[Peace-discuss] Why the rich are getting richer (part of the reason)

[C. G. Estabrook]

[This review is from the establishment foreign policy journal /Foreign Affairs/, 
published by the Council on Foreign Relations.  It should be read while 
remembering the source. Note e.g. how race is substituted for class, apparently 
by the book as well as the review.]

Why the Rich are Getting Richer
American Politics and the Second Gilded Age
By Robert C. Lieberman
January/February 2011

A review of

"Winner-Take-All Politics: How Washington Made the Rich Richer - and Turned Its 
Back on the Middle Class"
By Paul Pierson and Jacob S. Hacker
Simon & Schuster [ISBN 1416588698]

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.

http://www.foreignaffairs.com/articles/67046/robert-c-lieberman/why-the-rich-are-getting-richer?page=show

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