Inequality and Its Casualties

First Principles: Arguing the Economy

Over the past generation, the American economy has become winner-take-all. The tilt in resources to the economic elite has been staggering. The income share of the top tenth of 1 percent—households now making an average of $7 million per year—more than quadrupled between 1978 and 2007. This tiny group went from bringing in about $1 out of every $50 earned to bringing in $1 of every $12.

Apologists for this massive shift in income distribution often attribute it to impersonal forces of technological change and globalization. In the words of former Treasury Secretary Henry Paulson, rising inequality “is simply an economic reality, and it is neither fair nor useful to blame any political party.” Yet other advanced democracies have not followed our economic path, even though they employ these very same technologies and are typically far more exposed to international trade than we are. Elsewhere, economic growth has been just as fast as ours, but the upward tilt of economic rewards has been much less pronounced. The overwhelming majority of the big winners in our new economy are not media superstars or extraordinary innovators, but those positioned to benefit from the dramatic rise of finance and the explosion of executive pay.

As Jacob Hacker and I have argued in our book Winner-Take-All Politics, this new economy has developed hand in hand with a new politics. In a not-so-virtuous cycle, Washington fostered the emergence of a winner-take-all economy even as sharply rising inequality had a pronounced effect on how Washington operates. In the last few years, the dangerous ramifications of this growing imbalance of economic and political power have been increasingly evident. Not only did it foster policies that helped bring about the worst economic crisis since the Great Depression; it has made it increasingly difficult for government to address long-standing economic challenges.

Since the 1970s, both the balance of political organization and the role of money in politics have evolved in ways that favor the wealthiest Americans. After suffering serious defeats over issues like consumer and environmental protection in the early 1970s, business counter-mobilized on a massive scale. With unions in decline, groups representing business and the most affluent Americans have increasingly dominated organized political activity on economic issues.

Moreover, while money has always mattered in Washington, the onset of rising inequality came right around the time that campaigns were becoming dramatically more expensive. And money flowed not just through campaigns, but through vastly expanded lobbying efforts. Indeed, the smart money in Washington—that coming from the organized groups for whom writing political checks is a vocation rather than a hobby—goes mainly to lobbying rather than elections. Lobbying expenditures, narrowly defined, topped $3.5 billion in 2009, compared to the roughly $400 million that political action committees donated to all candidates in the 2010 congressional elections. The goal is to influence governance, shaping what policies get enacted and how they are carried out regardless of who wins a particular campaign.

Lords of Finance, Lords of Policy

Over the past generation, this pronounced slant in organization and money has had dramatic effects on both parties, with policy-makers becoming much more responsive to the demands of those at the top of the economic ladder. The change in the Republican Party has been most evident, as the GOP has moved from hostility toward selected aspects of the Great Society to increasingly vigorous opposition to long-settled features of the American social contract developed during the Progressive Era and the New Deal. Limiting the wealthy’s exposure to taxes and curbing regulatory oversight of businesses have become the cornerstones of Republican economic policy.

While Democrats have been more ambivalent about this new economic world, in practice they too have come to accommodate it. The party has muted its progressive economic message in order to curry favor with the formidable business lobbies, and to fashion appeals to the wealthy individuals whose financial support has become essential for ever-more expensive campaigns. Beginning with the Clinton Administration, Democrats built much tighter connections to the rapidly expanding empires of finance. Wall Street became the crucial supplier of funds for a reinvigorated Democratic Party apparatus. High finance also became the major source of manpower for a new generation of Democratic policy elites, a shift that was accompanied by the development of a revolving door connecting the corridors of political power to unprecedented private-sector riches.

The tightening relationship between economic and political power has contributed to major policy victories benefiting top income groups. Sharp reductions in tax rates for the wealthy began in the late 1970s, even before Reagan came to office, and became a staple of economic policy thereafter. Financial deregulation occurred through a series of initiatives well before the formal repeal of the Glass-Steagall Act in 1999.

Perhaps even more important than these new laws, however, were sustained efforts to block legislative and regulatory initiatives that might have allowed us to confront with greater vigor the new challenges that have come with rapid economic change. Political obstruction blocked efforts to update our industrial relations system in ways that might have made union organization feasible in the new American economy. As finance pushed aggressively into new and ever riskier territory, its allies strenuously resisted effective political oversight. High-level corporate executives successfully minimized regulatory scrutiny even as executive pay exploded to levels unparalleled outside the United States.

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