Inside the Wealth Conspiracy: Jacob Hacker and Paul Pierson
By Jacob S. Hacker and Paul Pierson - Nov 22, 2010 9:00 PM ET
Bloomberg Opinion
Four years ago, then-Treasury Secretary Henry Paulson took a moment from his economic cheerleading to acknowledge that, yes, economic inequality had risen.
Over the previous three decades, the share of pretax national income raked in by the richest 0.1 percent of Americans had more than quadrupled. By the time Paulson spoke, this tiny upper-crust of American households (average 2007 income: $7 million) brought home about $1 of every $8 earned in the U.S.
Paulson expressed concern about the trend. Yet his basic message was that Americans should get used to it. Growing inequality, he declared, “is simply an economic reality, and it is neither fair nor useful to blame any political party.”
Today, the gap between hardship on Main Street and profits on Wall Street is even more undeniable. Paulson’s view, though, is as widespread among the prosperous and powerful as ever. We hear again and again that those at the top are simply superstars, empowered by technological change and globalization to make vast fortunes. Public policy or partisan positions, in this common perspective, have little or nothing to do with it.
The truth is, politicians in Washington haven’t been innocent bystanders in our steady march toward a much more unequal society. For 30 years, rising campaign costs and an explosion of lobbying activity made politicians from both parties more attentive to the concerns of those at the top of the economic ladder. The response has been a string of political decisions -- or deliberate failures to act -- that have abetted the shift of rewards to the upper rungs of the economic ladder.
Listening to Bankers
Paulson, in fact, provides a big clue about what happened. He, like so many recent prominent economic officials, straddled the worlds of Wall Street and Washington. President Barack Obama just continued this well-established practice by appointing financier Roger Altman to succeed Larry Summers as the head of his National Economic Council.
Under Republicans and Democrats alike -- enthusiastically in the former case, more ambivalently in the latter -- Wall Street received an sympathetic ear, even though its practices were enriching just a tiny slice of Americans and posed real risks to the economy as a whole.
Supporting the high fliers of finance was only one part of what American politicians did to build a winner-take-all economy. They also delivered repeated tax cuts that were exquisitely targeted at the most well-to-do, economic smart- bombs that showered cash on a select few. The effective tax rates of the richest taxpayers -- that is, the amount they actually pay -- plummeted from the late 1970s through the early 2000s.
Quiet Power
At other times Washington was a silent partner, sitting on its hands while economic changes rendered existing rules obsolete. New technologies and business models allowed bankers to outflank restrictions on their practices. Increasing capital mobility and regulatory passivity let corporations push out unions. As the foundations of broad-based postwar prosperity crumbled, powerful organizations urged Washington to do nothing, and Washington complied.
Mark Twain once quipped that “everyone complains about the weather but nobody does anything about it.” Many analysts would have us view the dramatic increase in inequality with a similar spirit -- as a natural condition that we should accept without complaint. We should be skeptical of this view -- and not just because it’s obsolete even with regard to the weather.
Inequality Isn’t Inevitable
We should be skeptical because government policies don’t just reallocate income after the fact; they also shape how markets distribute the rewards. We should be skeptical because globalization and technological change, while creating pressures for inequality, don’t dictate economic outcomes.
Other prosperous economies that are as globalized and networked as we are have seen limited growth in inequality. Moreover, where such tendencies have emerged, their political systems have pushed back. It is the U.S. that stands out as an exception, as it moves closer to the distributional structure characteristic of economic oligarchies such as Russia, Mexico or Brazil.
The relevance of Washington to growing inequality is bad news for now. Newly empowered Republicans still push an agenda of deregulation, social-spending cuts, and high-income tax cuts that will promote rather than challenge this trend. Recently, Republican Senator-Elect Rand Paul took Paulson’s stance a dramatic step further, responding to a question about inequality by insisting “there are no rich…there are no poor.” Chastened Democrats are unable or unwilling to put up much resistance. Instead, they seem eager to offer an olive branch or two to the winners in our winner-take-all economy.
In the long-run, though, the relevance of Washington is good news for those who view the trends of the past generation with concern. What happens in our politics matters a lot for how our economy operates, and for how its rewards and burdens are divided. Washington helped build an economy that showers so much on so few. It could help build an economy of shared prosperity as well.
(Jacob Hacker is a professor of political science at Yale University. Paul Pierson is a professor of political science at the University of California at Berkeley. They are the co- authors of “Winner-Take-All Politics: How Washington Made the Rich Richer -- and Turned Its Back on the Middle Class.” The opinions expressed are their own.)
Income inequality in the US
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