Inequality in the United States
Inequality in the United States
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The dramatic rise in inequality in the United States over the past generation has occasioned considerable attention from economists, but strikingly little from students of American politics. This has started to change: in recent years, a small but growing body of political science research on rising inequality has challenged standard economic accounts that emphasize apolitical processes of economic change. For all the sophistication of this new scholarship, however, it too fails to provide a compelling account of the political sources and effects of rising inequality. In particular, these studies share with dominant economic accounts three weaknesses: (1) they downplay the distinctive feature of American inequality –namely, the extreme concentration of income gains at the top of the economic ladder; (2) they miss the profound role of government policy in creating this “winner-take-all” pattern; and (3) they give little attention or weight to the dramatic long-term transformation of the organizational landscape of American politics that lies behind these changes in policy. These weaknesses are interrelated, stemming ultimately from a conception of politics that emphasizes the sway (or lack thereof) of the “median voter” in electoral politics, rather than the influence of organized interests in the process of policy making. A perspective centered on organizational and policy change –one that identifies the major policy shifts that have bolstered the economic standing of those
1Yale University, New Haven, CT, USA 2University of California, Berkeley, Berkeley, CA, USA
Corresponding Author: Jacob S. Hacker, Department of Political Science, Yale University, New Haven, CT 06520, USA Phone: (203) 435-5554 Email: jacob.hacker@yale.edu
*This article is part of a special issue on “Winner-Take-All Politics” that consists of a substantial article by Jacob Hacker and Paul Pierson, six comments on their piece, and a final rejoinder by Hacker and Pierson.
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at the top and then links those shifts to concrete organizational efforts by resourceful private interests –fares much better at explaining why the American political economy has become distinctively winner-take-all.
Keywords
inequality, American politics, business, power, public policy, political organization
Amid the greatest economic crisis since the Great Depression, the growing gap between the middle class and the rich has moved from the periphery to the center of political debate. Revelations about the Wall Street excesses that fueled the present crisis— excesses often promoted by public officials—have led many to conclude that those at the top have benefited from a rigged system that has allowed privileged insiders to make fortunes while shifting the negative effects of their activities onto the broader public.1 Although the current crisis has given the issue new urgency, the distributional tilt that it highlights is hardly new. Fueled by the outsized gains of the affluent, inequal- ity has been increasing for more than a quarter century, fundamentally reshaping the distribution of income in the United States.
The dramatic rise in inequality has prompted a huge outpouring of commentary and analysis. Until recently, however, most of this discussion has focused on the hypothe- sized economic roots of rising inequality: increasing global integration, rising returns to education, changing technology, heightened domestic competition, and so on. The rela- tionship between American politics and the sharp rise in inequality, by contrast, has been notable for its absence.
This has started to change. The past few years have seen a small but prominent wave of books and articles on rising inequality by students of American politics.2 These valuable works suggest that politics and public policy have played a more central role in the rise in inequality than economic accounts suggest, and they have begun to investigate the previ- ously neglected links between growing inequality and the actions of public officials.
Yet these works, too, are incomplete. They rightly depart from standard economic accounts that focus on depoliticized processes of economic change. Yet they have not produced a convincing political analysis of the political roots of rising inequality that can rival the dominant economic perspective on the issue that casts inequality as a political—in large part because they approach the politics of U.S. inequality with a relatively narrow analytic frame that embodies a number of constraining features of contemporary American politics research.
By a “convincing political analysis,” we mean an analysis that meets two tests. First, it must be consistent with the known facts about inequality. In particular, we argue that it must be consistent with the fact that American inequality is “winner- take-all,” with a very small slice of the population becoming dramatically richer and the rest largely holding steady. Second, a convincing analysis must show how political processes and government policy are causally related to the known facts about eco- nomic inequality. In other words, it must identify the correct set of outcomes and explicate their relationship to Americans politics and public policy.
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Economic accounts generally falter on both these tests. Most have downplayed the highly concentrated nature of economic gains, emphasizing instead the general widen- ing of the gap between those with advanced degrees and skills and those without them. And even those economic accounts that have recognized the top-heavy quality of American inequality have had surprisingly little to say about the role of government policy in fostering it. This would be unproblematic, of course, if public policy had really played as limited a role as many of these economic accounts imply. But, as we will show, there is very strong evidence for a central role for public policy, particularly with regard to the run-up of incomes at the very top.
The new wave of political accounts fares much better, but still falls short on both tests. For the most part, these accounts neither accurately describe the distributional changes that have occurred nor offer plausible accounts of the political and policy processes behind those changes. Yet the shortcomings of existing political accounts stem from a different source than the shortcomings of existing economic accounts. Economic accounts tend to ignore American politics entirely, to their considerable detriment. Recent political science studies instead miss the mark because of a commit- ment to a particular vision of American politics that we call “politics as electoral spectacle.” In this perspective, the driving force behind policy changes is the ability of the so-called median voter—the swing voters in the middle of the distribution of opin- ion and income among voters—to discipline politicians through the “electoral connection.”3 As we demonstrate, however, the sharp upward skew of income since the 1970s is exceedingly hard to explain with models that revolve around the strength or limits of median-voter influence. Instead, it calls for an alternative perspective— which we call “politics as organized combat”—that emphasizes the role of organized interests in shaping large-scale public policies that mediate distributional outcomes.
We make this argument in five steps. First, we present the evidence that American economic inequality has been winner-take-all, with the gains at the top highly concen- trated, sustained for a generation, and accompanied by few trickle-down benefits for the rest of the population. Next, we show that existing economic accounts are largely inconsistent with this pattern, and that existing political accounts, while stronger in identifying the political roots of rising inequality, neglect some of the most important policy foundations of winner-take-all inequality and some of the most fundamental political mechanisms that have brought it about.
We trace this failure to a view of American politics that overemphasizes the voter– politician nexus while neglecting the role of organized interests and the profound effects of government on the distribution of market rewards. In place of this conventional view, we develop an alternative organizationally minded and policy-focused perspective. This alternative becomes the lens through which we examine how major organizational shifts in the 1970s tilted the balance of political power sharply in favor of those at the very top of the economic ladder, paving the way for America’s winner-take-all inequality. Finally, we bring these analytic elements together to show that winner-take-all inequality is sub- stantially rooted in fundamental shifts in four core areas of U.S. public policy—related to financial markets, corporate governance, industrial relations, and taxation—that have been powerfully driven by this political-organizational transformation.
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The Rise of Winner-Take-All Inequality
That income inequality has grown substantially over the past thirty years is no longer in dispute. Yet persistent confusion remains about the exact nature of this change and its main causes. Indeed, these two sources of confusion are linked, since properly identifying the character of American inequality is essential to offering convincing explanations of its rise.
As we show in this section, the three crucial features of growing U.S. inequality are that (1) economic gains have been highly concentrated at the very top; (2) these lop- sided gains have been sustained, growing virtually without interruption since around 1980; and (3) these gains have resulted in few “trickle-down” benefits for most of the population. Together, these three features call into question standard economic accounts of rising inequality that focus on gaps between broad groups based on rising returns to education and skills. They also call into question the leading political sci- ence accounts of rising inequality taken up in the next section, which also tend to focus on the growing distance between the top and bottom thirds of the population rather than the pulling away of the very affluent.
1. Gains Have Been Highly Concentrated Many observers have mistakenly characterized rising inequality as simply a general stretching of the distribution, with the rungs on the economic ladder remaining more or less evenly spaced as they move apart. This portrayal is often grounded in general survey data on incomes (such as the Census Bureau’s March Current Population Survey). Survey data, however, are notoriously poor at capturing trends at the top of income ladder. A much more accurate and revealing picture is provided by studies based on tax statistics, such as the well-known series on U.S. inequality compiled by Thomas Piketty and Emmanuel Saez.4 These data—based on incomes actually reported by tax filers— allow us to look with considerable accuracy at the very top of the distribution.
What these statistics show is that while gaps have grown across the income spec- trum, the real action is at the top, especially the very top.5 The share of pretax income earned by the richest 1 percent of the U.S. population, for example, has increased from around 8 percent in 1974 to more than 18 percent in 2007. Including capital gains like investment and dividend income, the share has gone from just over 9 percent to 23.5 percent. Moreover, the top 1 percent are not the most fortunate beneficiaries of the post-1980 income explosion at the top. The more exclusive the group, the more strato- spheric the gains have been. The top 0.1 percent (the richest 150,000 or so families) have seen their slice of the pie grow from 2.7 percent to 12.3 percent of income—a more than fourfold increase. Meanwhile, the top 0.01 percent (the richest 15,000 or so families) have seen their share of income rise from less than one in every one hundred dollars in 1974 to more than one of every seventeen—or more than 6 percent of national income accruing to 0.01 percent of families. This is the highest share of income going to this rarified group ever.
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2. Gains Have Been Sustained
The income tax data also reveal that the shift of income toward the top has been sus- tained, increasing steadily (and, by historical standards, rapidly) since around 1980. Figure 1 shows the share of national income that goes to the top 1 percent of house- holds. The only reversals apparent in the post-1980 upward trend occur during the dives in the stock market that occurred in the late 1980s and around 2000. (This is even more apparent when capital gains are included in income, but since capital gains fluctuate from year to year, excluding them makes sense when examining over-time trends.) In short, the growing share of national income captured by the richest of Americans is a long-term trend that does not appear to be obviously related to either the business cycle or the shifting partisan occupation of the White House.
3. Gains Have Resulted in Few Trickle-Down Benefits for the Nonrich Finally, these massive gains at the top were not accompanied by major gains on lower rungs of the income ladder. This is a more controversial point than the first two, since it concerns both relative gains (which unquestionably favor those at the top) and trends in
Figure 1. The richest 1 percent’s share of national pretax income, 1960–2007 Sources: Thomas Piketty and Emmanual Saez, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics 118, no. 1 (2003): 1–39; and Thomas Piketty and Emmanual Saez, updated tables and figures for Piketty and Saez 2003, http://elsa.berkeley.edu/~saez/TabFig2007.xls (accessed December 2009). Note: Excluding capital gains.
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the absolute standing of the nonrich (which is the subject of greater dispute). To accu- rately assess these broader effects of rising inequality requires including government taxes and benefits in our measure of family income, since government benefits can be a substantial source of income for middle- and low-income Americans. The Congressio- nal Budget Office (CBO) has developed these broader indicators.6 Although available only back to 1979—unlike the Piketty and Saez pretax income series, which goes back to the early twentieth century—this augmented income dataset is widely considered the gold standard for studying family income trends, providing as accurate a picture as we can currently get of trends in household income at various points in the distribution.
This picture turns out to be stark: The bottom of the distribution went nowhere, the middle saw a modest gain, and the top ran away with the grand prize. While the overall economy expanded substantially between 1979 and 2005, the average incomes of the poorest fifth of households increased by only around 6 percent and the middle quintile of households saw their incomes rise just 21 percent, even when inflation and govern- ment taxes and benefits are taken into account. Meanwhile, the average after-tax incomes of the richest 1 percent of households rose nearly 230 percent. And, again, the gains enjoyed by the top 1 percent pale in comparison to those received by the top hundredth of 1 percent. Between 1979 and 2005, the CBO numbers show, the average after-tax income of households in the top 0.01 percent increased from just over $4 million to nearly $24.3 million—an almost sextupling in a little more than a quarter century.
Based on the CBO data, Table 1 shows how little trickle-down seems to have occurred. It compares how much each income group actually received with what their incomes would have been if incomes had grown at equal rates across the class spec- trum between 1979 and 2005. In other words, what if overall growth had been the same, but the share of income received by each income group had remained constant? The first column shows the average effect on household income for households in each group. The second column shows the total income change for that the group, which is simply the average income times the number of households in the group.
The first column drives home that few of the benefits of economic growth at the top between 1979 and 2005 trickled down. Note that the bolded figures apply only to the top 10 percent of households. These are the households that did better than average. Turned around, every income group below the top 10 percent saw their incomes rise more slowly than average household income between 1979 and 2005. The average income of the middle fifth of households would be $10,000 higher in 2005 if they had experienced the average growth of household income, rather than their actual income growth, over this period.
In the aggregate, as the second column shows, the income gap between the two scenarios (average vs. actual) is largest for the middle fifth of households—a group that we will see is at the center of the “median-voter” models popular in political sci- ence. But as the table demonstrates, the gains of equal growth would have been broadly distributed among the bottom 80 percent of Americans, which would have collectively gained by more than $700 billion. Remember, this would be the size of the transfer each and every year. No less striking, that $700 billion is only slightly more than what the top 1 percent gives up under the equal-growth scenario ($673 billion).
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Essentially, then, the losses of the more than ninety million households in the bottom 80 percent that are implied by the move from average to actual experience equal the gains of the slightly more than one million households in the top 1 percent.
Another way to see the same set of trends is to examine how well families in the fourth quintile (the sixtieth to the eightieth percentile) did relative to two contrasting groups: those in the bottom quintile and those in the top 10 percent. Was the post-1979 economic trajectory of the solidly middle-class sixty–eighty group closer to the aver- age experience of those lowest on the economic ladder or those highest on it? After all, even if middle-class Americans would have been better off had they experienced the average growth of household income over this period, they might still see their fate as intertwined with the fate of the affluent if those at the bottom slipped away from the top much more rapidly than they did.
This is not, however, what happened. The bottom fifth (zero–twenty) did experi- ence slower income growth than the fourth quintile (sixty–eighty), but the gap in growth between these two groups is dwarfed by the gap in growth between the fourth quintile and the top 10 percent. Among the bottom fifth, real income increased by a vanishingly small 6.25 percent between 1979 and 2005, compared with a more robust but still modest 29.47 percent among the sixty–eighty group. But real income more than doubled (103.22 percent) among the top 10 percent (and, as already noted, it more than tripled among the top 1 percent). To return to the thought experiment in Table 1, it would have required an aggregate transfer of $80 billion from the sixty– eighty segment of the distribution to the bottom fifth in 2005 to equalize the post-1979 growth in income between the two groups. The aggregate transfer from the top 10 percent that would have been required to equalize income growth between the sixty– eighty group and the top 10 percent would be more than $1 trillion. If income growth is the only criterion, the middle-class sixty–eighty group has far more in common with the poor than the rich.
Table 1. Inequality by the Numbers
How much more (or less) would each income group have received in 2005 if post-tax-and- transfer household income had grown at the same rate for all groups from 1979 to 2005?
Income group Difference in average per household ($) Total income difference for group ($)
Bottom fifth 5,623 richer per household 136 billion richer as a group Second fifth 8,582 richer 189 billion richer Middle fifth 10,100 richer 224 billion richer Third fifth 8,598 richer 194 billion richer Next tenth 3,733 richer 43 billion richer Next 5 percent 4,912 poorer 29 billion poorer Next 4 percent 29,895 poorer 140 billion poorer Top 1 percent 597,241 poorer 673 billion poorer
Source: Authors’ calculations based on Congressional Budget Office (CBO), Historical Effective Federal Tax Rates (Washington, DC: CBO, December 2007). Note: Negative numbers in bold.
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A critic of this interpretation might question the implicit portrayal of the economy as a zero-sum game and argue that the gains of the rich did not come at the expense of other income groups, because the economy would have grown more slowly if the gains of growth had been more broadly distributed. An important test of this argument is whether growth rates were higher in the United States than in Europe, where inequality did not rise as sharply. The answer is no. On average, between 1979 and 2005, the American economic engine ran just about as hot as the European economic engine.7 What is more, Americans households increased their work hours substantially over this period. In fact, this increase turns out to account for about two-thirds of the household income gains among the middle fifth.8 By contrast, the rise in work hours (the product of average hours worked per active worker and the rate of labor-force participation) was much more modest in Europe. As a result, GDP per hour worked actually rose faster in Europe than in the United States between 1979 and 2005.9 This lends credence to the view that the gains of the well off came at least partially at the expense of those lower on the income ladder. So, of course, do the huge costs for middle-class families associated with the current economic crisis, which itself is closely related to many of the trends discussed in this article.
Why Winner-Take-All? The Weaknesses of Existing Accounts The three salient trends discussed in the last section—that income has become hyper- concentrated at the top, that the increase in income hyperconcentration has been sustained, and that this hyperconcentration has produced few, “trickle-down” benefits for the vast majority of American households—raise difficult problems for standard economic analyses of rising inequality that emphasize autonomous market changes that have widened the gap among broad skill and educational groups. They also, how- ever, call into question some central features of recent works that move beyond this economic emphasis to bring in politics.
