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Unequal Democracy: The Political Economy of the New Gilded Age

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Larry Bartels's book is one of the most important written works on economic inequality issues over the last 25 years. Anyone discussing economic inequality in the U.S. will have to deal with Bartels's arguments and evidence, even if you disagree with his findings and how he interprets those findings.

Among the evidence and arguments of Bartels's books are the following:

*** Since World War II, Democratic Presidents have been associated with modestly progressive patterns of real per family income growth, that is the income growth during Democratic Presidents' terms has been somewhat higher for lower income families than for upper income families. Republican Presidents have been associated with highly regressive patterns of real per family income growth, that is income growth has been much higher for upper income families than for other families. However, all income groups have on average gained more under Democratic Presidents.

*** The Democratic Presidents' better performance has been concentrated during the second year of Presidential terms. Republican Presidents have done better during the 4th year of Presidential terms, that is the election year. This may help explain Presidential election results, as voters appear to respond more to election year economic performance than the economic performance of prior years.

*** Economic issues still are key for working class voters in the U.S.

*** Political leaders appear to be much more responsive to upper class and middle class voters in their state than to lower class voters. However, even more of voting behavior is explained by the ideology of a politician's political party. This is true both for the Democrats, who have ignored most voters' opposition to estate taxes, and for Republicans, who have ignored most voters' support for higher minimum wages.

Bartels's work is only a start. He really does not have even close to a complete theory about WHY economic growth for different income families has the correlations he finds with Presidential political party. We would need to know more about this to more completely judge the relative economic performance under different political parties.

In addition, his book raises the issue of how we can improve the quality of the political debate in the U.S. over issues of economic inequality. There is considerable resistance in the U.S. to openly discussing these issues. Politicians who discuss these issues risk being accused of promoting "class warfare". As Bartels points out, there is some tendency to want to assume that somehow the income distribution is determined by unchanging economic laws that are impervious to political influence. Bartels presents new evidence that in fact the income distribution can be influenced by public policy to a very large extent. But the question is, how do we make this understanding part of the mainstream political debate?

"Unequal Democracy" presents the results of a six-year exploration of the political causes and consequences of economic inequality in America. It was inspired by the substantial escalation of this inequality in recent years. Total income going to the top 0.1% of income earners has more than tripled, from 3.2% in the late 1950s to 10.9% in 2005; that going to the top 1% rose from 10.2% to 21.8%. Further, this widening is accelerating. Despite this trend, 80% believe that though you may start out poor, if you work hard you can make lots of money - more than any other developed nation. This belief undermines motivation for change.

Bartels believes that the most significant domestic policy initiative of the past decade has been a massive government-engineered transfer of additional wealth from the lower and middle classes to the rich via substantial reduction in federal income taxes for the rich.

Economists have found little evidence that large disparities promote growth, or that progressive tax rates retard growth by discouraging economic effort.

Meanwhile, political campaigns have become dramatically more expensive, increasing the reliance of elected officials on those who can afford to help finance their re-election bids. At the same time, membership in labor groups, a previously countervailing force, has substantially declined.

On average over the past half century, real incomes of middle-class families grew 2X under Democrats vs. Republicans, and working poor families grew 6X faster under Democrats - even after allowing for differences in economic circumstances.

So why do those with lower incomes vote for Republicans? Bartels tells us that contrary to the theme of "What Happened to Kansas," moral values do not trump economics as a basis for lower-income voting behavior. Bartels offers evidence that the contradiction is explained by confusion generated by mixing "working class" (defined often as those w/o a college education) with lower-income. The working class has a lot of relatively high earners that are influenced by the moral values issues.

Bartels then contends that Republican success in presidential races is due to voters' overemphasis on election-year economic growth, vs. the superior longer-term performance of Democratic presidents, but lesser achievement during the last year of their terms.

Finally, its on to the estate ("death") tax. Actions to reduce and eliminate it during the early Bush II years represent about 15% of the impact of the overall tax reduction package. Bartels asserts that there is enormous misunderstanding about this tax regarding the wideness of its applicability. As a result, it is a wonder that it still exists.

Bottom Line: "Unequal Democracy" presents a carefully documented set of conclusions about an important and timely topic; its only drawback is that sometimes the statistics get too deep.

This is a quite amazing book for its wealth of fascinating and often counter intuitive information, particularly income distribution stats and political survey information. There is definitely a form of political delusion at work in the USA, based on voters so consistently voting against their own interests. For example voters favoring abolition of the estate tax when it only affects the top 2% of tax payers or favoring the Bush 2001 tax cuts without knowing anything much about them. More interestingly he shows how, while increasing political knowledge (measured by simple questions on who is what position in US politics) increases Democrats awareness of economic inequality; the same increasing political knowledge makes Republicans LESS knowledgeable or more in denial that inequality has increased, let alone whether it is a problem. He also nails the idea that the blue collar have shifted against their interests. Republican voting is still largely a matter of the better off supporting them, especially the less well educated and religious better off The Democrats lost power because of the defection of the South that now merely reflects the national picture (rather than hugely Democratic as before Civil Rights circa 1964) and the growth of reasonably well off, non college educated, religious voters who vote on economic AND values grounds, though still against their economic interests. Since 1948 economic growth has been on average significantly higher and unemployment lower for all social groups under Democrat presidents; inflation has been only slightly higher. And income equality much better under Democrats. Ultimately I suppose a worrying and somewhat pessimistic book, but a necessary tough tonic before thinking of solutions. Voters tend to vote on the economy in election year and the Republicans have done better in election years and voters don't seem to remember the other years when things were much worse. I hope both Presidential Candidates read it but doubt it will have the necessary impact. That will take a gutsy new FDR to put the country back together again after a collapse like the 1930s. Interestingly my conservative friends go into huge denial about this book: they can't even consider it; it is so threatening to their world view. I am open to doubt about its data and arguments, but the author provides plentiful source and precise survey question detail so intelligent engagement with the book is really easy, whether you agree or not with his fundamental premises. The author hasn't voted since 1984 he says and then voted Reagan, so this is not another move on.org book for the choir. The evidence drove him to his conclusions rather than the other way round. I wish there were more books this insightful.

While I think that the premise and argument of this book is accurate, I have found the Kindle edition practically unreadable. The author relies on lots of tables, which are unreadable even when zoomed. Other tables in the text bleed off the right edge of the screen. Sloppy conversion to Kindle!

In this study Princeton professor Larry Bartels makes the argument that lower- and middle-income groups consistently do better under Democratic administrations than under Republican. During the last sixty years (1948-present) the average annual growth of real GNP was 1.64 percent per capita under Republican presidents and 2.78 percent under Democratic presidents. He shows further that income inequality has gone sharply upward during Republican administrations and slightly downward during Democratic. Inequality has gone up significantly since 1980, years in which Republicans have won all but two presidential elections. He calls this the "new gilded age" because the top 1 percent now controls 20 percent of the wealth, a percentage not seen since the 1920's. Perhaps another sign that the economy is out of balance and heading for greater turbulence.

Republican economists will argue that this is merely a statistical aberration. They claim that presidents have little influence over the economy, and other forces such as monetary policy, oil prices, and technology are more determinative. Republicans view the market as a force of nature, whereas Democrats see it as a political construct. Bartels, being a Democrat, makes a strong case for government intervention to achieve greater balance and greater income equality.

Bartels shows that Democratic presidents have consistently produced their best results during their second year in office. This is because the spending programs put in place the first year usually produce their benfits the second. Not suprisingly income growth was virtually the same for both parties the first, third, and fourth years. The second year surge seems to have given Democrats the edge.

The question that comes to mind is that if Democrats are producing higher income growth and greater equality why did Republicans win 5 of the last 7 presidential elections? Bartels' answer is that the benefits of the second year are no longer part of the voter's consideration by the time elections roll around. Also by the fourth year Republican presidential candidates are making populist election year promises that make them indistinguishable for Democratic candidates. (Which party now is not in favor of bailouts and stimulus packages?)

Bartles makes an interseting argument. He argues that for those looking out for their economic interests it is not only important for Democrats to vote Democratic but Republicans - other than the top 1 percent - should also be voting Democratic. (Joe the Plumber included.) The upcoming presidential elections will probably prove Bartels theory correct.

A couple of things jumped out for me:

"comparing average annual real pre-tax (1) income growth (%) for families at various points in the income distribution" from 1948-2005:

-- First, everyone made more money under Democratic presidents, although the difference was small for the wealthiest (95th percentile).

-- Under Republicans, the wealthy do a lot better (2.12% increase per year for the 95th percentile) than those with less (0.43% increase for the 20th percentile).

-- Under Democrats the middle class, working class, and poor do a little better than the rich (2.38-2.64% increase compared to 2.12% for the 95th percentile).
Because these are percent per year, they compound. Over time Democratic presidents have narrowed the income gap whilst making everyone wealthier. Republican presidents have significantly widened the income gap and even the wealthy make less than under Democrats.

Bartels spends many pages showing that this is not a statistical fluke or the product of other factors. He also explains why each party's tax and fiscal policies lead to what we observe. This is a real effect of the party in power.

[...]

An eye-opening book. Bartels makes 2 major points:

- Partisan politics make a significant difference in income growth and income distribution. This is contrary to economic reductionism and some popular belief, i.e., that the economy will do what it does regardless of who we elect as president. The story is not good for Republicans and conservatives, but this is not an ideological argument -- it's statistical analysis.

- There is no statistical evidence to claim that elected representatives (Democratic or Republican) pay any direct attention to the views of the lower third of income earners in their constituencies. That lower third shares a consistently diminishing portion of income growth and has no discernible share in political decisions made by their elected representatives (in Congress).

Along the way, Bartels offers an alternative answer to the "What's the Matter with Kansas?" question -- Thomas Frank's book -- why voters (at least before the last election) vote for Republican candidates who do not appear to represent their best economic interests. Franks had said that, with those voters, "cultural value" issues (abortion, school prayer, etc.) had over-ridden economic interests. Bartels, again through statistical analysis, finds that those voters are actually voting their economic interests, but through a "myopic" lens -- voters' behaviors reflect election year economic performance to the exclusion of other years. Republican presidential candidates benefit from disproportionate economic growth during election years, while not paying the price of low or even negative growth and increasing inequality over the full course of their administrations. Democrats, despite producing higher overall income growth across all income segments and lower inequality, suffer from relatively poor growth during election years.

This is a well-researched examination of the POLITICS of inequality. Unfortunately it fails to analyze the ECONOMICS of inequality, with the result that Bartels' findings are based on some false premises and misperceptions.

The most serious error is to define and measure economic inequality solely in terms of income, when, in actuality, wealth is causing most of the divergence in incomes through the ownership of financial capital. Take a look at the income graphs: incomes converge during market crashes and recessions and diverge during market booms, so inequality is largely determined by the value of financial assets. Mr. Bartels uses the terms "haves" and "have-nots" extensively, but never stops to answer the obvious question: have what? What they have is capital: financial capital, human capital, and social capital. In this sense, growing inequality is one price of capitalist success. But instead of categorizing people as rich, poor, or middle class according to income data, Bartels should be looking at what determines those incomes and how those factors have changed over the past 30 years.

The rise of what Bartels terms the "New Gilded Age" can be attributed to two main events, a historical trend, and a technological revolution. The two events are Nixon's repudiation of the gold redemption Bretton Woods dollar standard in 1971 and Paul Volcker's appointment by Carter to break the back of inflation with tight monetary policy. The historical trend is the continuing globalization of trade and manufacturing that started in the early 1970s, while the technological revolution is that taking place in communications and information. Each of these changes has helped tip the balance of power between capital and labor, with the result that the returns to capital far outstrip returns to labor over the relevant time period. I question whether anyone really wants to accept the trade-offs to reverse this. Those trade-offs might include slower growth, less opportunity, less job creation, shrinking incomes, lower asset prices, higher inflation, dollar devaluation, and probably a declining population. Our emerging trading partners want no part of such trade-offs - they will take capitalist success wherever they can, so that's the world we find ourselves competing in.

Though Bartels misses these fundamental economic truths about our current state of the world, he does identify the true political danger, which is that all this capital wealth has taken control over the democratic political process. This means the "haves" are now running policy and in so doing are defying economic realities (like market crashes) with policies that perpetuate market crises (like easy Fed policy and bailouts). But it is vitally important that we get our policy analysis correct, because Bartels' interpretation leads him to conclude that the balance can be reinstated by electing more Democrats to office. Nothing could be more misguided. It doesn't matter which Republocrats gain office, policies will continue to favor capital. Why? Simply put, because it's a CAPITALIST system and success is defined in those terms. This has been proven clearly with the Clinton-Bush-Obama consistency in financial policy. Same old, same old.

Unfortunately, Bartels misses all this as he focuses on the politics of inequality and the dysfunctional political system. Let's take his two main cases that demand explanation: the estate tax repeal and higher minimum wages. The public favors repeal of the estate tax and a minimum wage that keeps pace with wage incomes, but both populist preferences fail. Bartels tries, but really can't explain why. Could it be that both estate tax repeal and lower minimum wages favor economic growth and capital accumulation? Do the non-wealthy recognize that in this free market system, accumulated capital is everything and thus from their personal perspective it's wrong for the government to tax inheritances, of anybody? And don't policies that allow the real value of the minimum wage to decline favor growth objectives by keeping wages low and employment higher or even stable? Aren't national policies biased to favor higher GDP, lower unemployment, and lower inflation? Bartels identifies how party elites override populist preferences, but both of these preferences would be more readily embraced if the party elites better understood the economic realities of the system they seek to manage. In these cases, Democratic elites (by stopping estate tax repeal) seem more out of step with reality than Republican elites (by stopping minimum wage hikes), though Bartels wrongly assumes the opposite.

The real problem with our current politics is not taxes, misinformation, or voter ignorance. It's that neither party is identifying the true causes of our democratic malaise and proposing solutions. Liberal elites tout redistribution through taxing and spending, but Western democracies adopting this strategy are in dire financial straits. This will not change, because political redistribution is counter-intuitive in a market economy where success in measured in profits and labor is a cost. The world has now largely accepted how markets create wealth, so there's no going back (Marxist socialism is dead). On the other hand, conservatives tout market outcomes, but fail to account for how the accepted rules of the game tilt the outcomes in favor of the already successful, to the detriment of those struggling to become successful. Neither party is proposing to change their stripes. And why should they? Elites benefit to no end by perpetuating the status quo that favors their elite status. Liberals are saying to voters, "You NEED US to survive," while conservatives are saying, "Just let us all enjoy our riches and someday you will too." Is it any wonder why we have voter revolts?

The key to breaking out of this degenerative cycle is to open up the capitalist production process through the broad ownership of capital. This is not redistribution: ALL capital is earned through successful risk-taking, so every citizen of a free society must participate in successful risk-taking in order to share in the returns. (This is preferred practice in technology companies and why wealth is widely dispersed by Apple, Google and Microsoft.) On the portfolio side, we have extensive markets for managing risk, which enables us to take on prudent risks in hope of gaining higher returns. There is no magic here, but this is the only way to manage globalized world markets where capital is mobile and labor is not - where profits accumulate as capital and labor costs are minimized. Education is important to the extent that it creates opportunity to build human capital, which is also put at risk to earn a positive return.

The democratic political system will thrive when we empower the have-nots by promoting policies that guarantee their economic independence through participation in capitalism. The liberal stance favoring redistribution cannot succeed because it presupposes the have-nots' perpetual dependence on political largesse. We already know that politics will favor the policies that yield economic success and wealth creation above all else. Thus, the promise of capitalism and freedom is not to be found in labor, union or otherwise; it's to be found in widespread, accumulated capital. We need political leaders and scholars like Bartels to rise up and bring this message to the masses. It hasn't happened yet and I'm not holding my breath.

I am surprised this book has not received more coverage than it has. Perhaps being a somewhat "dense" read makes it less interesting. However, if you can get through the charts, graphs, and some of the minutiae the author includes to make his case, there is an interesting case made. It is a thought provoking and worthy of the effort.

I've been searching for some data on how well off people are during the different rules and along came unequal democracy. If you now people that keep trying to convince you that if you vote for the Dems, you will be over taxed to the gates of hell, this is a must read. It's a text book but very readable.