In 1973, if you put the 1 percent of the country that had made the most money in a room and got them to empty out their pockets, you’d see 8 percent of all the money paid out in wages over the last year falling to the floor. If you’d repeated that exercise in 2008, you’d find 18 percent of the economy’s income on the ground. You’d better have a pretty big room.
But that’s what makes the rich different from you and me: their riches. The problem is that since 1973 median wages have been stagnating. Inequality isn’t just rising because the rich are getting richer. It’s rising because the rest of us, by and large, aren’t. If median household incomes had risen between 1974 and 2008 by as much as they rose between 1949 and 1973, the median family would be making well over $100,000 a year by now. In such a world, we might wonder about inequality, but we’d have less reason to worry about it.
But the rest are not getting richer. The question is whether the two phenomena are connected: Has the economy gone Hood Robin, with median wages stagnating because the folks at the tippy-top are channeling more and more of the economy’s gains into their own bank accounts? Or have the rich and famous moved into their own economy, and whatever is going on with median incomes is a different problem that will require different solutions?
Economists have not had an easy time parsing this out. The problem, they say, is that it’s very difficult to pinpoint a mechanism that can explain much of this. In fact, pick your explanation, and an economist can tell you a story for why it’s not true. They just can’t point you toward the one that is true.
We know, for instance, that taxes on the rich have fallen dramatically in recent decades. But the data on inequality are pre-tax. That is to say, they’re showing changes in who gets paid what, not who gets left with how much.
Immigration? Absolutely not. Might depress wages slightly at the very bottom of the economy, but it’s probably making the median American somewhat better off by making goods cheaper, and it might even be helping her wages by increasing demand for higher-skilled positions. And it doesn’t explain at all why the rich are getting so much richer.
Computers and associated technological change? Then why hasn’t inequality risen by as much in Europe? They’re into computers, too. And median wages actually did better in the 1990s, which is the decade most associated with the spread of information technology throughout the economy.
The decline of unions? The reigning estimate here is from Berkeley economist David Card. He thinks the decline might account for 15 to 20 percent of the problem. Many others consider that overstated.
International trade? Sorry. It just wasn’t a big enough factor between 1970 and 2000. Paul Krugman and others have begun to argue that since 2000—which is really to say, since China and India have come into their own as major exporters—that story has begun to change, and trade may be depressing American wages. That may be important going forward, but it doesn’t explain what’s happened so far.
But the debate has been shaken up by the sudden intervention of Jacob S. Hacker and Paul Pierson, two celebrated political scientists who, in their book Winner-Take-All Politics, argue that the problem isn’t with the explanations. It’s with the economists.
That diagnosis has some unlikely allies. Krugman, for one. The problem with the approach economists take, this Nobel Prize-winning economist has said, is that when their models miss something, so do they. “The temptation to only go for what’s ‘modelable’ is not entirely wrong,” he told me. “Unless you’re missing the story. And in this case, you’re missing the story.” In The Conscience of a Liberal, his book on inequality, he relied heavily on work done by Larry Bartels—a Princeton political scientist. The implication was clear: When there’s a multi-decade phenomenon that economists can’t seem to explain, maybe it’s about time to ask somebody else.
Hacker and Pierson have a theory of where the economists went awry: Economists might understand markets, they say, but they don’t understand politics. In markets, when big things change, it’s usually because something has happened. But in politics, big changes can be the result of something not happening. The rise of inequality, in Hacker and Pierson’s view, is the result of “systematic, prolonged failures of government to respond to the shifting realities of a dynamic economy.” They call this theory, in which big things happen because lots of other things don’t happen, “drift,” and it’s at the center of their story.
Their first—and most persuasive—piece of evidence is international: Germany, France, Japan, the Netherlands, Sweden, and Switzerland have seen almost no rise in inequality. Australia, Canada, Ireland, and the UK have seen a rise in inequality, but only half of what America has seen. And anyway, Hacker and Pierson say, if inequality was driven by politics, wouldn’t you expect to see more of it in the English-speaking countries that mirror America’s policy consensus most closely?
Then comes the question of timing: Why did it start in the 1970s? This has been the trouble for economists, as the economy didn’t undergo any self-evidently major changes. But it’s a red flag to political scientists, Hacker and Pierson say, because right about then, our politics underwent some extremely major changes.
It was around that time, after all, that the business community really began to get politically organized. In 1971, future Supreme Court Justice Lewis Powell wrote his famous memo saying that “the American economic system is under broad attack” and “business must learn the lesson…that political power is necessary; that such power must be assiduously cultivated; and that when necessary, it must be used aggressively and with determination—without embarrassment and without the reluctance which has been so characteristic of American business.”
The next year, the National Association of Manufacturers moved its headquarters from New York to Washington, D.C. “We have been in New York since before the turn of the century, because we regarded this city as the center of business and industry,” the organization said. “But the thing that affects business most today is government….In the last several years, that has become very apparent to us.” That same year, the Business Roundtable was formed, and within five years, had signed up the majority of the Fortune 200.
And so business, which felt battered by the swell of new regulations and rules associated with the Great Society, began fighting. And winning. One of its first, and arguably most consequential, victories was to kill a revamp of the nation’s labor laws that would’ve made it much easier to organize new workers. Unions, which had begun going into decline, were denied their chance to get up off the mat. Then came Ronald Reagan and that was pretty much that for organized labor.
As far as Hacker and Pierson are concerned, that was pretty much that for the American middle class, too. “It is surely no coincidence,” they write, “that almost all the advanced industrial democracies that have seen little or no shift toward the top 1 percent have much stronger unions than does the United States.”
Of course, “surely no coincidence” is not the same as evidence. But Hacker and Pierson have more than an interesting data point: They have a theory. When an economist looks at the decline of unions, she typically looks at the decline in worker bargaining power. But when a political scientist looks at the decline of unions, he sees a change in the distribution of political power. “[O]rganized labor’s role is not limited to union participation in the determination of wages,” write Hacker and Pierson. “Much more fundamental is the potential for unions to offer an organizational counterweight to the power of those at the top.”
Unions call it “solidarity.” Republicans call it “liberalism.” But whatever you call it, the fact is that unions do not spend the bulk of their political capital fighting for laws that would make it easier to organize. Most of it goes toward a more broadly defined agenda of economic and social uplift. Organized labor—arguably to its detriment—acts as the world’s largest advocacy group on behalf of people who aren’t rich. And there’s really no one else who does that.
As unions weakened, the nonrich lost their loudest voice in Washington. And that meant they became quiet indeed.
Winner-Take-All Politics is sold, somewhat campily, as a “crime drama.” Various pieces of data are referred to as “DNA evidence.” Luckily, the cute doesn’t get in the way of the content: The writing is crisp and clear, and the graphs and tables are used well, clarifying rather than complicating the proceedings.
But the book’s greatest strength is its easy command of political science data, which sets it apart from most of the other studies of inequality that have been released. Perhaps the most shocking study the authors cite comes from Martin Gilens, a political scientist at Princeton University. Gilens has been collecting the results of nearly 2,000 survey questions reaching back to the 1980s, looking for evidence that when opinions change, so too does policy. And he found it—but only for the rich. “Most policy changes with majority support didn’t become law,” Hacker and Pierson write. The exception was “when they were supported by those at the top. When the opinions of the poor diverged from those of the well-off, the opinions of the poor ceased to have any apparent influence: If 90 percent of poor Americans supported a policy change, it was no more likely to happen than if 10 percent did. By contrast, when more of the well-off supported a change, it was substantially more likely to happen.”
In part, this is because politicians began to need money more than they had before, as the costs of campaigns started skyrocketing. The predictable outcome? Both parties have been relying more on wealthy donors and less on labor unions. Where unions had substantial support among the Republican Party in the middle of the twentieth century—then-Senator Ted Stevens, we learn, ended up backing the labor law reforms that the business community eventually killed—today the Club for Growth primaries anyone in the GOP who forgets to refer to union presidents as “bosses.” Meanwhile, the Democrats have had to embrace the business community to remain financially competitive. As Hacker and Pierson show, Democrats were at a massive funding disadvantage in the 1960s and ’70s. In 1981, the Democratic National Committee was still paying down debt incurred during the 1968 election. There was only one place to turn to close the gap: corporate America, and the (mostly) men who ran it, or lobbied for it. And so they turned there, which meant turning away from the middle class, at least somewhat. As Hacker and Pierson say, today’s Republican and Democratic parties are not black and white. They’re “black and gray.”
Hacker and Pierson have a theory of politics, and it’s largely persuasive. But do they have an explanation of inequality? That’s trickier. Take their observations on the decline of American unions. How much inequality can they really explain? Well, maybe they explain some of the tax changes we’ve seen in recent years, but those don’t explain what happened to pre-tax incomes. And unions were more politically powerful in the early 1980s, when Ronald Reagan sharply cut taxes, than they are today—fully 20 percent of the private-sector workforce was still unionized then, compared to less than 7 percent today.
Hacker and Pierson note that health-care costs have consumed some of the raises that median workers would have otherwise gotten, and it’s possible that labor unions could have forced the political system to pay more attention to health-care reform. That may be true, but given that various attempts at health-care reform failed while labor was at the height of its powers, it’s difficult to say with any certainty that the path of health-care policy would be any different if businesses hadn’t managed to derail labor-law reform in the 1970s.
The influence of the rich certainly had a role in pushing politicians to deregulate the financial sector, and there’s reason to believe that deregulation—and, more to the point, the absence of new regulations—contributed to both the financial bubble, which boosted the incomes of the rich, and the bust, which dealt another blow to the interests of everyone else. But it’s not clear that a stronger labor movement would’ve spent its time fighting to regulate derivatives: The roaring economy was powering a lot of renewed faith in financial markets, and unions, even if they had been more powerful, were focused on questions like how best to spend the surplus and how to handle global trade. And given the global nature of the money flows that led to the bubble, it’s easy to imagine us doing things a bit differently even as the eventual outcome remained the same.
The problem for Hacker and Pierson, in other words, is that just as the economists aren’t very convincing on the politics, they’re not sufficiently convincing on the economics. It’s true that the political system has shifted toward emphasizing the interests of the rich, and it’s true that that’s probably had a significant impact on both the rich and everyone else. But how much of an impact? And what would have happened if the distribution of political power had remained frozen at 1973 levels? That’s harder to say.
What their theory explains, in the end, is not so much why median wages stagnated and income inequality skyrocketed, but why the political system has been so feckless and haphazard about responding. A political system where unions held more clout and politicians weren’t so addicted to the money provided by rich donors would be a political system that would likely have taken some of these problems much more seriously.
But what worries me is that even that political system might not have responded effectively. And that’s at least in part because, for all the books written and all the peers reviewed, we’re still having trouble saying just what, exactly, is causing all this—and that makes the problem quite a bit harder to fix.
At this point, I’d say there are four good places to look for answers. One is where Hacker and Pierson focus their energies: Whatever our eventual conclusions on inequality, we’re going to have trouble acting on them if the political system can’t bring itself to care about the average American a little bit more. A second is the education system: Arguably the only persuasive explanation for what’s happened to median wages is that educational attainment leveled off in the 1970s, even as the demand for educated workers increased. Economists Claudia Goldin and Lawrence Katz estimate that this explains two-thirds of the rise in inequality, and importantly, explains it on the side of median-wage stagnation, which is what we’re most worried about. Even if that estimate is a bit high, boosting educational attainment would still be a good place to start.
Then there’s the financial system. Insofar as anything explains the run-up in the incomes of the very rich, it’s the increasing financialization of the economy. And if you look at profits in the financial sector, you’ll see, among other things, an incredible rise between 2002 and 2007, and then a sharp rebound after the crash. That rise was an illusion: It was a bubble that would’ve taken down most every bank on Wall Street and most every person in the market if the government hadn’t aggressively stepped in to save the financial system. But the government did aggressively step in, and it recapitalized the banks by giving them cheap money that they could use to make more money and get everyone’s stock portfolios healthy again.
This was probably a good thing for a lot of reasons (a world without financial markets looks more like Mad Max than it does like 1973), but the reality is that the federal government and the Federal Reserve brought overwhelming force to their efforts to save the financial market and underwhelming force to their efforts to save the labor market. And so the rich are getting richer again, but unemployment remains above 9 percent. There’s little we can—or even should—undo here, but we at least need to recognize what it is that we keep doing: green-lighting the policies that make the rich richer or, in the case of the crisis, keep them rich, while dithering and drifting on the problems and needs of the vast middle. Watching House Republicans talk about repealing the health-care law even as bankers are back to getting their pre-crash bonuses is just the latest evidence of our grotesque priorities. I don’t know how you solve the problems of inequality or median wage stagnation, but it’s not like that.
And finally, we need to recognize that Americans haven’t accepted the status quo. Rather, they’re unaware of it. Behavioral economist Dan Ariely and psychologist Michael Norton recently asked people to estimate wealth inequality in this country. As it happens, most Americans think wealth is distributed vastly more equally than it actually is, and yet they would like something more equal still: When given a choice between various options, they chose the one most closely resembling Sweden, followed by the world in which every quintile has exactly 20 percent of the wealth. Only 10 percent chose our world. But the problem, as Hacker and Pierson point out, is that the political system isn’t listening. It’s time it did. The fact that we don’t quite know how to solve inequality and median-wage stagnation doesn’t make the situation any less urgent.