economy toward the service sector. The service
economy also rewards the educated, with high-paying professional jobs
in finance, health care, and information technology. At the low end,
however, jobs in the service economy are concentrated in retail sales
and entertainment, where salaries are low, unions are weak, and
workers are expendable.

Champions of globalization portray these developments as the natural
consequences of market forces, which they believe are not only
benevolent (because they increase aggregate wealth through trade and
make all kinds of goods cheaper to consume) but also unstoppable.
Skeptics of globalization, on the other hand, emphasize the
distributional consequences of these trends, which tend to confer
tremendous benefits on a highly educated and highly skilled elite
while leaving other workers behind. But neither side in this debate
has bothered to question Washington’s primary role in creating the
growing inequality in the United States.

IT’S THE GOVERNMENT, STUPID

Hacker and Pierson refreshingly break free from the conceit that
skyrocketing inequality is a natural consequence of market forces and
argue instead that it is the result of public policies that have
concentrated and amplified the effects of the economic transformation
and directed its gains exclusively toward the wealthy. Since the late
1970s, a number of important policy changes have tilted the economic
playing field toward the rich. Congress has cut tax rates on high
incomes repeatedly and has relaxed the tax treatment of capital gains
and other investment income, resulting in windfall profits for the
wealthiest Americans.

Labor policies have made it harder for unions to organize workers and
provide a countervailing force to the growing power of business;
corporate governance policies have enabled corporations to lavish
extravagant pay on their top executives regardless of their
companies’ performance; and the deregulation of financial markets has
allowed banks and other financial institutions to create ever more
Byzantine financial instruments that further enrich wealthy managers
and investors while exposing homeowners and pensioners to ruinous risks.

In some cases, these policy changes originated on Capitol Hill: the
Ronald Reagan and George W. Bush tax cuts, for example, and the 1999
repeal of the Glass-Steagall Act, a repeal that dismantled the
firewall between banks and investment companies and allowed the
creation of powerful and reckless financial behemoths such as
Citigroup, were approved by Congress, generally with bipartisan
support. However, other policy shifts occurred gradually and imperceptibly.

Hacker and Pierson’s second important point is that major policy
shifts do not always happen in such obvious ways. Many of the
policies that have facilitated the winner-take-all economy have just
as often come about as a result of what Hacker and Pierson call
“drift,” which occurs when an enacted policy fails to keep up with
changing circumstances and then falls short of, or even subverts, its
intended goal. The American system of separated powers — with its
convoluted procedures and bizarre rules, such as vetoes and the
filibuster — is especially conducive to drift, particularly compared
to more streamlined parliamentary systems in other countries that
afford majorities relatively unimpeded dominance over the
policymaking process. Policies in the United States, once made, tend
to be hard to overturn or even to modify.

Sometimes drift occurs through simple neglect or inertia. An example
is the phenomenon known as “bracket creep,” the process by which
prior to the indexing introduced in 1981, inflation pushed incomes
into higher tax brackets. But Hacker and Pierson particularly zero in
on instances of intentional policy drift, when policymakers
deliberately sidestepped or resisted available policy alternatives
that might have reduced inequality. Allowing corporate executives to
be compensated with stock options is one such case; stock-option
compensation tends to bend incentives toward the short-term
maximization of share prices rather than planning for long-term
growth. Consequently, such compensation has allowed top managers to
capture jaw-dropping gains despite their companies’ often dismal
performances. The long-term cost of corporate failure is borne not by
CEOs and their executive minions, of course, but by rank-and-file
employees, who get laid off when companies need to cut costs and
whose pension investments are wiped out when companies’ stocks sink.

In the 1990s, the Financial Accounting Standards Board, which
regulates accounting practices, noticed this practice, correctly
predicted the damage it would do to the economy, and then sought to
curtail it. But Congress, spurred on by the lobbying efforts of major
corporations, stopped the FASB in its tracks. As a result, Americans
spent the 1990s and the first decade of this century living under
1970s accounting rules, which allowed top executives to more or less
help themselves and, through the mutual back-scratching habits of
corporate boards, help one another.

Similarly, labor law has failed to keep up with the times.
Policymakers have repeatedly failed to enact reforms that would have
accommodated new union-organizing techniques and empowered unions to
counter the growing power of business to resist labor’s demands. In
this realm, the United States is running a twenty-first-century
economy under 1940s rules. A clearheaded understanding of the power
of drift in policymaking puts the Republican congressional minority
during President Barack Obama’s first two years in a fresh light.
Obsessive obstructionism is not just a symptom of general crabbiness;
it is a shrewd and sensible part of a larger strategy to enrich
corporations while gutting long-standing protections for the middle class.

The dramatic growth of inequality, then, is the result not of the
“natural” workings of the market but of four decades’ worth of
deliberate political choices. Hacker and Pierson amass a great deal
of evidence for this proposition, which leads them to the crux of
their argument: that not just the U.S. economy but also the entire
U.S. political system has devolved into a winner-take-all sport. They
portray American politics not as a democratic game of majority rule
but rather as a field of “organized combat” — a struggle to the
death among competing organized groups seeking to influence the
policymaking process. Moreover, they suggest, business and the
wealthy have all but vanquished the middle class and have thus been
able to dominate policymaking for the better part of 40 years with
little opposition.

THE BUSINESS BACKLASH

In pursuing this argument, Hacker and Pierson revive the old academic
tradition of pluralism to shine a bright light on some of the
pathologies of American politics. The contemporary study of American
politics emerged from pluralism, the post-World War II view that in
the shadow of the two totalitarianisms of midcentury Europe –
communism and fascism — democracy could be rendered stable and
progressive through a politics of mutual accommodation among
relatively evenly matched groups. Rather than titanic conflict
between workers and capitalists, so the argument went, pluralist
democracy would produce solid incremental policy changes that would
inch American society forward toward security and affluence. The
dramatic and decidedly nonincremental events of the 1960s and 1970s
— the civil rights movement, the Vietnam War, and broader cultural
upheaval — punctured this view.

Critics of pluralism began to note its limitations, emphasizing the
primacy of individual motivations rather than group affiliations.
Since then, the study of American politics has largely turned away
from questions of organized interests and their role in policymaking
and has focused instead on the ways in which individual attitudes and
behavior combine to produce policy. Yet if one assumes that people
vote based on their economic interests and that election outcomes
influence policy through something like majority rule, how can one
account for a generation of policies that promoted the interests of
the wealthy few at the direct expense of everybody else?

Another critique of pluralism is that it underestimated the
lopsidedness of political organization. As the great political
scientist E. E. Schattschneider wrote in 1960, “The flaw in the
pluralist heaven is that the heavenly chorus sings with a strong
upper-class accent.” Schattschneider, it turned out, did not know the
half of it. To most observers, the 1960s seemed the height of
American liberalism, and the decade’s policy developments –
upgrading the basic New Deal package of social protection and labor
rights to include extensive protection of civil rights and civil
liberties and additional benefits such as limited health insurance –
seemed to bear out this view. But to business elites, the 1960s
marked the nadir of their influence in American society, and they did
not react passively. The era saw the stirrings of a conservative
counterrevolution marked by ideological, political, and
organizational developments, and particularly by the political
awakening of business.

American conservatives, increasingly empowered by effective
organization and lavish funding from their patrons in the business
community, began to actively resist the politics of pluralist
accommodation. Rather than accepting the basic contours of the New
Deal and the Great Society and seeking to adjust them step by
incremental step, conservatives assumed a newly confrontational
posture and turned their efforts toward dismantling the legacies of
Franklin Roosevelt and Lyndon Johnson.

The economic crisis of the 1970s, which heralded the end of a
generation of U.S. economic dominance, helped their cause by laying
bare the limitations of the New Deal order. The country’s economic
and social policy regime — which relied heavily on the private
provision of important social protections, such as pensions and
health insurance — may have been adequate for a globally dominant
industrial economy that generated 30 years of widely shared growth
and stable employment for millions of industrial workers. But in the
1970s, it began to prove thoroughly inadequate for an era of
globalization, deindustrialization, and economic dislocation, as
displaced workers found themselves unable to rely on the government
for economic protection. This, in Hacker and Pierson’s parlance, was
policy drift on a massive scale.

Ascendant conservatives seized on this state of affairs to argue that
the whole New Deal edifice of social protection, financial
regulation, progressive taxation, and civil rights should be
dismantled rather than reinforced. Beginning with the Carter
administration, the expanding business lobby successfully defeated
proposal after reform proposal and aggressively promoted an opening
round of tax cuts and deregulation — mere down payments on the
frenzy to come.

CURING THE DISEASE

If there is a flaw in their telling of this grim tale, it is that
Hacker and Pierson perhaps underestimate the actual discontent of the
American middle class over the period they discuss. In the 1960s and
1970s, Americans came increasingly to distrust their government, and
not without reason. Their leaders had led them into a distant war
that proved unwinnable and tore the country apart; a criminally
corrupt president was exposed and forced to resign; cities were going
up in flames, exposing the deep racial rift that remained in American
society despite the triumphs of the civil rights movement. Democrats
and Republicans began to diverge on racial issues. The Republicans
became the party not only of the wealthy but also of the whites (no
Democrat since Johnson has received a majority of the white vote in a
presidential election).

Even in the age of Obama, racial inequality remains an acute and
intractable problem, and the forces of racial resentment, mingled
with legitimate discontent over the government’s abandonment of the
middle class, infect American politics down to the present day (as
the Tea Party movement’s more lurid fulminations suggest). So by the
late 1970s, dissatisfaction with the state of the government,
politics, and policy was rampant across the board, among the wealthy
and the middle class alike, and the conditions were ripe for a turn
against the political status quo. Conservatives, on behalf of the
wealthy, were ready with ideas and organization to seize the moment.
Progressives and the middle class were not, and so began the spiral
toward the winner-take-all game that Hacker and Pierson describe.

Like many social critics, Hacker and Pierson are long on diagnosis
and rather short on treatment. Not surprisingly, they emphasize
rebuilding the organizational capacity of the middle and working
classes as the place to start repairing the infrastructure of
American politics, neither a terribly precise prescription nor a
route to a quick cure. But if they are right — and theirs is a
compelling case — the task of restoring some sense of proportion and
balance to the winner-take-all political economy is essential if the
American body politic is to recover from its current diseased condition.

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