There is a great disparity of wealth in the United States right now. Over the last two decades, the invisible hand of the market has re-oriented the global economy in such a way that labor-intensive industries have moved overseas, along with the middle and lower-middle class jobs from the States. As the number of manual labor jobs has declined, the demand for skilled labor within the service and financial sectors has increased, and salaries have risen. The end result: in 2009, the top 5% of earners saw their average incomes increase, while the rest of the country saw their average incomes decrease. The top 1% of the country owns 24% of the wealth – the highest percentage since the Great Depression. We are like a banana republic (the country, not the store). In a nutshell:
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.
Why this great disparity of wealth? Is it the invisible hand of the market pimp-slapping the middle class? Are the rich colluding to keep themselves rich through nefarious means, like high-frequency trading, at the expense of the rest of us? Or is this just the natural course of a capitalist society that rewards innovation and risk with wealth and reward? These are all good questions. Proponents of Ayn Rand’s objectivist philosophy might not find these statistics too troubling, as it demonstrates that indeed the greatest minds of our generation are being duly compensated for their efforts to move forward the human race, just like Dagny Taggart and Hank Reardon. But, according to these two political scientists, Hacker and Pierson, they would be wrong. Ironically, the real culprit is the sworn enemy of the objectivist: the government.
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 this Foreign Affairs book review, the author digs deeper into how the structure of our political system makes it difficult for enacted policies to be changed or modified, resulting in “drift,” which occurs when regulations become outdated and, in the new context, become either irrelevant or actually counterproductive in achieving the original goal. The author uses the example of paying the executives of companies in stock options to incentivize growth. The end result has been an overemphasis on short-term gains that raise the share price at the expense of long-term sustainable growth. The U.S. political system has enabled this environment, and has done so at least since the 1970’s.
Naturally, the conclusion is not rosy and largely confirms what I have always felt about our government, which is that it is beholden to special interests and rife with corruption masquerading as “lobbying.” Here the author explains the result better than I can:
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.
It would be easy to drop a snide remark here about the hypocrisy of a business-friendly philosophy that pushes for less government control with one hand and manipulates the political system with the other. “Who is John Galt?” originally came to mind, but I’ll refrain. The article is must-read for anyone who would like some historical context around the hot-button political issues of the day – the extension of the Bush tax cuts, unemployment benefits – and the rise of the tea-party, a group so wrong-headed that they are fanatical about pushing for policies that are clearly not in their economic interest. Plus, it is good to reflect about the fact that, in the aftermath of the most devastating recession since the Great Depression, that the level of inequality in the country – also the largest since the Great Depression – still continues to rise.