I started this current series to discuss what is wrong with our country and what we need to do to fix it. While I have discussed some of the topics that I will be including in this series, they have been included in other articles. In this series I will concentrate on a single topic. This will also mean that some of the articles may be slightly shorter than my readers have grown accustomed to, however they will still be written with the same attention to detail. This series will have no set number of articles and will continue to grow as I come across additional subjects.
Wealth, Income, and Power
This document presents details on the wealth and income distributions in the United States, and explains how we use these two distributions as power indicators. The most striking numbers on income inequality will come last, showing the dramatic change in the ratio of the average CEO’s paycheck to that of the average factory worker over the past 40 years.
First, though, some definitions. Generally speaking, wealth is the value of everything a person or family owns, minus any debts. However, for purposes of studying the wealth distribution, economists define wealth in terms of marketable assets, such as real estate, stocks, and bonds, leaving aside consumer durables like cars and household items because they are not as readily converted into cash and are more valuable to their owners for use purposes than they are for resale (see Wolff, 2004, p. 4, for a full discussion of these issues). Once the value of all marketable assets is determined, then all debts, such as home mortgages and credit card debts, are subtracted, which yields a person’s net worth. In addition, economists use the concept of financial wealth — also referred to in this document as “non-home wealth” — which is defined as net worth minus net equity in owner-occupied housing. As Wolff (2004, p. 5) explains, “Financial wealth is a more ‘liquid’ concept than marketable wealth, since one’s home is difficult to convert into cash in the short term. It thus reflects the resources that may be immediately available for consumption or various forms of investments.”
We also need to distinguish wealth from income. Income is what people earn from work, but also from dividends, interest, and any rents or royalties that are paid to them on properties they own. In theory, those who own a great deal of wealth may or may not have high incomes, depending on the returns they receive from their wealth, but in reality those at the very top of the wealth distribution usually have the most income. (But it’s important to note that for the rich, most of that income does not come from “working”: in 2008, only 19% of the income reported by the 13,480 individuals or families making over $10 million came from wages and salaries. See Norris, 2010, for more details.)
This document focuses on the “Top 1%” as a whole because that’s been the traditional cut-off point for “the top” in academic studies, and because it’s easy for us to keep in mind that we are talking about one in a hundred. But it is also important to realize that the lower half of that top 1% has far less than those in the top half; in fact, both wealth and income are super-concentrated in the top 0.1%, which is just one in a thousand. (To get an idea of the differences, take a look at an insider account by a long-time investment manager who works for the well-to-do and very rich. It nicely explains what the different levels have — and how they got it. Also, David Cay Johnston (2011) has written a column about the differences among the top 1%, based on 2009 IRS information.)
As you read through the facts and figures that follow, please keep in mind that they are usually two or three years out of date because it takes time for one set of experts to collect the basic information and make sure it is accurate, and then still more time for another set of experts to analyze it and write their reports. It’s also the case that the infamous housing bubble of the first eight years of the 21st century inflated some of the wealth numbers.
There’s also some general information available on median income and percentage of people below the poverty line in 2010. As might be expected, most of the new information shows declines; in fact, a report from the Center for Economic and Policy Research (2011) concludes that the decade from 2000 to 2010 was a “lost decade” for most Americans.
One final general point before turning to the specifics. People who have looked at this document in the past often asked whether progressive taxation reduces some of the income inequality that exists before taxes are paid. The answer: not by much, if we count all of the taxes that people pay, from sales taxes to property taxes to payroll taxes (in other words, not just income taxes). And the top 1% of income earners actually pay a smaller percentage of their incomes to taxes than the 9% just below them. These findings are discussed in detail near the end of this document.
Exactly how rich are the Top 1%?
People often wonder exactly how much income and/or wealth someone needs to have to be included in the Top 1% or the Top 20%; Table 1 below lists some absolute dollar amounts associated with various income and wealth classes in 2013, but the important point to keep in mind is that for the most part, it’s the relative positions of wealth holders and income earners that we are trying to comprehend in this document.
Table 1: Income and net worth in the U.S. by class, 2013
| Wealth or income class | Mean household income | Mean household net worth |
|---|---|---|
| Top 1 percent | $1,679,000 | $18,623,400 |
| Top 20 percent | $257,200 | $2,260,300 |
| 60th-80th percentile | $76,500 | $236,400 |
| 40th-60th percentile | $46,000 | $68,100 |
| Bottom 40 percent | $20,300 | -$10,800 |
From Wolff (2014); only mean figures are available, not medians. Note that income and wealth are separate measures; so, for example, the top 1% of income-earners is not exactly the same group of people as the top 1% of wealth-holders, although there is considerable overlap.
The Wealth Distribution
In the United States, wealth is highly concentrated in relatively few hands. As of 2013, the top 1% of households (the upper class) owned 36.7% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 52.2%, which means that just 20% of the people owned a remarkable 89%, leaving only 11% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one’s home), the top 1% of households had an even greater share: 42.8%. Table 2 and Figure 1 present further details, drawn from the careful work of economist Edward N. Wolff at New York University (2017).
Table 2: Distribution of net worth and financial wealth in the United States, 1983-2013
| Total Net Worth | |||
|---|---|---|---|
| Top 1 percent | Next 19 percent | Bottom 80 percent | |
| 1983 | 33.8% | 47.5% | 18.7% |
| 1989 | 37.4% | 46.2% | 16.5% |
| 1992 | 37.2% | 46.6% | 16.2% |
| 1995 | 38.5% | 45.4% | 16.1% |
| 1998 | 38.1% | 45.3% | 16.6% |
| 2001 | 33.4% | 51.0% | 15.6% |
| 2004 | 34.3% | 50.3% | 15.3% |
| 2007 | 34.6% | 50.5% | 15.0% |
| 2010 | 35.1% | 53.5% | 11.4% |
| 2013 | 36.7% | 52.2% | 11.1% |
| Financial (Non-Home) Wealth | |||
|---|---|---|---|
| Top 1 percent | Next 19 percent | Bottom 80 percent | |
| 1983 | 42.9% | 48.4% | 8.7% |
| 1989 | 46.9% | 46.5% | 6.6% |
| 1992 | 45.6% | 46.7% | 7.7% |
| 1995 | 47.2% | 45.9% | 7.0% |
| 1998 | 47.3% | 43.6% | 9.1% |
| 2001 | 39.7% | 51.5% | 8.7% |
| 2004 | 42.2% | 50.3% | 7.5% |
| 2007 | 42.7% | 50.3% | 7.0% |
| 2010 | 41.3% | 53.5% | 5.2% |
| 2013 | 42.8% | 51.9% | 5.3% |
Total assets are defined as the sum of: (1) the gross value of owner-occupied housing; (2) other real estate owned by the household; (3) cash and demand deposits; (4) time and savings deposits, certificates of deposit, and money market accounts; (5) government bonds, corporate bonds, foreign bonds, and other financial securities; (6) the cash surrender value of life insurance plans; (7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in unincorporated businesses; and (10) equity in trust funds. Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt, including auto loans; and (3) other debt. From Wolff (2017).
Figure 1: Net worth and financial wealth distribution in the U.S.
From Wolff (2017).
In terms of types of financial wealth, in 2013 the top one percent of households had 49.8% of all privately held stock, 54.7% of financial securities, and 62.8% of business equity. The top ten percent had 84% to 94% of stocks, bonds, trust funds, and business equity, and almost 80% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America; see Table 3 and Figure 2 for the details. The only category which is not skewed severely toward the upper class is debt.
Table 3: Wealth distribution by type of asset, 2013
| Investment Assets | |||
|---|---|---|---|
| Top 1 percent | Next 9 percent | Bottom 90 percent | |
| Business equity | 62.8% | 31.0% | 6.2% |
| Financial securities | 54.7% | 39.6% | 5.7% |
| Stocks and mutual funds | 49.8% | 41.2% | 9.1% |
| Trusts | 49.5% | 34.0% | 16.5% |
| Non-home real estate | 33.7% | 44.1% | 22.2% |
| TOTAL investment assets | 51.5% | 37.0% | 11.5% |
| Housing, Liquid Assets, Pension Assets, and Debt | |||
| Top 1 percent | Next 9 percent | Bottom 90 percent | |
| Principal residence | 9.8% | 31.1% | 59.2% |
| Deposits | 24.8% | 42.4% | 32.8% |
| Life insurance | 30.0% | 35.3% | 34.7% |
| Pension accounts | 17.8% | 47.5% | 34.8% |
| TOTAL other assets | 14.5% | 37.6% | 47.9% |
| Debt | 5.4% | 21.1% | 73.5% |
From Wolff (2014).
Figure 2a: Wealth distribution by type of asset, 2013: investment assets
Figure 2b: Wealth distribution by type of asset, 2013: other assets
From Wolff (2014).
There is a perception that a large number of Americans own stock — through mutual funds, trusts, pensions, or direct purchase of shares. This is true to some extent: 46% of American households have direct or indirect investments in the stock market. But the top 10% of households own 81% of the total value of those investments (Wolff, 2014); the vast majority have relatively meager holdings.
Inheritance and estate taxes
Figures on inheritance tell much the same story. According to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000. On the other hand, 91.9% receive nothing (Kotlikoff & Gokhale, 2000). Thus, the attempt by ultra-conservatives to eliminate inheritance taxes — which they always call “death taxes” for P.R. reasons — would take a huge bite out of government revenues (an estimated $253 billion between 2012 and 2022) for the benefit of the heirs of the mere 0.6% of Americans whose death would lead to the payment of any estate taxes whatsoever (Citizens for Tax Justice, 2010b).
It is noteworthy that some of the richest people in the country oppose this ultra-conservative initiative, suggesting that this effort is driven by anti-government ideology. In other words, few of the ultra-conservative and libertarian activists behind the effort will benefit from it in any material way. However, a study (Kenny et al., 2006) of the financial support for eliminating inheritance taxes discovered that 18 super-rich families (mostly Republican financial donors, but a few who support Democrats) provide the anti-government activists with most of the money for this effort. (For more infomation, including the names of the major donors, download the article from United For a Fair Economy’s Web site.)
Actually, ultra-conservatives and their wealthy financial backers may not have to bother to eliminate what remains of inheritance taxes at the federal level. The rich already have a new way to avoid inheritance taxes forever — for generations and generations — thanks to bankers. After Congress passed a reform in 1986 making it impossible for a “trust” to skip a generation before paying inheritance taxes, bankers convinced legislatures in many states to eliminate their “rules against perpetuities,” which means that trust funds set up in those states can exist in perpetuity, thereby allowing the trust funds to own new businesses, houses, and much else for descendants of rich people, and even to allow the beneficiaries to avoid payments to creditors when in personal debt or sued for causing accidents and injuries. About $100 billion in trust funds has flowed into those states so far. You can read the details on these “dynasty trusts” (which could be the basis for an even more solidified “American aristocracy”) in a New York Times opinion piece published in July 2010 by Boston College law professor Ray Madoff, who also has a book on this and other new tricks: Immortality and the Law: The Rising Power of the American Dead (Yale University Press, 2010).
Home ownership & wealth
For the vast majority of Americans, their homes are by far the most significant wealth they possess. Figure 3 comes from the Federal Reserve Board’s Survey of Consumer Finances (via Wolff, 2017) and compares the median income, total wealth (net worth, which is marketable assets minus debt), and non-home wealth (which earlier we called financial wealth) of White, Black, and Hispanic households in the U.S.
Figure 3: Income and wealth by race in the U.S.
From Wolff (2017). All figures adjusted to 2013 US dollars.
Besides illustrating the significance of home ownership as a source of wealth, the graph also shows that Black and Latino households are faring significantly worse overall, whether we are talking about income or net worth. In 2013, the average white household had more than 15 times as much total wealth as the average African-American or Latino household. If we exclude home equity from the calculations and consider only financial wealth, the ratios are more than 200:1. Extrapolating from these figures, we see that 65% of white families’ wealth is in the form of their principal residence; for Blacks and Hispanics, the figures are close to 90%.
And for all Americans, things got worse during the “Great Recession”: comparing the 2007 numbers to the 2013 numbers, we can see a huge loss in wealth — both housing and financial — for most families, making the gap between the rich and the rest of America even greater, and increasing the number of households with no marketable assets from 18.6% to 21.8% (Wolff, 2012 & 2014).
Do Americans know their country’s wealth distribution?
An interesting study (Norton & Ariely, 2010) reveals that Americans have no idea that the wealth distribution (defined for them in terms of “net worth”) is as concentrated as it is. When shown three pie charts representing possible wealth distributions, 90% or more of the 5,522 respondents — whatever their gender, age, income level, or party affiliation — thought that the American wealth distribution most resembled one in which the top 20% has about 60% of the wealth. In fact, of course, the top 20% control 85% of the wealth. (Table 2 and Figure 1 in this document show the Top 20% owning 89% of the net worth, rather than 85%; the discrepancy is mostly due to Ariely & Norton’s data being about 10 years older.)
Even more striking, they did not come close on the amount of wealth held by the bottom 40% of the population. It’s a number I haven’t even mentioned so far, and it’s shocking: the lowest two quintiles hold just 0.3% of the wealth in the United States. Most people in the survey guessed the figure to be between 8% and 10%, and two dozen academic economists got it wrong too, by guessing about 2% — seven times too high. Those surveyed did have it about right for what the 20% in the middle have; it’s at the top and the bottom that they don’t have any idea of what’s going on.
Americans from all walks of life were also united in their vision of what the “ideal” wealth distribution would be, which may come as an even bigger surprise than their shared misinformation on the actual wealth distribution. They said that the ideal wealth distribution would be one in which the top 20% owned between 30 and 40 percent of the privately held wealth, which is a far cry from the 85 percent that the top 20% actually own. They also said that the bottom 40% — that’s 120 million Americans — should have between 25% and 30%, not the mere 8% to 10% they thought this group had, and far above the 0.3% they actually had. In fact, there’s no country in the world that has a wealth distribution close to what Americans think is ideal when it comes to fairness. So maybe Americans are much more egalitarian than most of them realize about each other, at least in principle and before the rat race begins.
Figure 4, reproduced with permission from Norton & Ariely’s article in Perspectives on Psychological Science, shows the actual wealth distribution, along with the survey respondents’ estimated and ideal distributions, in graphic form.
NOTE: In the “Actual” line, the bottom two quintiles are not visible because the lowest quintile owns just 0.1% of all wealth, and the second-lowest quintile owns 0.2%.
Source: Norton & Ariely (2010).
David Cay Johnston, a retired tax reporter for the New York Times, published an excellent summary of Norton & Ariely’s findings (Johnston, 2010b; you can download the article from Johnston’s Web site).
Historical context
Numerous studies show that the wealth distribution has been concentrated throughout American history, with the top 1% already owning 40-50% in large port cities like Boston, New York, and Charleston in the 1800s. (But it wasn’t as bad in the 18th and 19th centuries as it is now, as summarized in a 2012 article in The Atlantic.) The wealth distribution was fairly stable over the course of the 20th century, although there were small declines in the aftermath of the New Deal and World II, when most people were working and could save a little money. There were progressive income tax rates, too, which took some money from the rich to help with government services.
Then there was a further decline, or flattening, in the 1970s, but this time in good part due to a fall in stock prices, meaning that the rich lost some of the value in their stocks. By the late 1980s, however, the wealth distribution was almost as concentrated as it had been in 1929, when the top 1% had 44.2% of all wealth. It has continued to edge up since that time, with a slight decline from 1998 to 2001, before the economy crashed in the late 2000s and little people got pushed down again. Table 4 and Figure 5 present the details from 1922 through 2010.
Table 4: Share of wealth held by the Bottom 99% and Top 1% in the United States, 1922-2013.
| Bottom 99 percent | Top 1 percent | |
|---|---|---|
| 1922 | 63.3% | 36.7% |
| 1929 | 55.8% | 44.2% |
| 1933 | 66.7% | 33.3% |
| 1939 | 63.6% | 36.4% |
| 1945 | 70.2% | 29.8% |
| 1949 | 72.9% | 27.1% |
| 1953 | 68.8% | 31.2% |
| 1962 | 68.2% | 31.8% |
| 1965 | 65.6% | 34.4% |
| 1969 | 68.9% | 31.1% |
| 1972 | 70.9% | 29.1% |
| 1976 | 80.1% | 19.9% |
| 1979 | 79.5% | 20.5% |
| 1981 | 75.2% | 24.8% |
| 1983 | 69.1% | 30.9% |
| 1986 | 68.1% | 31.9% |
| 1989 | 64.3% | 35.7% |
| 1992 | 62.8% | 37.2% |
| 1995 | 61.5% | 38.5% |
| 1998 | 61.9% | 38.1% |
| 2001 | 66.6% | 33.4% |
| 2004 | 65.7% | 34.3% |
| 2007 | 65.4% | 34.6% |
| 2010 | 64.6% | 35.4% |
| 2013 | 63.3% | 36.7% |
Sources: 1922-1989 data from Wolff (1996). 1992-2013 data from Wolff (2014).
Figure 5: Share of wealth held by the Bottom 99% and Top 1% in the United States, 1922-2013.
Here are some dramatic facts that sum up how the wealth distribution became even more concentrated between 1983 and 2004, in good part due to the tax cuts for the wealthy and the defeat of labor unions: Of all the new financial wealth created by the American economy in that 21-year-period, fully 42% of it went to the top 1%. A whopping 94% went to the top 20%, which of course means that the bottom 80% received only 6% of all the new financial wealth generated in the United States during the ’80s, ’90s, and early 2000s (Wolff, 2007).
The rest of the world
Thanks to a 2006 study by the World Institute for Development Economics Research — using statistics for the year 2000 — we now have information on the wealth distribution for the world as a whole, which can be compared to the United States and other well-off countries. The authors of the report admit that the quality of the information available on many countries is very spotty and probably off by several percentage points, but they compensate for this problem with very sophisticated statistical methods and the use of different sets of data. With those caveats in mind, we can still safely say that the top 10% of the world’s adults control about 85% of global household wealth — defined very broadly as all assets (not just financial assets), minus debts. That compares with a figure of 69.8% for the top 10% for the United States. The only industrialized democracy with a higher concentration of wealth in the top 10% than the United States is Switzerland at 71.3%. For the figures for several other Northern European countries and Canada, all of which are based on high-quality data, see Table 5.
| wealth owned by top 10% | |
|---|---|
| Switzerland | 71.3% |
| United States | 69.8% |
| Denmark | 65.0% |
| France | 61.0% |
| Sweden | 58.6% |
| UK | 56.0% |
| Canada | 53.0% |
| Norway | 50.5% |
| Germany | 44.4% |
| Finland | 42.3% |
The Relationship Between Wealth and Power
What’s the relationship between wealth and power? To avoid confusion, let’s be sure we understand they are two different issues. Wealth, as I’ve said, refers to the value of everything people own, minus what they owe, but the focus is on “marketable assets” for purposes of economic and power studies. Power, as explained elsewhere on this site, has to do with the ability (or call it capacity) to realize wishes, or reach goals, which amounts to the same thing, even in the face of opposition (Russell, 1938; Wrong, 1995). Some definitions refine this point to say that power involves Person A or Group A affecting Person B or Group B “in a manner contrary to B’s interests,” which then necessitates a discussion of “interests,” and quickly leads into the realm of philosophy (Lukes, 2005, p. 30). Leaving those discussions for the philosophers, at least for now, how do the concepts of wealth and power relate?
First, wealth can be seen as a “resource” that is very useful in exercising power. That’s obvious when we think of donations to political parties, payments to lobbyists, and grants to experts who are employed to think up new policies beneficial to the wealthy. Wealth also can be useful in shaping the general social environment to the benefit of the wealthy, whether through hiring public relations firms or donating money for universities, museums, music halls, and art galleries.
Second, certain kinds of wealth, such as stock ownership, can be used to control corporations, which of course have a major impact on how the society functions. Tables 6a and 6b show what the distribution of stock ownership looks like. Note how the top one percent’s share of stock equity increased (and the bottom 80 percent’s share decreased) between 2001 and 2010.
Table 6a: Concentration of stock ownership in the United States,
2001-2010
| Percent of all stock owned: | ||||
|---|---|---|---|---|
| Wealth class | 2001 | 2004 | 2007 | 2010 |
| Top 1% | 33.5% | 36.7% | 38.3% | 35.0% |
| Next 19% | 55.8% | 53.9% | 52.8% | 56.6% |
| Bottom 80% | 10.7% | 9.4% | 8.9% | 8.4% |
Table 6b: Amount of stock owned by various wealth classes in the U.S., 2010
| Percent of households owning stocks worth: | |||
|---|---|---|---|
| Wealth class | $0 (no stocks) | $1-$9,999 | $10,000 or more |
| Top 1% | 5.1% | 0.6% | 94.3% |
| 95-99% | 6.9% | 4.0% | 89.1% |
| 90-95% | 11.8% | 4.8% | 83.4% |
| 80-90% | 21.0% | 8.5% | 70.5% |
| 60-80% | 41.3% | 15.6% | 44.1% |
| 40-60% | 55.4% | 19.9% | 24.7% |
| 20-40% | 76.1% | 17.4% | 6.5% |
| Bottom 20% | 79.2% | 17.3% | 4.5% |
| TOTAL | 53.1% | 17.5% | 31.6% |
Both tables’ data derived from Wolff (2007, 2010, & 2012). Includes direct ownership of stock shares and indirect ownership through mutual funds, trusts, and IRAs, Keogh plans, 401(k) plans, and other retirement accounts. All figures are in 2010 dollars.
Third, just as wealth can lead to power, so too can power lead to wealth. Those who control a government can use their position to feather their own nests, whether that means a favorable land deal for relatives at the local level or a huge federal government contract for a new corporation run by friends who will hire you when you leave government. If we take a larger historical sweep and look cross-nationally, we are well aware that the leaders of conquering armies often grab enormous wealth, and that some religious leaders use their positions to acquire wealth.
There’s a fourth way that wealth and power relate. For research purposes, the wealth distribution can be seen as the main “value distribution” within the general power indicator I call “who benefits.” What follows in the next three paragraphs is a little long-winded, I realize, but it needs to be said because some social scientists — primarily pluralists — argue that who wins and who loses in a variety of policy conflicts is the only valid power indicator (Dahl, 1957, 1958; Polsby, 1980). And philosophical discussions don’t even mention wealth or other power indicators (Lukes, 2005). (If you have heard it all before, or can do without it, feel free to skip ahead to the last paragraph of this section)
Here’s the argument: if we assume that most people would like to have as great a share as possible of the things that are valued in the society, then we can infer that those who have the most goodies are the most powerful. Although some value distributions may be unintended outcomes that do not really reflect power, as pluralists are quick to tell us, the general distribution of valued experiences and objects within a society still can be viewed as the most publicly visible and stable outcome of the operation of power.
In American society, for example, wealth and well-being are highly valued. People seek to own property, to have high incomes, to have interesting and safe jobs, to enjoy the finest in travel and leisure, and to live long and healthy lives. All of these “values” are unequally distributed, and all may be utilized as power indicators. However, the primary focus with this type of power indicator is on the wealth distribution sketched out in the previous section.
The argument for using the wealth distribution as a power indicator is strengthened by studies showing that such distributions vary historically and from country to country, depending upon the relative strength of rival political parties and trade unions, with the United States having the most highly concentrated wealth distribution of any Western democracy except Switzerland. For example, in a study based on 18 Western democracies, strong trade unions and successful social democratic parties correlated with greater equality in the income distribution and a higher level of welfare spending (Stephens, 1979).
And now we have arrived at the point I want to make. If the top 1% of households have 30-35% of the wealth, that’s 30 to 35 times what they would have if wealth were equally distributed, and so we infer that they must be powerful. And then we set out to see if the same set of households scores high on other power indicators (it does). Next we study how that power operates, which is what most articles on this site are about. Furthermore, if the top 20% have 84% of the wealth (and recall that 10% have 85% to 90% of the stocks, bonds, trust funds, and business equity), that means that the United States is a power pyramid. It’s tough for the bottom 80% — maybe even the bottom 90% — to get organized and exercise much power.
Income and Power
The income distribution also can be used as a power indicator. As Table 7 shows, it is not as concentrated as the wealth distribution, but the top 1% of income earners did receive 17.2% of all income in 2009. That’s up from 12.8% for the top 1% in 1982, which is quite a jump, and it parallels what is happening with the wealth distribution. This is further support for the inference that the power of the corporate community and the upper class have been increasing in recent decades.
Table 7: Distribution of income in the United States, 1982-2006
| Income | |||
|---|---|---|---|
| Top 1 percent | Next 19 percent | Bottom 80 percent | |
| 1982 | 12.8% | 39.1% | 48.1% |
| 1988 | 16.6% | 38.9% | 44.5% |
| 1991 | 15.7% | 40.7% | 43.7% |
| 1994 | 14.4% | 40.8% | 44.9% |
| 1997 | 16.6% | 39.6% | 43.8% |
| 2000 | 20.0% | 38.7% | 41.4% |
| 2003 | 17.0% | 40.8% | 42.2% |
| 2006 | 21.3% | 40.1% | 38.6% |
| 2009 | 17.2% | 41.9% | 40.9% |
From Wolff (2012).
The rising concentration of income can be seen in a special New York Times analysis by David Cay Johnston of an Internal Revenue Service report on income in 2004. Although overall income had grown by 27% since 1979, 33% of the gains went to the top 1%. Meanwhile, the bottom 60% were making less: about 95 cents for each dollar they made in 1979. The next 20% – those between the 60th and 80th rungs of the income ladder — made $1.02 for each dollar they earned in 1979. Furthermore, Johnston concludes that only the top 5% made significant gains ($1.53 for each 1979 dollar). Most amazing of all, the top 0.1% — that’s one-tenth of one percent — had more combined pre-tax income than the poorest 120 million people (Johnston, 2006).
But the increase in what is going to the few at the top did not level off, even with all that. As of 2007, income inequality in the United States was at an all-time high for the past 95 years, with the top 0.01% — that’s one-hundredth of one percent — receiving 6% of all U.S. wages, which is double what it was for that tiny slice in 2000; the top 10% received 49.7%, the highest since 1917 (Saez, 2009). However, in an analysis of 2008 tax returns for the top 0.2% — that is, those whose income tax returns reported $1,000,000 or more in income (mostly from individuals, but nearly a third from couples) — it was found that they received 13% of all income, down slightly from 16.1% in 2007 due to the decline in payoffs from financial assets (Norris, 2010).
And the rate of increase is even higher for the very richest of the rich: the top 400 income earners in the United States. According to another analysis by Johnston (2010a), the average income of the top 400 tripled during the Clinton Administration and doubled during the first seven years of the Bush Administration. So by 2007, the top 400 averaged $344.8 million per person, up 31% from an average of $263.3 million just one year earlier. (For another recent revealing study by Johnston, read “Is Our Tax System Helping Us Create Wealth?“).
How are these huge gains possible for the top 400? It’s due to cuts in the tax rates on capital gains and dividends, which were down to a mere 15% in 2007 thanks to the tax cuts proposed by the Bush Administration and passed by Congress in 2003. Since almost 75% of the income for the top 400 comes from capital gains and dividends, it’s not hard to see why tax cuts on income sources available to only a tiny percent of Americans mattered greatly for the high-earning few. Overall, the effective tax rate on high incomes fell by 7% during the Clinton presidency and 6% in the Bush era, so the top 400 had a tax rate of 20% or less in 2007, far lower than the marginal tax rate of 35% that the highest income earners (over $372,650) supposedly pay. It’s also worth noting that only the first $106,800 of a person’s income is taxed for Social Security purposes (as of 2010), so it would clearly be a boon to the Social Security Fund if everyone — not just those making less than $106,800 — paid the Social Security tax on their full incomes.
Do Taxes Redistribute Income?
It is widely believed that taxes are highly progressive and, furthermore, that the top several percent of income earners pay most of the taxes received by the federal government. Both ideas are wrong because they focus on official, rather than “effective” tax rates and ignore payroll taxes, which are mostly paid by those with incomes below $100,000 per year.
But what matters in terms of a power analysis is what percentage of their income people at different income levels pay to all levels of government (federal, state, and local) in taxes. If the less-well-off majority is somehow able to wield power, we would expect that the high earners would pay a bigger percentage of their income in taxes, because the majority figures the well-to-do would still have plenty left after taxes to make new investments and lead the good life. If the high earners have the most power, we’d expect them to pay about the same as everybody else, or less.
Citizens for Tax Justice, a research group that’s been studying tax issues from its offices in Washington since 1979, provides the information we need. When all taxes (not just income taxes) are taken into account, the lowest 20% of earners (who average about $12,400 per year), paid 16.0% of their income to taxes in 2009; and the next 20% (about $25,000/year), paid 20.5% in taxes. So if we only examine these first two steps, the tax system looks like it is going to be progressive.
And it keeps looking progressive as we move further up the ladder: the middle 20% (about $33,400/year) give 25.3% of their income to various forms of taxation, and the next 20% (about $66,000/year) pay 28.5%. So taxes are progressive for the bottom 80%. But if we break the top 20% down into smaller chunks, we find that progressivity starts to slow down, then it stops, and then it slips backwards for the top 1%.
Specifically, the next 10% (about $100,000/year) pay 30.2% of their income as taxes; the next 5% ($141,000/year) dole out 31.2% of their earnings for taxes; and the next 4% ($245,000/year) pay 31.6% to taxes. You’ll note that the progressivity is slowing down. As for the top 1% — those who take in $1.3 million per year on average — they pay 30.8% of their income to taxes, which is a little less than what the 9% just below them pay, and only a tiny bit more than what the segment between the 80th and 90th percentile pays.
What I’ve just explained with words can be seen more clearly in Figure 6.
Figure 6: Share of income paid as tax, including local and state tax
We also can look at this information on income and taxes in another way by asking what percentage of all taxes various income levels pay. (This is not the same as the previous question, which asked what percentage of their incomes went to taxes for people at various income levels.) And the answer to this new question can be found in Figure 7. For example, the top 20% receives 59.1% of all income and pays 64.3% of all the taxes, so they aren’t carrying a huge extra burden. At the other end, the bottom 20%, which receives 3.5% of all income, pays 1.9% of all taxes.
Figure 7: Share of all income earned and all taxes paid, by quintile
So the best estimates that can be put together from official government numbers show a little bit of progressivity. But the details on those who earn millions of dollars each year are very hard to come by, because they can stash a large part of their wealth in off-shore tax havens in the Caribbean and little countries in Europe, starting with Switzerland. And there are many loopholes and gimmicks they can use, as summarized with striking examples in Free Lunch and Perfectly Legal, the books by Johnston that were mentioned earlier. For example, Johnston explains the ways in which high earners can hide their money and delay on paying taxes, and then invest for a profit what normally would be paid in taxes.
Income inequality in other countries
The degree of income inequality in the United States can be compared to that in other countries on the basis of the Gini coefficient, a mathematical ratio that allows economists to put all countries on a scale with values that range (hypothetically) from zero (everyone in the country has the same income) to 100 (one person in the country has all the income). On this widely used measure, the United States ends up 95th out of the 134 countries that have been studied — that is, only 39 of the 134 countries have worse income inequality. The U.S. has a Gini index of 45.0; Sweden is the lowest with 23.0, and South Africa is near the top with 65.0.
The table that follows displays the scores for 22 major countries, along with their ranking in the longer list of 134 countries that were studied (most of the other countries are very small and/or very poor). In examining this table, remember that it does not measure the same thing as Table 5 earlier in this document, which was about the wealth distribution. Here we are looking at the income distribution, so the two tables won’t match up as far as rankings. That’s because a country can have a highly concentrated wealth distribution and still have a more equal distribution of income due to high taxes on top income earners and/or high minimum wages — both Switzerland and Sweden follow this pattern. So one thing that’s distinctive about the U.S. compared to other industrialized democracies is that both its wealth and income distributions are highly concentrated.
Table 8: Income equality in selected countries
| Country/Overall Rank | Gini Coefficient |
|---|---|
| 1. Sweden | 23.0 |
| 2. Norway | 25.0 |
| 8. Austria | 26.0 |
| 10. Germany | 27.0 |
| 17. Denmark | 29.0 |
| 25. Australia | 30.5 |
| 34. Italy | 32.0 |
| 35. Canada | 32.1 |
| 37. France | 32.7 |
| 42. Switzerland | 33.7 |
| 43. United Kingdom | 34.0 |
| 45. Egypt | 34.4 |
| 56. India | 36.8 |
| 61. Japan | 38.1 |
| 68. Israel | 39.2 |
| 81. China | 41.5 |
| 82. Russia | 42.3 |
| 90. Iran | 44.5 |
| 93. United States | 45.0 |
| 107. Mexico | 48.2 |
| 125. Brazil | 56.7 |
| 133. South Africa | 65.0 |
Note: These figures reflect family/household income, not individual income.
Source: Central Intelligence Agency (2010).
The differences in income inequality between countries also can be illustrated by looking at the share of income earned by the now-familiar Top 1% versus the Bottom 99%. One of the most striking contrasts is between Sweden and the United States from 1950 to 2009, as seen in Figure 8; and note that the differences between the two countries narrowed in the 1950s and 1960s, but after that went their separate ways, in rather dramatic fashion.
Figure 8: Top income shares in the U.S. and Sweden, 1950-2009
The impact of “transfer payments”
As we’ve seen, taxes don’t have much impact on the income distribution, especially when we look at the top 1% or top 0.1%. Nor do various kinds of tax breaks and loopholes have much impact on the income distribution overall. That’s because the tax deductions that help those with lower incomes — such as the Earned Income Tax Credit (EITC), tax forgiveness for low-income earners on Social Security, and tax deductions for dependent children — are offset by the breaks for high-income earners (for example: dividends and capital gains are only taxed at a rate of 15%; there’s no tax on the interest earned from state and municipal bonds; and 20% of the tax deductions taken for dependent children actually go to people earning over $100,000 a year).
But it is sometimes said that income inequality is reduced significantly by government programs that matter very much in the lives of low-income Americans. These programs provide “transfer payments,” which are a form of income for those in need. They include unemployment compensation, cash payments to the elderly who don’t have enough to live on from Social Security, Temporary Assistance to Needy Families (welfare), food stamps, and Medicaid.
Thomas Hungerford (2009), a tax expert who works for the federal government’s Congressional Research Service, carried out a study for Congress that tells us about the real-world impact of transfer payments on reducing income inequality. Hungerford’s study is based on 2004 income data from an ongoing study of a representative sample of families at the University of Michigan, and it includes the effects of both taxes and four types of transfer payments (Social Security, Temporary Assistance to Needy Families, food stamps, and Medicaid). The table that follows shows the income inequality index (that is, the Gini coefficient) at three points along the way: (1.) before taxes or transfers; (2) after taxes are taken into account; and (3) after both taxes and transfer payments are included in the equation. (The Citizens for Tax Justice study of income and taxes for 2009, discussed earlier, included transfer payments as income, so that study and Hungerford’s have similar starting points. But they can’t be directly compared, because they use different years.)
Table 9: Redistributive effect of taxes and transfer payments
| Income definition | Gini index |
|---|---|
| Before taxes and transfers | 0.5116 |
| After taxes, before transfers | 0.4774 |
| After taxes and transfers | 0.4284 |
Source: Congressional Research Service, adapted from Hungerford (2009).
As can be seen, Hungerford’s findings first support what we had learned earlier from the Citizens for Tax Justice study: taxes don’t do much to reduce inequality. They secondly reveal that transfer payments have a slightly larger impact on inequality than taxes, but not much. Third, his findings tell us that taxes and transfer payments together reduce the inequality index from .52 to .43, which is very close to the CIA’s estimate of .45 for 2008.
In short, for those who ask if progressive taxes and transfer payments even things out to a significant degree, the answer is that while they have some effect, they don’t do nearly as much as in Canada, major European countries, or Japan.
Income Ratios and Power: Executives vs. Average Workers
Another way that income can be used as a power indicator is by comparing average CEO annual pay to average factory worker pay, something that has been done for many years by Business Week and, later, the Associated Press. The ratio of CEO pay to factory worker pay rose from 42:1 in 1960 to as high as 531:1 in 2000, at the height of the stock market bubble, when CEOs were cashing in big stock options. It was at 411:1 in 2005 and 344:1 in 2007, according to research by United for a Fair Economy. By way of comparison, the same ratio is about 25:1 in Europe. The changes in the American ratio from 1960 to 2007 are displayed in Figure 9, which is based on data from several hundred of the largest corporations.
Figure 9: CEOs’ pay as a multiple of the average worker’s pay, 1960-2007
It’s even more revealing to compare the actual rates of increase of the salaries of CEOs and ordinary workers; from 1990 to 2005, CEOs’ pay increased almost 300% (adjusted for inflation), while production workers gained a scant 4.3%. The purchasing power of the federal minimum wage actually declined by 9.3%, when inflation is taken into account. These startling results are illustrated in Figure 10.
Although some of the information I’ve relied upon to create this section on executives’ vs. workers’ pay is a few years old now, the AFL/CIO provides up-to-date information on CEO salaries at their Web site. There, you can learn that the median compensation for CEO’s in all industries as of early 2010 is $3.9 million; it’s $10.6 million for the companies listed in Standard and Poor’s 500, and $19.8 million for the companies listed in the Dow-Jones Industrial Average. Since the median worker’s pay is about $36,000, then you can quickly calculate that CEOs in general make 100 times as much as the workers, that CEO’s of S&P 500 firms make almost 300 times as much, and that CEOs at the Dow-Jones companies make 550 times as much. (For a more recent update on CEOs’ pay, see “The Drought Is Over (At Least for CEOs)” at NYTimes.com; the article reports that the median compensation for CEOs at 200 major companies was $9.6 million in 2010 — up by about 12% over 2009 and generally equal to or surpassing pre-recession levels. For specific information about some of the top CEOs, see http://projects.nytimes.com/executive_compensation.
If you wonder how such a large gap could develop, the proximate, or most immediate, factor involves the way in which CEOs now are able to rig things so that the board of directors, which they help select — and which includes some fellow CEOs on whose boards they sit — gives them the pay they want. The trick is in hiring outside experts, called “compensation consultants,” who give the process a thin veneer of economic respectability.
The process has been explained in detail by a retired CEO of DuPont, Edgar S. Woolard, Jr., who is now chair of the New York Stock Exchange’s executive compensation committee. His experience suggests that he knows whereof he speaks, and he speaks because he’s concerned that corporate leaders are losing respect in the public mind. He says that the business page chatter about CEO salaries being set by the competition for their services in the executive labor market is “bull.” As to the claim that CEOs deserve ever higher salaries because they “create wealth,” he describes that rationale as a “joke,” says the New York Times (Morgenson, 2005).
Here’s how it works, according to Woolard:
The compensation committee [of the board of directors] talks to an outside consultant who has surveys you could drive a truck through and pay anything you want to pay, to be perfectly honest. The outside consultant talks to the human resources vice president, who talks to the CEO. The CEO says what he’d like to receive. It gets to the human resources person who tells the outside consultant. And it pretty well works out that the CEO gets what he’s implied he thinks he deserves, so he will be respected by his peers. (Morgenson, 2005.)
The board of directors buys into what the CEO asks for because the outside consultant is an “expert” on such matters. Furthermore, handing out only modest salary increases might give the wrong impression about how highly the board values the CEO. And if someone on the board should object, there are the three or four CEOs from other companies who will make sure it happens. It is a process with a built-in escalator.
As for why the consultants go along with this scam, they know which side their bread is buttered on. They realize the CEO has a big say-so on whether or not they are hired again. So they suggest a package of salaries, stock options and other goodies that they think will please the CEO, and they, too, get rich in the process. And certainly the top executives just below the CEO don’t mind hearing about the boss’s raise. They know it will mean pay increases for them, too. (For an excellent detailed article on the main consulting firm that helps CEOs and other corporate executives raise their pay, check out the New York Times article entitled “America’s Corporate Pay Pal”, which supports everything Woolard of DuPont claims and adds new information.)
If hiring a consulting firm doesn’t do the trick as far as raising CEO pay, then it may be possible for the CEO to have the board change the way in which the success of the company is determined. For example, Walmart Stores, Inc. used to link the CEO’s salary to sales figures at established stores. But when declining sales no longer led to big pay raises, the board simply changed the magic formula to use total companywide sales instead. By that measure, the CEO could still receive a pay hike (Morgenson, 2011).
There’s a much deeper power story that underlies the self-dealing and mutual back-scratching by CEOs now carried out through interlocking directorates and seemingly independent outside consultants. It probably involves several factors. At the least, on the workers’ side, it reflects their loss of power following the all-out attack on unions in the 1960s and 1970s, which is explained in detail in an excellent book by James Gross (1995), a labor and industrial relations professor at Cornell. That decline in union power made possible and was increased by both outsourcing at home and the movement of production to developing countries, which were facilitated by the break-up of the New Deal coalition and the rise of the New Right (Domhoff, 1990, Chapter 10). It signals the shift of the United States from a high-wage to a low-wage economy, with professionals protected by the fact that foreign-trained doctors and lawyers aren’t allowed to compete with their American counterparts in the direct way that low-wage foreign-born workers are.
(You also can read a quick version of my explanation for the “right turn” that led to changes in the wealth and income distributions in an article on this site, where it is presented in the context of criticizing the explanations put forward by other theorists.)
On the other side of the class divide, the rise in CEO pay may reflect the increasing power of chief executives as compared to major owners and stockholders in general, not just their increasing power over workers. CEOs may now be the center of gravity in the corporate community and the power elite, displacing the leaders in wealthy owning families (e.g., the second and third generations of the Walton family, the owners of Walmart). True enough, the CEOs are sometimes ousted by their generally go-along boards of directors, but they are able to make hay and throw their weight around during the time they are king of the mountain.
The claims made in the previous paragraph need much further investigation. But they demonstrate the ideas and research directions that are suggested by looking at the wealth and income distributions as indicators of power.
Why Democracy Needs the Rich
Wealthy Americans are far from the most politically influential group—and what influence they do exert is often beneficent.
The rich are in bad odor. The Left has made the “1 percent” a target of sustained moral and political criticism. But what exactly is wrong with the wealthy?
Liberals often insist on the need for economic fairness. Some argue that the wealthy could pay more taxes without substantially harming the economy, though they should be grateful when taxpayers provide money to advance progressive goals. Others object to the very existence of large fortunes and seek to erode them via taxation. But the substantial majority of the very rich are self-made—two-thirds of the Forbes 400 built their own businesses, a proportion that is growing—and they add far more to the welfare of consumers than they retain in wealth.
Perhaps more troubling is the claim that the rich create social costs for the polity by wielding disproportionate influence in the political process. In Why Does Inequality Matter?, Harvard philosopher T. M. Scanlon identifies the political effects of wealth inequality as one of its most consequential costs. Yale political scientist Jacob Hacker and venture capitalist Nathan Loewentheil argue, more specifically, that the outsize influence of the very rich blocks policies to help the middle class and poor that the political system would otherwise enact. And Vermont senator Bernie Sanders, perhaps the most prominent critic of inequality in the U.S., says that ours is an “oligarchic” society “in which a small number of incredibly wealthy and powerful billionaires own and control a significant part of the economy and exert enormous influence over the political life of our country.”
Such concerns animate a raft of new proposals—from legislation that would prevent people from spending money on electioneering, to efforts to limit tax deductions or to require the disclosure of donors’ identities for philanthropy that promotes certain causes. The argument that the wealthy pose a threat to our system has also been used to justify tax proposals that might substantially harm economic growth. Even if such exactions prove inefficient, some progressives defend them on the grounds that they curb the political power of the rich. Yet, however popular it has become, the argument that the disproportionate influence of the wealthy threatens American democracy fails on several levels.
Begin with the problem of defining how much influence is too much. Evidence suggests that politicians do often follow the views of the wealthy on such matters as taxation, spending, and regulation: for example, the wealthy are less enthusiastic about raising the minimum wage than is the general population. But unequal influence—exerted through money spent on campaigns or political causes—does not necessarily mean undue influence. Perhaps the wealthy have more informed perspectives on certain issues than the average voter and push for policies that benefit not only themselves but others, too.
The U.S. is a representative democracy, not a direct democracy. The Framers expressly rejected the notion that the people should be able to instruct their representatives on how to vote. One proposed amendment to the Bill of Rights would have permitted voters to impose such binding directions, but James Madison objected: the nation’s representatives “must be able to contradict the sense of . . . the people” and not to vote for measures that they thought harmed the “public good,” he argued. Representatives will inevitably consider not just whether their policies align with the electorate’s current views but whether they will have good effects—at least, if they want to be reelected. Voters have short memories; they will hardly forgive politicians whose policies do harm just because those policies once earned high marks in opinion polls.
Public-choice theory—the application of economic principles to political decision-makers and institutions—reminds us that since individual voters are unlikely to change the result of an election, they will be naturally, and rationally, ignorant of most policies. They will often vote for expressive reasons—to affirm their image of themselves as good people. In times of crisis, voters may tend to pay more attention to the concrete consequences of their vote. But given that voting in ordinary times is mostly expressive, politicians should not uncritically obey popular sentiment but instead translate it into prudent policy.
For many wealthy voters, however, properly assessing the consequences is part of their self-image, making them more wedded to intricacies of policy debate. In business, where the rich have usually made their wealth, prediction makes the difference between success and failure, and understanding the real-world effects of policy becomes an imperative. Intelligent people who spend their lives gauging the markets for their products or anticipating how regulations will affect their companies often possess impressive predictive skills that ordinary workers may not possess.
In particular, business leaders are likely to be more grounded in their views than politically engaged intellectuals, who tend toward abstraction, imagining a just society without considering the consequences of the steps needed to realize their vision—which may not be realistic in the first place. As historian Augustin Cochin observes, “whereas in the real world the arbiter of all thought is proof and its issue is the effect, in the [intellectuals’] world the arbiter is the opinion of others, and the aim their approbation.” In the house of mirrors of the intelligentsia, trendy orthodoxies can gain popularity, regardless of their long-term consequences. The rich tend to be better positioned to provide a unique perspective that focuses on the likely consequences of policies—an important component of what Madison referred to as the “public good.”
The ideological or political sway of the rich also pales compared with that of other groups whose impact the Left often celebrates. Key progressive constituencies, especially the media, the academy, and the public bureaucracy, exercise a tremendous influence on American politics, culture, and governance, despite holding political views far less representative of the general public than those of the wealthy. The rich would emphatically lose in any contest to name the most ideologically homogenous, politically powerful group—the group, too, most likely to thwart popular opinion.
Consider journalists, those gatekeepers of culture and politics. Editors decide which stories get covered, which don’t, and which receive top billing; reporters filter events through narrative frames that trickle into public school curricula; and opinion writers editorialize on behalf of issues and candidates. The vast majority of journalists are Democrats, and the influence of legacy media still far outweighs that of their conservative or independent competitors. Journalists’ views are becoming more uniform and intolerant of dissent: just think of Tom Cotton, whose New York Times op-ed calling for the military to quell nationwide riots resulted in a newsroom revolt and the resignation of the editorial-page editor.
Or take academics, who, far from being confined to the ivory tower, transmit ideas to the next generation. Fashionable claims that the U.S. was founded on an ideology of slavery, that interlocking systems of oppression dominate the downtrodden, and that the Founders used liberty as a smokescreen for white supremacy got their start in college classrooms. As in journalism, many universities encourage a creedal atmosphere, unwelcoming to those who fail to repeat the social-justice catechism. And like journalists, professors are far to the left of the average American. At Harvard, only 4 percent of faculty political donations go to Republicans. At many universities, it’s impossible to find more than a few professors in the humanities or social sciences who hold conservative views.
Another example: federal bureaucrats, who wield influence via the administrative state. One might think that top bureaucrats don’t exert much independent sway, as they serve under political appointees, who change with presidential administrations. But most political appointees are short-termers, who don’t always grasp procedural and substantive intricacies and must keep good relations with their subordinates to be successful—and that allows those subordinates to use their expertise to shape policy. Federal bureaucrats, like the media and academics, stand to the left of the median Democrat. Government lawyers are more liberal than the average lawyer, who is himself more liberal than the average American. In 2016, 95 percent of presidential campaign contributions from federal bureaucrats went to Hillary Clinton.
Compared with any of these groups, the rich are a paragon of balance. The richest 4 percent of Americans went slightly for Democrats in 2012 but favored John McCain in the previous election. Billionaire donors exist across the political spectrum. The Koch brothers and the late Sheldon Adelson have mostly contributed to right-wing candidates and causes; Tom Steyer and George Soros have contributed to the Left. If the rich lose their influence, while the aforementioned groups retain theirs, the commanding heights of opinion-making will become more unbalanced—not because the rich are so far to the right but because they are a rare source of heterogeneity in the debate.
In fact, the wealthy cannot prevent people with unorthodox views from joining their ranks in the same way that the aforementioned groups can. Classical political philosophers worried that the power of the rich could create an oligarchy, but ancient societies were more static than modern market democracies. The next generation of the rich will make its money from unforeseen innovations and entrepreneurship. Such creative destruction also generates fresh insight in the political sphere, bringing in people with a keen appreciation of how society works in reality—particularly when they are compared with journalists, academics, and bureaucrats.
Some will object to this comparison. Journalists, academics, and bureaucrats are engaged in a fundamentally different enterprise from that of wealthy political donors, they might argue: the former focus principally on ideas and policy; the latter pursue electioneering. But no hard boundary demarcates electoral speech from political speech in general; democracy is an ever-bubbling cauldron of political ideas. The themes that reporters emphasize to the public and the ideas that academics transmit to the next generation arguably do more to shape the political terrain than election advertisements or initiatives funded by wealthy donors. Who has more long-term influence on our politics—a prominent law professor at Yale, or a billionaire funding an ad campaign?
This is not to say that wealthy people don’t exercise substantial political influence. But when they do, it is often to prevent more enduring, undemocratic imbalances from forming.
Concentrated interest groups—a set of people with shared interests and a legal mechanism for avoiding free-rider problems, enabling them to press efficiently for a political agenda—include professional guilds and unions, both private and public. These groups exert substantial political power and pose a significant problem for democratic governance, securing exactions and regulations that benefit narrow interests at the expense of the public. When unionized police and public school teachers negotiate contracts that provide extravagant pensions and insulate themselves from discipline, they degrade the public services that government workers are expected to provide. And when guilds like the American Bar Association secure burdensome licensing regulations, they protect incumbents at the expense of entrants.
These groups challenge the theory of democracy on which our republic is founded. In Federalist No. 10, James Madison identified the greatest danger to republican governance as the tyranny of the majority. A large republic was likely to contain a multiplicity of factions, Madison understood, making it harder for a stable majority to form and oppress minorities. But if concentrated interests come to wield disproportionate power, the extended republic with many factions will generate, rather than check, oppression, since certain interest groups will obtain spending and regulation that benefit them at the majority’s expense. Even if the exactions from interest groups are individually small, the costs imposed on a diffuse majority will be large overall.
Rich individuals are best positioned to push back against such concentrated groups. No one else will do it. The poor lack the know-how or the organization, and the middle class the money, to counteract them. Urban charter schools, which break the public education monopoly and offer families a choice in schooling, are sustained largely by the contributions and political support of the rich. Efforts to relax occupational-licensing restrictions or reform police accountability mechanisms also depend on support from the wealthy and their charitable foundations.
“It’s important for a nation to have citizens with substantial resources to push back against the government.”
But the rich don’t form an interest group of their own: they do not possess the legal mechanisms to avoid the free-rider problems that make it easier to lobby collectively. Hence they cannot prevent progressive taxation, in which the 1 percent pays a substantially higher proportion of its income in taxes than any other group. It betrays a fundamental ignorance of the ways of modern democracy to examine the influence of the wealthy without considering how that influence operates in a system rife with concentrated interest groups.
Finally, history and logic indicate that a democracy in which the wealthy can exercise sway is likely a more stable and prosperous regime than one where the government attempts to redistribute influence from one group to another. When people are unequally talented and differently organized, seeking to ensure that everyone has equal influence is a utopian project that would have high costs.
The rich can stand up more easily than others to overweening officials and mobs, forming a bulwark against arbitrary or tyrannical rule. Most of the time, ordinary citizens are not present as a substantial counterweight to the state because of their rational ignorance of politics and policy and the difficulty of coordinating their efforts. It thus is important for a nation to have citizens with substantial resources and peculiar abilities to push back against the government.
This is especially true in democracies, which, after all, can find themselves threatened by demagogues and mobs. Democracy transmutes personal emotions into political passions, creating popular movements that encourage zealous conformity and threaten the openness to argument upon which government by consent relies. Democracies also tend to split citizens into partisan tribes, which enforce conformity within their ranks and generate polarization. The rich can stand up to such trends, since they need not worry about keeping their jobs, getting raises, or ruining their connections within a party. With freedom from fear comes the ability to act independently.
Far from being a negative influence in democratic societies, then, the wealthy are a net positive. They provide a counterweight to mobs and tribes. They fight against special interests on behalf of more diffuse interests. They counteract more ideologically homogenous and powerful groups, including the press and academia. And they often inject into democratic deliberation a better understanding of the consequences of political decisions. None of this means that we should be ruled by the very rich alone, nor should inequality in influence translate to inequality in voting. But the wealthy, constituting a tiny fraction of voters, are not just a dynamo of our prosperity. They are also important to a civic life that allows for prosperity, order, and openness. They make democracy smarter, more stable, and less insular.
The problem with the U.S. economy is there are too many poor people
Are you in the top 1%, 5% or 10% of the U.S. income and wealth scale? If you are, congratulations on being rich and economically successful. Good for you too for not being a big part of our current economic challenges. You’re protected from the headwinds affecting the other 90% of your fellow citizens.
It’s easy to hate the rich for all that they have and all that you don’t, but the rich aren’t the problem.
Most of the rich were rich 10 years ago and have become richer. The rich are good at being rich; they buy expensive houses, cars, planes, and other toys. They hire people and create some jobs but not enough to have a discernible impact in an economy the size of the U.S. A few Americans have been able to enter this top tier, but not nearly enough.
Since the financial crisis of 2008, the Federal Reserve and federal government have engineered economic rescue efforts consisting of large deficit spending and liquidity injections totaling trillions of dollars. This drenching downpour of cash successfully staved off economic collapse and deeper financial tragedies. The government gets high marks for disaster aversion.
But, while the deficit spending and interest-rate suppression kept the ship afloat, they didn’t do much to get the ship moving very well, or improve the lots of the steerage passengers and crew. Yes, the first-class passengers are fine, were fine, and have almost always been fine. They have all been assigned a lifeboat. But the ship has not been safely steered clear from icebergs.
The U.S. economy is the largest in the world, and nearly 70% of it is driven by consumer spending. Billionaires are a fraction of the top 1%, and they literally can’t spend all their money. There is so much money in so few hands at the very top that they simply can’t spend enough of it to make a difference to an economy as large as America’s. The problem is that the poor and middle class don’t have enough money.
If your economy depends on consumer spending, the consumer needs money to spend. If your consumer economy is to increase, the consumers need to have more money to spend. The government’s approach that saved our economy has created a surge in asset prices that has made rich people richer but hasn’t done much for the average American family.
By the fourth quarter of 2019, there were encouraging signs.
Unemployment was below 4% and there were more job openings than people seeking jobs. When employers compete to get workers, they have to pay more for them. Wage gains, while inflationary, are a crucial step in getting more money into the hands of a larger number of Americans.
This additional money in more pockets creates demand for more stuff and requires increased manufacturing and hiring and results in economic expansion. This is a great formula for economic renaissance. But this hasn’t happened. It hasn’t happened because Milton Friedman was wrong.
The inflation problem
Widely acknowledged as one of the greatest economists ever, Friedman said “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” We have had more than 10 years of rapidly and steadily increasing money supply, but we haven’t had any meaningful inflation.
Therefore, Farr’s addendum to Friedman (I can’t believe I just wrote that) is that unless the increase of money leads to an increase in demand, there is no inflation (or for that matter, significant economic growth.)
The government’s monetary and fiscal programs that saved the economy from collapse are precisely those that led to the ever-increasing wealth gap. The middle class and poor are stuck and struggling while the wealthy become wealthier.
The popular political response is to blame and tax the rich. It appeals to the great American paradox of dreaming to be rich while simultaneously hating everyone who already is. The rich aren’t the problem, and it’s not their fault. This is government policy that began on a good path, accomplished meaningful and important goals, and lost its way.
The policy is the problem, and it needs to change.
Most of the money that has been spent just this year resulted in temporary relief for those who received it and very little in terms of sustained or long-term effect. The relief was needed, but without ongoing stimulus to spur growth, the impacts fade quickly.
Had a portion of the government funding been spent on repairing all of the bridges and highways in the U.S., people would have been hired by the hundreds of thousands; concrete, steel and other materials would have been purchased; and those resulting structures would have increased commerce and added to economic growth. The same can be said for longer-term investments such as energy infrastructure, education, and research and development.
I’m not arguing against relief; I’m arguing that stimulus that doesn’t spur long term growth isn’t stimulus at all. Politicians on both sides of the aisle need to better understand what is keeping the ship afloat, versus what will get it moving again.
The poor and middle class are the crux of the American economic dilemma, and until we are able to sustainably increase their lot, our economy will continue to suffer.
Taxing the rich may feel good, but it won’t raise enough money to dent this economic ill. I’m not arguing against higher taxes for the rich, but I am looking at the numbers.
Taxes on the wealthy could certainly be higher. Taxing the rich will provide more funds to pay for the government and to pay for interest on the government’s debt. But unless those monies are deployed such that they can create jobs and growth, the problem of the trapped poor and middle class will remain unchanged and may worsen.
Until employment and wages increase, the U.S. economy will remain at best bogged down and at worst digging a deeper hole for all of us, our children and grandchildren.
The costs of inequality: Increasingly, it’s the rich and the rest
Economic and political inequities are interlaced, analysts say, leaving many Americans poor and voiceless
“We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both,” Associate Supreme Court Justice Louis Brandeis said decades ago during another period of pronounced inequality in America.
Echoing the concern of the Harvard Law School (HLS) graduate, over the past 30 years myriad forces have battered the United States’ legendary reputation as the world’s “land of opportunity.”
The 2008 global economic meltdown that eventually bailed out Wall Street financiers but left ordinary citizens to fend for themselves trained a spotlight on the unfairness of fiscal inequality. The issue gained traction during the Occupy Wall Street protest movement in 2011 and during the successful U.S. Senate campaign of former HLS Professor Elizabeth Warren in 2012.
What was once viewed as a fringe political issue is now at the heart of the angry, populist rhetoric of the 2016 presidential campaign. Personified by outsider candidates Bernie Sanders and Donald Trump, economic inequality has resonated with broad swaths of nervous voters on both the left and right.
“Smart poor kids are less likely to graduate from college now than dumb rich kids. That’s not because of the schools, that’s because of all the advantages that are available to rich kids.”
— Robert Putnam
Lawrence Katz, the Elisabeth Allison Professor of Economics in Harvard’s Faculty of Arts and Sciences (FAS), says the most damaging aspects of the gap between the top 1 percent of Americans and everyone else involve the increasing economic and political power that the very rich wield over society, along with a growing educational divide, and escalating social segregation in which the elites live in literal and figurative gated communities.
If the rate of economic mobility — the ability of people to improve their economic station — was higher, he says, our growing income disparity might not be such a problem.
“But what we have been seeing is rising inequality with stagnant mobility, which means that the consequences of where you start out, whether it’s in a poor neighborhood, whether it’s from a single-parent household, are more consequential today than in the past. Your ZIP code and the exact characteristics of your parents seem to matter more,” said Katz. “And that’s quite disturbing.”
The growing gap between the rich and the rest isn’t a matter of who can afford a yacht or a Manhattan penthouse, analysts say. Rather, it’s the crippling nature of these disparities as they touch nearly every aspect of daily lives, from career prospects and educational opportunities to health risks and neighborhood safety.
The widening income gap also has fueled a class-based social disconnect that has produced inequitable educational results. “Now, your family income matters more than your own abilities in terms of whether you complete college,” said Robert Putnam, the Peter and Isabel Malkin Professor of Public Policy at Harvard Kennedy School (HKS). “Smart poor kids are less likely to graduate from college now than dumb rich kids. That’s not because of the schools, that’s because of all the advantages that are available to rich kids.”
Economic inequality also feeds the political kind, driving everything from the actions of our political representatives to the quality and quantity of civic engagement, such as voting and community-based public service.
“It’s long been known that the better educated, those with higher incomes, participate more” in politics on “everything from voting to contacting politicians to donating,” said Theda Skocpol, the Victor S. Thomas Professor of Government and Sociology at FAS. “What is quite new in recent times is … very systematically, that government really responds much more to the privileged than to even middle-income people who vote.”
Money eases access
The U.S. Supreme Court’s unlacing of campaign-finance laws that limited how much donors could give candidates or affiliate organizations, coupled with allowing donors to shield their identities from public scrutiny, have spawned a financial arms race that requires viable presidential candidates, for example, to solicit donors constantly in a quest to raise $1 billion or more to win.
Given that rulebook, it’s hardly surprising that the political supporters with the greatest access to candidates are usually the very wealthy. Backers with both influence and access often help to shape the political agenda. The result is a kind of velvet rope that can keep those without economic clout on the sidelines, out of the conversation.
“In the current election cycle, 158 families have given half the money to candidates.”
— Lawrence Lessig
“Something like the carried-interest provision in the tax code, when you explain it to ordinary citizens, they don’t like the idea that income earned by investing other people’s money should be taxed at a lower rate than regular wage and salary income. It’s not popular in some broad, polling sense. But many politicians probably don’t realize it at all because … politicians spend a lot of their time asking people to give money to them [who] don’t think it’s a good idea to change that,” said Skocpol. “There’s a real danger that, as wealth and income are more and more concentrated toward the top, it does become a vicious circle.”
“Money has corrupted our political process,” said Lawrence Lessig, the Roy L. Furman Professor of Law and Leadership at HLS. In Congress, he said, “They focus too much on the tiny slice, 1 percent, who are funding elections. In the current election cycle [as of October], 158 families have given half the money to candidates. That’s a banana republic democracy; that’s not an American democracy.”
Lessig was so unhappy with how political campaigns are funded that he briefly ran for president on the issue. Reviewing his efforts during a Harvard forum on the topic in November, he described his candidacy as a referendum on the campaign-finance system, but also on the need to reform Congress, which he called a “broken and corrupted institution” undercut by big donors and gerrymandered election districts.
How we got here
Christopher “Sandy” Jencks, the Malcolm Wiener Professor of Social Policy at HKS, believes that the past 30 years of rising American inequality can be attributed to three key factors:
- The decline in jobs and employment rates for less-skilled workers, which has increased the number of households with children but no male breadwinner.
- The demand for college graduates outpacing the pool of job candidates, adding to the gap between the middle class and upper-middle class.
- The share of income gains flowing to the top 1 percent of earners doubling as a result of deregulation, globalization, and speculation in the financial services industry.
The U.S. government does “considerably less” than comparable democracies to even out disposable family incomes, Jencks says. And current state and local tax policies “actually increase income inequality.”
“All the costs and risks of capitalism seem to have been shifted largely to those who work rather than those who invest,” he said.
Compounding the economic imbalance is the unlikely prospect that those at the bottom can ever improve their lot.
“We have some of the lowest rates of upward mobility of any developed country in the world,” said Nathaniel Hendren, an associate professor of economics at FAS who has studied intergenerational mobility and how inequality transmits across generations.
Hendren, along with Harvard economists Katz and Raj Chetty, now at Stanford University, looked at the lasting effects of moving children to better neighborhoods as part of Moving to Opportunity, a short-lived federal housing program from the ’90s. Their analysis, published in May, found that the longer children are exposed to better environments, the better they do economically in the future. Whichever city or state children grow up in also radically affects whether they’ll move out of poverty, he said.
For children in parts of the Midwest, the Northeast, and the West, upward mobility rates are high. But in the South and portions of the Rust Belt, rates are very low. For example, a child born in Iowa into a household making less than $25,000 a year has an 18 percent chance to move into the upper 20 percent of income strata over a lifetime. But a child born in Atlanta or Charlotte, N.C., has only a 4 percent chance of moving up, their study found.
What unites areas of low mobility, Hendren says, are broken family structures, reduced levels of civic and community engagement, lower-quality K-12 education, greater racial and economic segregation, and broader income inequality.
In addition, 90 percent of American workers have seen their wages stall while their costs of living continue to rise.
“When you look at the data, it’s sobering. Median household income when last reported in 2013 was at a level first attained in 1989, adjusting for inflation. That’s a long time to go without any gains,” said Jan Rivkin, the Bruce V. Rauner Professor of Business Administration at Harvard Business School (HBS).
Wage inequality is on the rise for both genders. Within that range, the gap between men and women remains a hot-button issue despite gains by women in the past three decades. Broadly, the ratio of median earnings for women increased from 0.56 to 0.78 between 1970 and 2010.
But according to Claudia Goldin, the Henry Lee Professor of Economics at FAS, the gender earnings gap is not a constant, varying widely by occupation and age. While women in their late 20s earn about 92 percent of what their male counterparts earn, women in their early 50s earn just 71 cents on the dollar that the average man makes. For some career paths, like pharmacists, veterinarians, and optometrists, corporatization has closed the gap between men and women.
Even so, wiping away the gender pay gap isn’t a cure-all for the larger issues of inequality.
“If you reduce gender inequality to zero, you’ve closed inequality … by a very small percent,” said Goldin. “I’m not saying there aren’t things that we can’t fix, but I am telling you, without a doubt, they’re going to move the lever by very little.”
Underinvestment in “the commons”
Rivkin says that the pressures of globalization and technological change and the weakening of labor unions have had a major impact. But he disagrees that political favoritism toward business interests and away from ordinary citizens is the primary reason for burgeoning inequality. Rather, he says that sustained underinvestment by government and business in “the commons” — the institutions and services that offer wide community benefits, like schools and roads — has been especially detrimental.
Last spring, HBS conducted an alumni survey for its annual U.S. Competitiveness Project research series, probing respondents for their views on the current and future state of American businesses, the prospects of dominating the global marketplace, and the likelihood that the resulting prosperity would be shared more evenly among citizens.
“What is quite new in recent times is … very systematically, that government really responds much more to the privileged than to even middle-income people who vote.”
— Theda Skocpol
The survey findings, released in September, showed that most HBS alumni were skeptical that living standards would rise more equitably soon, given existing policies and practices. A majority said that inequality and related issues like rising poverty, limited economic mobility, and middle-class stagnation were not only social ills, but problems that affected their businesses.
“My sense is that a larger and larger number of business leaders are waking up to the idea that issues of inequality, and particularly lack of shared prosperity, have to be addressed for the sake of business,” said Rivkin, the project’s co-chair.
The surging power of the very wealthy in America now rivals levels last seen in the Gilded Age of the late 19th century, analysts say. One difference, however, is that the grotesque chasm between that era’s robber barons and tenement dwellers led to major social and policy reforms that are still with us, including labor rights, women’s suffrage, and federal regulatory agencies to oversee trade, banking, food, and drugs.
Hendren said there’s no less chance today of rising or falling along the income spectrum than there was 25 years ago. “The chances of moving up or down the ladder are the same,” he said, “but the way we think about inequality is that the rungs on the ladder have gotten wider. The difference between being at the top versus the bottom of the income distribution is wider, so the consequences of being born to a poor family in dollar terms are wider.”
What price inaction?
Unless America’s policymakers begin to chip away at the underlying elements of systemic inequality, the costs to the nation will be profound, analysts say.
“I think we will pay many prices. We will continue to have divisive politics. We won’t make the investments we need to provide the majority of kids with a better life, and that would be really not fulfilling,” said Katz.
Partisan gridlock in Washington, D.C., has diminished the effectiveness of government — perhaps the most essential and powerful tool for addressing inequality and citizens’ needs. By adopting a political narrative that government should not and cannot effectively solve problems, legislative inaction results in policy inaction.
“It’s definitely been a strategy” to justify starving government of resources, which in turn weakens it and makes it less attractive as a tool to accomplish big things, said Skocpol. “In an everybody-for-themselves situation, it is the better-educated and the wealthy who can protect themselves.”
Surveying the landscape, Katz sees reasons to be both hopeful and worried.
“The optimism is that there are regions of the U.S., metropolitan areas that have tremendous upward mobility. So we do have models that work. We do have programs like Medicare and the Earned Income Tax Credit that work pretty well. I think that if national policy more approximated the upper third of state and local policies, the U.S. would have a lot of hope,” said Katz. “My pessimistic take would be that if you look at two-thirds of America, things are not improving in the way we would like.”
Putnam is heartened that inequality has been widely recognized as a major problem and is no longer treated as a fringe political issue.
What can be done?
Jencks says there are many steps the federal government could take — if the political will existed to do so — to slow down or reverse inequality, like increasing the minimum wage, revising the tax code to tax corporate profits and investments more, reducing the debt burden on college students, and improving K-12 education so more students are better prepared for college and for personal advancement.
“Strong regulation and strong support for collective control over the things that society values is much more prevalent in societies that have lower levels of inequality,” he said.
Though labor rights have been eroding for decades, Benjamin Sachs, the Kestnbaum Professor of Labor and Industry at HLS, still thinks that unions could provide an unusual way to help equalize political power nationally. Unions used to wield both economic and political clout, but legislative and court decisions reduced their effectiveness as economic actors, cutting their political influence as well. At the same time, campaign finance reform to limit the influence of wealth on politics has failed.
To restore some balance, Sachs suggests “unbundling” unions’ political and economic activities, allowing them to serve as political organizing vehicles for low- and middle-income Americans, even those whom a union may not represent for collective bargaining purposes.
“The risk that economic inequalities will produce political ones … has led to several generations of campaign finance regulation designed to get money out of politics. But these efforts have not succeeded,” Sachs wrote in a 2013 Yale Law Review article. “Rather than struggling to find new ways to restrict political spending by the wealthy … the unbundled union, in which political organization is liberated from collective bargaining, constitutes one promising component of such a broader attempt to improve representational equality.”
Still, given the historic labor and wage trend lines, Goldin said the economic forces that perpetuate unequal wages — and inequality more broadly — won’t simply disappear even with a spate of new laws.
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POSSIBLE SOLUTIONS TO ECONOMIC AND POLITICAL INEQUALITY:
- Increase economic mobility
- Tax corporate profits, investments more
- Raise the minimum wage
- Cut the debts of college graduates
- Improve K-12 education
- Reduce the influence of money in politics
- Even out disposable family incomes
- Tax carried interest at a higher rate
- Make business taxes a compliance issue
- Mentor low-income children
- Jump-start vocational education
“I think it is naïve of most individuals to think that for everything there is something that government can legislate and regulate and impose that makes life better for everybody,” she said. “That’s just not the case.”
Even so, with Congress stalled over fresh policies, analysts say that much of the innovation concerning inequality has moved to state and local levels, where partisanship is less calcified and the needs of constituents are more evident.
In Oregon and California, for example, residents will be automatically registered to vote upon turning 18, a move that Skocpol says should bolster civic participation and provide protection from onerous new voter-identification laws.
While it’s clear that investing in children and their education pays lifelong dividends for them, those gains take 20 years to be realized, said Katz. That’s why it’s critical that their parents get help and live in less vulnerable situations.
“There is certainly evidence that if we reduce the degree of economic and racial and ethnic segregation of our communities, we can move in that direction,” said Katz, who is working on an experiment to expand the Earned Income Tax Credit in New York City to help younger workers without children who are struggling to break into the labor market.
Changes to the minimum wage, the tax system, and the treatment of carried interest “are all debates in which our society should engage,” said Rivkin, who cautioned that those would be hard-fought political battles that wouldn’t yield results for at least a decade.
Of course industry needs to run its businesses productively and profitably, but it can do so without harming “the commons,” Rivkin said. “Business has been very effective at pursuing its narrow self-interest in looking for special tax breaks. I think that kind of behavior just needs to stop.” Drawing on an idea from HBS Finance Professor Mihir Desai, Rivkin suggests that businesses treat their tax responsibilities as a compliance function rather than as a profit center. That money could then go back into investment in “the commons,” where “lots of common ground” exists among business, labor, policymakers, educators, and others.
“The businesses should be working with the local community college to train the workers whom they would love to hire; the university should be getting together with policymakers to figure out how to get innovations out of the research lab into startups faster; business should work with educators to reinvent the school system,” said Rivkin.
Putnam suggests more widespread mentoring of low-income children who lack the social safety net that upper- and middle-class children enjoy, a topic he explored in his book “Our Kids: The American Dream in Crisis.”
He recently convened five working groups to develop a series of white papers that will offer overviews of the key challenges in family structure and parenting; early childhood development; K-12 education; vocational, technical, and community colleges; and community institutions. The papers will be shared with mayors and leaders in churches, nonprofits, and community organizations across the nation, where much of the reform effort is taking place.
“There’s an increasing sense that this is a big deal, that we’re moving toward an America that none of us has ever lived in, a world of two Americas, a completely economically divided country,” said Putnam. “That’s not an America I want my grandchildren to grow up in. And I think there are lots of people in America who, if they stop and think about it, would say, ‘No, that’s not really us.’”
Why Do the Rich Have So Much Power?
Americans may be equal, but some are more equal than others.
America is, in principle, a democracy, in which every vote counts the same. It’s also a nation in which income inequality has soared, a development that hurts many more people than it helps. So if you didn’t know better, you might have expected to see a political backlash: demands for higher taxes on the rich, more spending on the working class and higher wages.
In reality, however, policy has mostly gone the other way. Tax rates on corporations and high incomes have gone down, unions have been crushed, the minimum wage, adjusted for inflation, is lower than it was in the 1960s. How is that possible?
The answer is that huge disparities in income and wealth translate into comparable disparities in political influence. To see how this works, let’s look at a fairly recent example: the budgetary Grand Bargain that almost happened in 2011.
At the time, Washington was firmly in the grip of deficit fever. Even though the federal government was able to borrow at historically low interest rates, everyone who mattered seemed to be saying that the budget deficit was the most important issue facing America and that it was essential to rein in spending on Social Security and Medicare.
So the Obama administration offered congressional Republicans a deal: cuts in Social Security and Medicare in return for slightly higher taxes on the wealthy. The deal foundered only because the party refused to accept even a small tax increase.
The question is, who wanted such a deal? Not the American public.
Voters in general weren’t all that worried about budget deficits. While most Americans believed that the deficit should be reduced — they always do — a CBS poll in early 2011 found only 6 percent of the public named the deficit as the most important issue, compared with 51 percent citing the economy and jobs.
Both the Obama administration and Republicans were staking out positions that flew in the face of public desires. A large majority has consistently wanted to see Social Security benefits expanded, not cut. A comparably large majority has consistently said that upper-income Americans pay too little, not too much, in taxes.
So whose interests were actually reflected in the 2011 budget fight? The wealthy.
A groundbreaking study of rich Americans’ policy preferences in 2011 found that the wealthy, unlike voters in general, did prioritize deficit reduction over everything else. They also, in stark contrast with the general public, favored cuts in Social Security and health spending.
And while a few high-profile billionaires like Warren Buffett have called for higher taxes on people like themselves, the reality is that most billionaires are obsessed with cutting taxes, like the estate tax, that only the rich pay.
In other words, in 2011 a Democratic administration went all-in on behalf of a policy concern that only the rich gave priority and failed to reach a deal only because Republicans didn’t want the rich to bear any burden at all.
Why do the wealthy have so much influence over politics?
Campaign contributions, historically dominated by the wealthy, are part of the story. A 2015 Times report found that at that point fewer than 400 families accounted for almost half the money raised in the 2016 presidential campaign. This matters both directly — politicians who propose big tax increases on the rich can’t expect to see much of their money — and indirectly: Wealthy donors have access to politicians in a way ordinary Americans don’t and play a disproportionate role in shaping policymakers’ worldview.
However, the influence of money on politics goes far beyond campaign contributions. Outright bribery probably isn’t much of a factor, but there are nonetheless major personal financial rewards for political figures who support the interests of the wealthy. Pro-plutocrat politicians who stumble, like Eric Cantor, the former House whip — who famously celebrated Labor Day by honoring business owners — quickly find lucrative positions in the private sector, jobs in right-wing media or well-paid sinecures at conservative think tanks. Do you think there’s a comparable safety net in place for the likes of Alexandria Ocasio-Cortez or Ilhan Omar?
And even the issues that the news media discuss often reflect a rich person’s agenda. Advertising dollars explain some of this bias, but a lot of it probably reflects subtler factors, like the (often false) belief that people who’ve made a lot of money have special insight into how the nation as a whole can achieve prosperity.
Perhaps the most striking aspect of the fixation on cutting benefits in the early 2010s was the extent to which it was treated not as a controversial position but as the undeniably right thing to do. As Ezra Klein pointed out in The Washington Post at the time: “For reasons I’ve never quite understood, the rules of reportorial neutrality don’t apply when it comes to the deficit. On this one issue, reporters are permitted to openly cheer a particular set of highly controversial policy solutions.”
In a variety of ways, then, America’s wealthy exert huge political influence. Our ideals say that all men are created equal, but in practice a small minority is far more equal than the rest of us.
You don’t want to be too cynical about this. No, America isn’t simply an oligarchy in which the rich always get what they want. In the end, President Barack Obama presided over both the Affordable Care Act, the biggest expansion in government benefits since the 1960s, and a substantial increase in federal taxes on the top 1 percent, to 34 percent from 28 percent.
And no, the parties aren’t equally in the wealthiest Americans’ pocket. Democrats have become increasingly progressive, while the rich dominate the Republican agenda. Donald Trump may have run as a populist, but once in office he reversed much of that Obama tax hike, while trying (but failing, so far) to take away health insurance from as many as 23 million Americans.
But while you shouldn’t be too much of a cynic, it remains true that America is less of a democracy and more of an oligarchy than we like to think. And to tackle inequality, we’ll have to confront unequal political power as well as unequal income and wealth.
Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class
A groundbreaking work that identifies the real culprit behind one of the great economic crimes of our time— the growing inequality of incomes between the vast majority of Americans and the richest of the rich.
We all know that the very rich have gotten a lot richer these past few decades while most Americans haven’t. In fact, the exorbitantly paid have continued to thrive during the current economic crisis, even as the rest of Americans have continued to fall behind. Why do the “haveit- alls” have so much more? And how have they managed to restructure the economy to reap the lion’s share of the gains and shift the costs of their new economic playground downward, tearing new holes in the safety net and saddling all of us with increased debt and risk? Lots of so-called experts claim to have solved this great mystery, but no one has really gotten to the bottom of it—until now.
In their lively and provocative Winner-Take-All Politics, renowned political scientists Jacob S. Hacker and Paul Pierson demonstrate convincingly that the usual suspects—foreign trade and financial globalization, technological changes in the workplace, increased education at the top—are largely innocent of the charges against them. Instead, they indict an unlikely suspect and take us on an entertaining tour of the mountain of evidence against the culprit. The guilty party is American politics. Runaway inequality and the present economic crisis reflect what government has done to aid the rich and what it has not done to safeguard the interests of the middle class. The winner-take-all economy is primarily a result of winner-take-all politics.
In an innovative historical departure, Hacker and Pierson trace the rise of the winner-take-all economy back to the late 1970s when, under a Democratic president and a Democratic Congress, a major transformation of American politics occurred. With big business and conservative ideologues organizing themselves to undo the regulations and progressive tax policies that had helped ensure a fair distribution of economic rewards, deregulation got under way, taxes were cut for the wealthiest, and business decisively defeated labor in Washington. And this transformation continued under Reagan and the Bushes as well as under Clinton, with both parties catering to the interests of those at the very top. Hacker and Pierson’s gripping narration of the epic battles waged during President Obama’s first two years in office reveals an unpleasant but catalyzing truth: winner-take-all politics, while under challenge, is still very much with us.
Winner-Take-All Politics—part revelatory history, part political analysis, part intellectual journey— shows how a political system that traditionally has been responsive to the interests of the middle class has been hijacked by the superrich. In doing so, it not only changes how we think about American politics, but also points the way to rebuilding a democracy that serves the interests of the many rather than just those of the wealthy few.
Revolt against the Rich
Nobel laureates, a new congresswoman and others urge raising taxes on the ultrawealthy to counter surging inequality
In 2015 I attended a workshop on political polarization with an eclectic group of scholars and activists. We swapped ideas on resolving battles over climate change, inequality, abortion and gay rights. One obstacle to compromise, a psychologist said, is that many Americans have a visceral, emotional reaction to issues like homosexuality.
I have a visceral, emotion reaction to inequality, I replied. It sickens me that some Americans have billions while others barely have enough to eat. An economist derided my attitude as typical left-wing irrationality. Inequality isn’t the problem, he said, poverty is the problem, and we shouldn’t try to solve it by taking more from the rich.
I felt chastened. But a flurry of recent articles—with headlines like “Abolish Billionaires” and “The Economics of Soaking the Rich”—argues that we should be appalled by the immense gap between the poor and rich. The proliferation of billionaires shows that capitalism is malfunctioning and in need of reforms, including higher taxes on the ultra-wealthy.
In 2015 I attended a workshop on political polarization with an eclectic group of scholars and activists. We swapped ideas on resolving battles over climate change, inequality, abortion and gay rights. One obstacle to compromise, a psychologist said, is that many Americans have a visceral, emotional reaction to issues like homosexuality.
I have a visceral, emotion reaction to inequality, I replied. It sickens me that some Americans have billions while others barely have enough to eat. An economist derided my attitude as typical left-wing irrationality. Inequality isn’t the problem, he said, poverty is the problem, and we shouldn’t try to solve it by taking more from the rich.
I felt chastened. But a flurry of recent articles—with headlines like “Abolish Billionaires” and “The Economics of Soaking the Rich”—argues that we should be appalled by the immense gap between the poor and rich. The proliferation of billionaires shows that capitalism is malfunctioning and in need of reforms, including higher taxes on the ultra-wealthy.ADVERTISEMENT
One vocal billionaire-basher is Alexandria Ocasio-Cortez, a newly elected Congresswoman from New York and self-identified democratic socialist. “I’m not saying that Bill Gates or Warren Buffet are immoral,” she said recently, “but a system that allows billionaires to exist when there are parts of Alabama where people are still getting ringworm because they don’t have access to public health is wrong.”
A report from the anti-poverty organization Oxfam provides a global, historical perspective on inequality. Maximum tax rates in the richest countries fell from an average of 62 percent in 1970 to 38 percent in 2013, and inequality has surged. The number of billionaires has doubled over the past decade to 2,208. The collective wealth of the 26 richest people now equals that of the 3.8 billion poorest, whose total wealth fell last year by 11 percent.
In short, the rich are getting richer and the poor, at least lately, poorer. “We need to transform our economies to deliver universal health, education and other public services,” Oxfam states. “To make this possible, the richest people and corporations should pay their fair share of tax.”
Ocasio-Cortez has proposed raising the federal tax rate for ultra-wealthy Americans to 70 percent, almost double the current maximum federal tax on income. The so-called marginal tax would apply to annual income above $10 million. Presidential candidates Elizabeth Warren and Bernie Sanders have called for higher taxes on assets as well as income of the ultra-rich.
Paul Krugman, a Nobel laureate in economics, agrees on the need for such taxes. The 70-percent tax proposal of Ocasio-Cortez, he writes in his New York Times column, is based on analyses by economist Peter Diamond, a Nobel laureate, and Christina Romer, former head of President Obama’s Council of Economic Advisers.
The analyses, Krugman explains, are based on “the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it.”
This is the reasoning behind progressive tax rates, which rise along with income. Raising tax rates too high might discourage some people from being more productive, resulting in a net loss of tax revenue. Balancing these factors, Diamond and Romer recommend maximum marginal tax rates of 73 and 80 percent, respectively.
Krugman rejects the claim that high taxes hurt the economy. Maximum tax rates reached 90 percent in the late 1950s, and they remained at 70 percent as recently as the early 1980s before plummeting during the Reagan administration. The U.S. economy “did just fine” during these periods, Krugman says. “Since then tax rates have come way down, and if anything the economy has done less well.”
Another Nobel-winning economist, Joseph Stiglitz, argues that inequality is socially corrosive. In “A Rigged Economy,” published in Scientific American in November, Stiglitz notes that “economies with greater equality perform better, with higher growth, better average standards of living and greater stability. Inequality in the extremes observed in the U.S. and in the manner generated there actually damages the economy.”
Over the past four decades inequality in America “has reached new heights,” Stiglitz says. “Whereas the income share of the top 0.1 percent has more than quadrupled and that of the top 1 percent has almost doubled, that of the bottom 90 percent has declined.” The wealthiest Americans “pay a smaller fraction of their income in taxes than those who are much poorer—a form of largesse that the Trump administration has just worsened with the 2017 tax bill.”
Rising inequality leads to a “vicious spiral,” Stiglitz contends, that subverts democracy. Economic inequality “translates into political inequality, which leads to rules that favor the wealthy, which in turn reinforces economic inequality.” Stiglitz recommends countering inequality with campaign-finance reform, cheaper education and, yes, higher taxes on the rich.
In The Atlantic, economics writer Derek Thompson rejects the claim that raising taxes on the wealthy will stifle economy-fueling innovation. New York City and San Francisco, which have two of the highest income-tax rates in the U.S., are “hubs of innovation.” Countries with higher tax rates than the U.S. also have higher rates of entrepreneurship.
Conservatives contend that entrepreneurs like Bill Gates, Jeff Bezos, Steve Jobs and Elon Musk deserve their riches, because they created products that improve our lives and spur economic growth. The government, in contrast, wastes tax dollars. Actually, economist Mariana Mazzucato points out in Harvard Business Review, government-funded research underpins the modern tech boom.
The Internet and ”nearly all the technologies in the iPhone (including GPS, Siri, and touchscreen)” stemmed from federal research, Mazzucato says. “And in the energy sector, solar, nuclear, wind, and even shale gas were primed by public finance. Elon Musk’s three companies Solar City, Tesla, and Space X have received over $4.9 billion in public support.”
Making the case for higher taxes, New York Times tech columnist Farhad Manjoo writes that “technology is creating a world where a few billionaires control an unprecedented share of global wealth.” Extreme wealth “buys political power, it silences dissent, it serves primarily to perpetuate ever-greater wealth, often unrelated to any reciprocal social good.”
Last month historian Rutger Bregman caused a stir at the World Economic Forum in Davos when he accused rich participants of avoiding higher taxes. Yes, some billionaires, notably Bill Gates, have done good works with their wealth, Bregman acknowledges, but societies should not rely on the generosity of the rich. “Philanthropy is not a substitute for democracy or proper taxation or a good welfare state,” he says.
Some rich people agree. Venture capitalist Nick Hanauer contends in The Prospect that “taxing the rich is the only plan that would increase investment, boost productivity, grow the economy, and create more and better jobs.” He dismisses the conservative claim that raising taxes on the wealthy and corporations will decrease investment and increase unemployment as a “con job.”
“When President Bill Clinton hiked taxes, the economy boomed,” Hanauer states. “When President George W. Bush slashed taxes, the economy ultimately collapsed.” Since Trump and his fellow Republicans cut taxes in 2017, “corporate America has announced more than 140,000 job cuts… while sharing just 9 percent of its $76 billion tax windfall in the form of wage hikes and one-time bonuses.”
I appreciate capitalism. Over the last few centuries free-market forces have helped humanity escape millennia of crushing poverty, ignorance and early death. Economist Deirdre McCloskey, whom I interviewed in 2016, calls this period, during which per-capita incomes surged by a factor of 10, “the Great Enrichment.” Wealth-distribution schemes like those proposed by economist Thomas Picketty are more likely to trap people in poverty than lift them out of it, according to McCloskey.
But as anthropologist Jason Hickel points out, the Great Enrichment encompassed slavery, colonization and the violent displacement of indigenous people. Today, more than half of humanity still lives on $7.40/day or less, barely adequate for a decent life. From this perspective, Hickel says, the “grand story of progress seems tepid, mediocre, and–in a world that’s as fabulously rich as ours–completely obscene.”
Neither I nor any of the critics cited above wants capitalism abolished. We simply want the wealthy to contribute their fair share. Many people have a visceral, emotional aversion to higher taxes on the rich, but that reaction, even for the rich, is irrational.
Opinion | Why It’s So Hard To Tax the Rich
Everyone believes the wealthy should pay more in taxes. Here’s why that rarely happens — and why Democrats are blowing the most obvious way to do it.
n the last few weeks, the Democrats have veered from one tax-the-rich plan to another. First there was President Joe Biden’s suggestion to increase capital gains taxes for heirs, which disappeared over the summer. Sen. Ron Wyden’s (D-Ore.) Billionaires Income Tax made it as far as a plan, but seems to have died the day it was born. The latest version is a surtax on millionaires, but it could easily meet the same fate as its predecessors by the time the deal is done.
Why is it so hard to tax the rich? After all, the idea behind progressive taxation is simple, even beautiful: Let the engine of capitalism roar and then have the winners compensate the losers. By taking care of those who lose out in the free-market melee, the winners ensure the losers won’t want to destroy the system. What’s more, taxing the wealthy is popular, with a majority of Americans telling pollsters that they think the wealthy don’t pay their fair share. And economists have endorsed it, pointing out that the wealthy have benefited disproportionately from the economic growth of the last several decades, that taxes on the wealthy prevent unproductive dynasties from forming, and that the things those tax revenues are spent on, from child care to clean energy, can benefit the economy.
And yet Democrats can’t find a way. They’re not alone — in fact no country has yet managed to get enough money out of progressive taxation to fund a comprehensive system of social programs. European countries with generous social programs fund them by making everyone pay, not just the rich. As a result, in those countries social programs don’t feel like charity or redistribution, but rather like insurance — something everyone pays for, and which everyone can access in times of need as a matter of right.
The United States has always rejected this broad-based approach to taxation, insisting on progressive taxation instead. On multiple occasions it has even been the American left, which in theory supports a more robust social system, that has undermined creating the European-style tax base needed to fund it. We do have a few programs that work on the insurance principle, like Social Security and Medicare, and it’s not a coincidence that those are our most resilient programs. But the talk lately has been of redistribution rather than insurance because it’s hard not to think that the wealthy, who have benefited so spectacularly over the last several decades, ought to shoulder more of the tax burden (and indeed, the European wealthy should too).
Examining the history of taxing the rich shows why it’s hard, even when there is a compelling economic and moral argument for doing so.
Taxes on the rich increased dramatically during the First and Second World Wars, but other than global catastrophes with mass casualties, nothing seems to produce the desperation that leads to broad, bipartisan consensus on raising taxes on the rich. Indeed, even a global catastrophe with mass casualties can’t always do it, as the pandemic has shown, because low interest rates have made it easier for the government to borrow instead.
Thus, since the Second World War, the top marginal income tax rate for individuals has declined steeply, as Democrats came around to the position that cutting taxes for the wealthy stimulates the economy (under John F. Kennedy) and then Republicans came around to the position that deficits are not a big problem (under George. W. Bush, and because of Ronald Reagan). Even if you account for all of the loopholes in the 1950s tax code, the effective tax rate for the top 1 percent — that is, the taxes they actually pay — is considerably lower now than it was at mid-century. In fact, in 2018, one study found that the top 400 billionaires were, for the first time in history, actually paying a lower tax rate than the bottom 50 percent of families.
A few recent U.S. presidents have successfully raised taxes on the rich, but those efforts didn’t pay off politically. Under Bill Clinton’s administration the top marginal tax rate rose very slightly in 1993, but it did not help Clinton in the 1994 midterms. Under Barack Obama tax rates for the wealthy went up in 2013 — and then the 2014 midterm elections produced the largest gains for Republicans in the Senate since the 1980s, and in the House since the 1930s. The midterm defeats were not caused by the tax increases, but increasing taxes on the rich didn’t help either Clinton or Obama. Although polls always show majorities favorable to taxing the rich, people don’t seem to vote based on that issue.
The awareness that taxing the rich doesn’t gain votes must be part of what makes moderate Democrats cautious. And because the rich can pay people to figure out how to legally violate the spirit of the law — an old standby is to find ways to turn income into things that don’t get taxed as highly, like capital gains, and a newer trick is to borrow against your assets so you don’t have to sell them and incur taxes at all — it takes a complex administrative machinery to stay ahead of them. Wyden’s wealth tax plan, which received support from over a hundred organizations, would have run into questions about whether it violated the constitutional requirement that direct taxes be proportional to a state’s population. It would also have required new procedures for valuing people’s wealth. It’s difficult to value assets as it is; you can guess how much a painting is worth but how do you really know until you try to sell it? And valuing those assets in the middle of an adversarial exchange between government and taxpayer is even harder, which may be why most of the countries that have attempted wealth taxation have ended it. It’s not impossible, and nothing says we have to restrict ourselves to what has happened in the past. But it is a big push on an issue on which notional support in polls does not translate into electoral support.
In the absence of desperate need or strong political support, is there any way to tax the rich? Raising capital gains taxes remains an appealing option. Getting rid of the home mortgage interest deduction is another.
And as it happens, there is one option that would not require any complex new administrative procedures, and that has actually been tried recently, and has been shown to work — but it’s Democrats who are standing in the way.
Other than Clinton and Obama, the other president who successfully raised taxes on the rich was Donald Trump. His tax cut of 2017, which was mostly a giveaway to the wealthy, included one provision that actually raised their taxes instead — the cap on deductions for state and local taxes, or SALT. This is a deduction that, all analysts agree, is shockingly regressive. It benefits only 9 percent of taxpayers, and most of the benefits go to the wealthy. As scholars have argued, it underpins systemic racism. It essentially forces the less wealthy to subsidize the local public services the rich purchase through higher state and local taxes. By putting a cap on it, Trump and the Republican Congress actually raised taxes for the wealthy. (They also put a limit on the home mortgage interest deduction, which also amounts to raising taxes on the wealthy, but because they raised the standard deduction the end result was to make the mortgage deduction even more regressive.)
Republicans havewanted to get rid of SALT for a long time, as it benefits the wealthy in blue states the most. These are the states where state and local taxes are the highest. As political maneuvering it’s brilliant, because it forces Democrats into a position of deciding between their principles of taxing the rich and their political wishes to protect their constituents.
In that battle, principles aren’t standing much of a chance. Senate Majority Leader Chuck Schumer and a coalition of Democrats from blue states have even argued for repealing Trump’s cap, even though the benefits of that repeal would go almost entirely to the richest quintile, and even though that would be an even bigger giveaway to the wealthy than Trump’s entire tax cut.
It’s Joe Manchin and Krysten Sinema who have drawn the ire of progressives. But Schumer and allies have been so devastatingly and quietly effective that somehow there is not much complaint that they have been lobbying for what amounts to a tax cut for rich Democrats. Indeed, they have been so invisibly effective that completely getting rid of the deduction is not on the table, despite the fact that even with the cap the deduction benefits the wealthy the most. Perhaps the easiest and simplest way of raising taxes on the rich — by getting rid of this deduction — is not even being proposed.
Why has it been so hard for Democrats to find a way to tax the rich? Because those rich people live in the blue states.
The System: Who Rigged It, How We Fix It
The concentration of wealth in America has created an education system in which the super-rich can buy admission to college for their children, a political system in which they can buy Congress and the presidency, a health care system in which they can buy care others can’t, and a justice system in which they can buy their way out of jail. Almost everyone else has been hurled into a dystopia of bureaucratic arbitrariness, corporate indifference, and the legal and financial sinkholes that have become hallmarks of modern American life.
The system is rigged. But we can fix it.
Today, the great divide in American politics isn’t between right and left. The underlying contest is between a small minority who have gained power over the system, and the vast majority who have little or none.
Forget politics as you’ve come to see it — as contests between Democrats and Republicans.
The real divide is between democracy and oligarchy.
The market has been organized to serve the wealthy. Since 1980, the percentage of the nation’s wealth owned by the richest four hundred Americans has quadrupled (from less than 1 percent to 3.5 percent) while the share owned by the entire bottom half of America has dropped to 1.3 percent [Saez & Zucman]. The three wealthiest Americans own as much as the entire bottom half of the population. Big corporations, CEOs, and a handful of extremely rich people have vastly more influence on public policy than the average American. Wealth and power have become one and the same.
[We now have a system that is based on Socialism for the Rich and Harsh Capitalism for the Rest]
As the oligarchs tighten their hold over our system, they have lambasted efforts to rein in their greed as “socialism”, which, to them, means getting something for doing nothing.
But “getting something for doing nothing” seems to better describe the handouts being given to large corporations and their CEOs. General Motors, for example, has received $600 million in federal contracts and $500 million in tax breaks since Donald Trump took office. Much of this “corporate welfare” has gone to executives, including CEO Mary Barra, who raked in almost $22 million in compensation in 2018 alone. GM employees, on the other hand, have faced over 14,000 layoffs and the closing of three assembly plants and two component factories.
Our system, it turns out, does practice one form of socialism — socialism for the rich. Everyone else is subject to harsh capitalism.
Socialism for the rich means people at the top are not held accountable. Harsh capitalism for the many, means most Americans are at risk for events over which they have no control, and have no safety nets to catch them if they fall.
Among those who are particularly complicit in rigging the system are the CEOs of America’s corporate behemoths.
Take Jamie Dimon, the CEO of JPMorgan Chase, whose net worth is $1.4 billion. He comes as close as anyone to embodying the American system as it functions today.
Dimon describes himself as “a patriot before I’m the CEO of JPMorgan.”
He brags about the corporate philanthropy of his bank, but it’s a drop in the bucket compared to his company’s net income, which in 2018 was $30.7 billion — roughly one hundred times the size of his company’s investment program for America’s poor cities.
Much of JP Morgan’s income gain in 2018 came from savings from the giant Republican tax cut enacted at the end of 2017 — a tax cut that Dimon intensively lobbied Congress for.
Dimon doesn’t acknowledge the inconsistencies between his self-image as “patriot first” and his role as CEO of America’s largest bank.
He doesn’t understand how he has hijacked the system.
Perhaps he should read my new book.
To understand how the system has been hijacked, we must understand how it went from being accountable to all stakeholders — not just stockholders but also workers, consumers, and citizens in the communities where companies are headquartered and do business — to intensely shareholder-focused capitalism.
In the post-WWII era, American capitalism assumed that large corporations had responsibilities to all their stakeholders. CEOs of that era saw themselves as “corporate statesmen” responsible for the common good.
But by the 1980s, shareholder capitalism (which focuses on maximizing profits) replaced stakeholder capitalism. That was largely due to the corporate raiders — ultra-rich investors who hollowed-out once-thriving companies and left workers to fend for themselves.
Billionaire investor Carl Icahn, for example, targeted major companies like Texaco and Nabisco by acquiring enough shares of their stock to force major changes that increased their stock value — such as suppressing wages, fighting unions, laying off workers, abandoning communities for cheaper labor elsewhere, and taking on debt — and then selling his shares for a fat profit. In 1985, after winning control of Trans World Airlines, he loaded the airline with more than $500 million in debt, stripped it of its assets, and pocketed nearly $500 million in profits.
As a result of the hostile takeovers mounted by Icahn and other raiders, a wholly different understanding about the purpose of the corporation emerged.
Even the threat of hostile takeovers forced CEOs to fall in line by maximizing shareholder profits over all else. The corporate statesmen of previous decades became the corporate butchers of the 1980s and 1990s, whose nearly exclusive focus was to “cut out the fat” and make their companies “lean and mean.”
As power increased for the wealthy and large corporations at the top, it shifted in exactly the opposite direction for workers. In the mid-1950s, 35 percent of all private-sector workers in the United States were unionized. Today, 6.4 percent of them are.
The wave of hostile takeovers pushed employers to raise profits and share prices by cutting payroll costs and crushing unions, which led to a redistribution of income and wealth from workers to the richest 1 percent. Corporations have fired workers who try to organize and have mounted campaigns against union votes. All the while, corporations have been relocating to states with few labor protections and so-called “right-to-work” laws that weaken workers’ ability to join unions.
Power is a zero-sum game. People gain it only when others lose it. The connection between the economy and power is critical. As power has concentrated in the hands of a few, those few have grabbed nearly all the economic gains for themselves.
The oligarchy has triumphed because no one has paid attention to the system as a whole – to the shifts from stakeholder to shareholder capitalism, from strong unions to giant corporations with few labor protections, and from regulated to unchecked finance.
As power has shifted to large corporations, workers have been left to fend for themselves. Most Americans developed 3 key coping mechanisms to keep afloat.
The first mechanism was women entering the paid workforce. Starting in the late 1970s, women went into paid work in record numbers, in large part to prop up family incomes, as the wages of male workers stagnated or declined. Then, by the late 1990s, even two incomes wasn’t enough to keep many families above water, causing them to turn to the next coping mechanism: working longer hours. By the mid-2000s a growing number of people took on two or three jobs, often demanding 50 hours or more per week.
Once the second coping mechanism was exhausted, workers turned to their last option: drawing down savings and borrowing to the hilt. The only way Americans could keep consuming was to go deeper into debt. By 2007, household debt had exploded, with the typical American household oweing 138 percent of its after-tax income. Home mortgage debt soared as housing values continued to rise. Consumers refinanced their homes with even larger mortgages and used their homes as collateral for additional loans.
This last coping mechanism came to an abrupt end in 2008 when the debt bubbles burst, causing the financial crisis. Only then did Americans begin to realize what had happened to them, and to the system as a whole. That’s when our politics began to turn ugly.
So what do we do about it?
The answer is found in politics and rooted in power.
The way to overcome oligarchy is for the rest of us to join together and form a multiracial, multiethnic coalition of working-class, poor and middle-class Americans fighting for democracy.
This agenda is neither “right” nor “left.” It is the bedrock for everything America must do.
The oligarchy understands that a “divide-and-conquer” strategy gives them more room to get what they want without opposition. Lucky for them, Trump is a pro at pitting native-born Americans against immigrants, the working class against the poor, white people against people of color. His goal is cynicism, disruption, and division. Trump and the oligarchy behind him have been able to rig the system and then whip around to complain loudly that the system is rigged.
But history shows that oligarchies cannot hold on to power forever. They are inherently unstable. When a vast majority of people come to view an oligarchy as illegitimate and an obstacle to their wellbeing, oligarchies become vulnerable.
As bad as it looks right now, the great strength of this country is our resilience. We bounce back. We have before. We will again.
In order for real change to occur — in order to reverse the vicious cycle in which we now find ourselves — the locus of power in the system will have to change.
The challenge we face is large and complex, but we are well suited for the fight ahead.
Together, we will dismantle the oligarchy.
Together, we will fix the system.
Resources
whorulesamerica.ucsc.edu, “Wealth, Income, and Power.” by G. William Domhoff; city-journal.org, “Why Democracy Needs the Rich: Wealthy Americans are far from the most politically influential group—and what influence they do exert is often beneficent.” By John O. McGinnis; cnbc.com, “The problem with the U.S. economy is there are too many poor people.” By Michael K. Farr; news.harvard.edu, “The costs of inequality: Increasingly, it’s the rich and the rest.” BY Christina Pazzanese; nytimes.com, “Why Do the Rich Have So Much Power?” By Paul Krugman; politicalscience.yale.edu, “Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class,” By Jacob Hacker; blogs.scientificamerican.com, “Revolt against the Rich: Nobel laureates, a new congresswoman and others urge raising taxes on the ultrawealthy to counter surging inequality.” By John Horgan; stlouisfed.org, “Has Wealth Inequality in America Changed over Time? Here Are Key Statistics.” By Ana Hernandez Kent and Lowell Ricketts; politico.com, “Opinion | Why It’s So Hard To Tax the Rich: Everyone believes the wealthy should pay more in taxes. Here’s why that rarely happens — and why Democrats are blowing the most obvious way to do it.” By Monica Prasad; inequalitymedia.org, “The System: Who Rigged It, How We Fix It.” By Robert Reich;
Addendum
Has Wealth Inequality in America Changed over Time? Here Are Key Statistics
If you Google “wealth inequality in America,” you may find our blog post What Wealth Inequality in America Looks Like: Key Facts & Figures. In it, we showed the state of wealth and income inequality in the U.S. using 2016 data—at the time, the most recently available—from the Federal Reserve Board’s Survey of Consumer Finances.
So, how has wealth inequality in the U.S. changed over time? What does the wealth distribution in America look like now? Well, groups that historically have had low wealth had notable increases in median wealth from 2016 to 2019. For Black families, Hispanic families and families with a high school degree (but no more), these impressive gains ranged from 25% to 60%.
Groups that historically have had higher wealth, like white families and families with at least a bachelor’s degree, gained only 4% to 5% more wealth in the same time period. However, since these families had higher wealth to begin with, small percentage gains translated into large gains in dollar terms. Thus, wide wealth gaps remained, and wealth levels among Black, Hispanic and less educated families remained low—making it difficult for these groups to fully participate in the economy and have financial stability.
In this article, we’ll use updated (2019) data from the Fed’s latest Survey of Consumer Finances, which was released this year, to refresh our previous primer on wealth inequality.
Let’s begin by looking at family wealth and wealth inequality for different demographic groups:
- Race and ethnicity: non-Hispanic, white; non-Hispanic, Black and Hispanic of any race.1
- Education: GED or less than high school, on-time high school degree, associate degree, bachelor’s degree and post-graduate degree.
- Age.
At the St. Louis Fed’s Center for Household Financial Stability, we’ve found these demographics are strong indicators of which families are more likely or less likely to experience economic resilience and upward mobility.
We see demographics as relatively stable across time and strongly associated with family wealth.2 Think of family wealth as what a family owns, minus what they owe.
Black families made gains, but the wealth gap with white families remains large.
The wealth gap between Black and white families remains large, despite Black families’ real (i.e., inflation-adjusted) wealth gains in dollar terms.
In 2019, the typical non-Hispanic Black family had about $23,000 of wealth. That’s up 32%, from $17,000 of wealth in 2016 (using unrounded numbers). By “typical,” we mean a family at the middle or median. (The median is a useful approximation of the typical family’s experience because it’s not as likely to be affected as the average by the inclusion of data on extremely high- or low-wealth-holding families.)
That’s also 12 cents per dollar of the typical non-Hispanic white family, which had about $184,000 of wealth in 2019. Non-Hispanic white family wealth was up 4%, from $177,000 in 2016.
The median wealth gap between white and Black families
NOTES: White and Black median family wealth and share of Black families below white family median. Dollar values are adjusted to 2019 dollars using the consumer price index for all urban consumers (CPI-U) and rounded to the nearest $1,000.
SOURCES: Federal Reserve Board’s Survey of Consumer Finances and authors’ calculations.
The graphic above displays white and Black median family wealth from 1989 to 2019. Also shown are the share of Black families with less than the typical white family at the median (i.e., the 50th percentile). For example, while half (50%) of white families had less than $184,000 in 2019, the majority (82%) of Black families had less wealth.
This illustrates vastly different, longstanding wealth outcomes between the groups. As a group, Black families owned 3% of total household wealth—an amount unchanged from 2016—despite making up 15% of households. White families, on the other hand, owned 85% of total household wealth—down slightly from 87% in 2016—but made up 66% of households.
Hispanic families made bigger gains, but their wealth gap with white families also remains large.
The typical Hispanic family of any race had $38,000 of wealth in 2019. That amount is up an impressive 60%, from $24,000 in 2016 (using unrounded numbers). That’s also 21 cents per dollar of white median wealth.
Similarly to Black families, Hispanics in 2019 owned 4% of total household wealth—up slightly from 3% in 2016—while making up 13% of households.
The graphic below displays white and Hispanic median family wealth from 1989 to 2019, as well as the share of Hispanic families with less than the white family median. You can observe that the majority of Hispanics, 76%, had less wealth than the median white family (i.e., the 50th percentile) in 2019.
The median wealth gap between white and Hispanic families
NOTES: White and Hispanic median family wealth and share of Hispanic families below white median. Dollar values are CPI-U adjusted to 2019 dollars and rounded to the nearest $1,000.
SOURCES: Federal Reserve Board’s Survey of Consumer Finances and authors’ calculations.
The wealth gap favoring college-educated families is still growing.
Thirty-nine percent of families had at least a four-year college degree in 2019, up from 36% in 2016. As a collective group, highly educated families continue to have considerably more wealth than less educated families.
Families headed by someone with at least a bachelor’s degree had 77% of the wealth pie in 2019 and $310,000 in median wealth. That is up from their holding of 75% of the wealth pie in 2016, with $293,000 in median wealth.
Meanwhile, the typical family without a bachelor’s degree had $66,000 in wealth in 2019, up from $54,000 in 2016. The wealth gap between these broad groups grew by about $5,000, even though it declined in percentage. That is, while the wealth of less educated families grew more rapidly in percentage terms (narrowing that gap), more educated families had greater median wealth to start with and thus their absolute growth in dollar terms was larger.
Wealth gaps by educational attainment
NOTES: Median (50th percentile) family wealth. Dollar values are CPI-U adjusted to 2019 dollars and rounded to the nearest $1,000.
SOURCES: Federal Reserve Board’s Survey of Consumer Finances and authors’ calculations.
The graphic above displays the educational wealth gap from 1989 to 2019. We show median household wealth values of five educational groups. An in-depth look at the data also reveals a more complex story.
Family respondents with:
- a GED, or with less than a high school diploma, had $18,000 in median wealth in 2019. That means this group had about $2,000 (8%) less median wealth in 2019 than in 2016 in inflation-adjusted dollars.
- a high school degree, or some college but no degree, had $79,000 in median wealth in 2019. Family respondents with, at most, an on-time high school diploma had about $16,000 (25%) more wealth in 2019 than in 2016.
- an associate degree or certificate had $102,000 in median wealth in 2019. Their wealth was unchanged from 2016 to 2019.
- a terminal bachelor’s degree had $243,000 in median wealth in 2019. So, they had about $12,000 (5%) more wealth in 2019 than in 2016.
- a postgraduate degree had $484,000 in median wealth in 2019. That means from 2016 to 2019, those with a postgraduate degree had about $25,000 (5%) more wealth.
Those with, at most, a high school diploma saw large gains in percentage terms. However, this was still less than those with a postgraduate degree in absolute terms. The least educated were the only group to see a loss in median wealth between 2016 and 2019.
The wealth gap between older and younger families continues to widen.
The median wealth of younger families (ages 25-35) has remained fairly flat between 1989 and 2019. In contrast, the wealth of older families (ages 65-75) grew rapidly between 1995 and 2007 and has nearly recovered to those levels.
Of course, the people in these groups change over time. In 1989, the younger group was made up of younger baby boomer families. In 2019, those in the younger group were millennial families. They had $24,000 in median wealth, or 9 cents per dollar of the $269,000 in median wealth held by older, mainly boomer families.
While inflation-adjusted younger family wealth barely budged between 1989 and 2019, older families in 2019 had much more median wealth than older families in 1989.
Wealth gaps by age
NOTES: Median (50th percentile) family wealth of 25- to 35-year-olds and 65- to 75-year-olds. Dollar values are CPI-U adjusted to 2019 dollars and are rounded to the nearest $1,000.
SOURCES: Federal Reserve Board’s Survey of Consumer Finances and authors’ calculations.
The graphic above displays the wealth gap for older and younger families from 1989 to 2019. It shows the median household wealth of families headed by 65- to 75-year-olds, as well as the median household wealth of families headed by 25- to 35-year-olds. In 1989, these values were $174,000 and $27,000, respectively. In 2019, these values were $269,000 and $24,000, respectively.
Overall wealth inequality remains high.
The demographic breakdowns above illustrate large wealth gaps. Looking at the population as a whole, without demographic lenses, offers a broader, though less nuanced, snapshot on how wealth is distributed. On average, families across the wealth distribution accumulated more wealth between 2016 and 2019.
In 2016, total U.S. household wealth amounted to $92.4 trillion in 2019-adjusted dollars. The 2016 population was about 126 million families. To be in the top 10% of the wealth distribution in 2016, a family needed at least $1.26 million.
In 2019, total wealth had grown to $96.1 trillion. The 2019 population was approximately 129 million families.
- To be in the top 10%, a family needed $1.22 million or more (slightly less than in 2016). Together, these roughly 12.9 million wealthy families owned 76% of total household wealth in 2019.
- To be in the middle 40%, a family needed at least $122,000 in wealth. Together, these approximately 51.5 million families owned 22% of U.S. wealth in 2019.
- To be in the bottom 50% meant a family had less than $122,000 in wealth. That represented about 64.3 million—or half of—families in 2019, owning just 1% of the nation’s wealth. Further, of this group, some 13.4 million families (about 1 in 10) had negative net worth—they didn’t even have a slice of the pie.
Wealth is what a family owns, minus what they owe. This is how wealth was concentrated (or not) among the U.S. population of 129 million families. The graphic below shows this distribution of total U.S. wealth in 2019.
The distribution of $96.1 trillion in total American wealth
NOTES: Figures do not add up to 100% due to rounding.
SOURCES: Federal Reserve Board’s Survey of Consumer Finances and authors’ calculations.
Who is in the top 10% of the wealth distribution?
Which families were more likely to hold the top 10% of wealth in 2019?
- White families: 13% of white families, compared to 1% of Black families and 3% of Hispanic families.
- Higher-educated families: 16% of families with at most a bachelor’s degree, and 27% of families with a postgraduate degree—compared to 4% of those with less than a four-year degree.
Who is in the bottom half of the wealth distribution?
Groups more likely to be in the bottom half of the wealth distribution include:
- Black and Hispanic families: 75% of Black families and 67% of Hispanic families, compared to 41% of white families.
- Less-educated families: 79% of respondents with a GED or less than a high school diploma, and 58% of those with at most a high school diploma—compared to 31% of those with a bachelor’s degree or more.
How has wealth distribution changed?
In summation, the wealth of the bottom half of families—roughly 64 million families—adds up to only 1% of total U.S. household wealth. This contrasts sharply with income, in which the bottom half of families, or those making less than $59,000, collectively have about 15% of total household income.
The lengthy economic expansion before the pandemic led to growth in wealth holdings for all groups, with proportionately faster growth (though smaller absolute growth) at the bottom.
The average family in:
- The bottom 50% of the wealth distribution had $22,000 of wealth, or about $5,000 (27%) more than in 2016.
- The middle 40% of the wealth distribution had $411,000 of wealth, or about $13,000 (3%) more than in 2016.
- The top 10% had $5,716,000 of wealth, or about $75,000 (1%) more than in 2016.
Despite this growth, the bottom half of families still have modest wealth holdings, which makes it extremely difficult for them to weather financial emergencies in tough times or to gain upward mobility in good times. These findings also underscore the importance of examining wealth by demographics.
Building wealth requires keeping demographics at the forefront.
Solutions aimed at building family wealth should keep demographic differences in mind in order to promote the economic well-being of American families. For example, there are two prominent ways to accumulate wealth:
- Earn more income, save more income, or both
- Own or receive assets that can appreciate in value, such as a home or stocks.
Progress has continued when it comes to improving opportunities for groups that historically have had low wealth to earn more. But ownership of the appreciating assets that are important to building wealth remains highly uneven, magnifying the role played by demographic factors.
What Is Wrong With Our Country?
https://common-sense-in-america.com/2022/05/03/what-is-wrong-with-our-country-lawyers/
https://common-sense-in-america.com/2022/06/10/what-is-wrong-with-our-country-special-interest-groups-and-lobbyists/
https://common-sense-in-america.com/2022/06/14/what-is-wrong-with-our-country-double-standards/
https://common-sense-in-america.com/2022/07/01/what-is-wrong-with-our-country-our-woke-military/
https://common-sense-in-america.com/2022/07/19/what-is-wrong-with-our-country-the-irs-and-our-tax-system/
https://common-sense-in-america.com/2022/07/22/what-is-wrong-with-our-country-our-welfare-system/
https://common-sense-in-america.com/2022/07/26/what-is-wrong-with-our-country-the-poor/
https://common-sense-in-america.com/2022/08/02/what-is-wrong-with-our-country-the-rich/