This is a transformative book. It's the best book on American politics that I've read since Rick Perlstein's Before the Storm. Not all of it is original (the authors seek to synthesize others' work as well as present their own, but provide due credit where credit is due). Not all of its arguments are fully supported (the authors provide a strong circumstantial case to support their argument, but don't have smoking gun evidence on many of the relevant causal relations). But it should transform the ways in which we think about and debate the political economy of the US.
The underlying argument is straightforward. The sources of American economic inequality are largely political - the result of deliberate political decisions to shape markets in ways that benefit the already-privileged at the expense of a more-or-less unaware public. The authors weave a historical narrative which Kevin Drum (who says the same things that I am saying about the book's importance) summarizes cogently here. This is not necessarily original - a lot of leftwing and left-of-center writers have been making similar claims for a long time. What is new is both the specific evidence that the authors use, and their conscious and deliberate effort to reframe what is important about American politics.
First - the evidence. Hacker and Pierson draw on work by economists like Picketty and Saez on the substantial growth in US inequality (and on comparisons between the US and other countries), but argue that many of the explanations preferred by economists (the effects of technological change on demand for skills) simply don't explain what is going on. First, they do not explain why inequality is so top-heavy - that is, why so many of the economic benefits go to a tiny, tiny minority of individuals among those with apparently similar skills. Second, they do not explain cross national variation - why the differences in the level of inequality among advanced industrialized countries, all of which have gone through more-or-less similar technological shocks, are so stark. While Hacker and Pierson agree that technological change is part of the story, they suggest that the ways in which this is channeled in different national contexts is crucial. And it is here that politics plays a key role.
Many economists are skeptical that politics explains the outcome, suggesting that conventional forms of political intervention are not big enough to have such dramatic consequences. Hacker and Pierson's reply implicitly points to a blind spot of many economists - they argue that markets are not `natural,' but instead are constituted by government policy and political institutions. If institutions are designed one way, they result in one form of market activity, whereas if they are designed another way, they will result in very different outcomes. Hence, results that appear like `natural' market operations to a neo-classical economist may in fact be the result of political decisions, or indeed of deliberate political inaction. Hacker and Pierson cite e.g. the decision of the Clinton administration not to police derivatives as an example of how political coalitions may block reforms in ways that have dramatic economic consequences.
Hence, Hacker and Pierson turn to the lessons of ongoing political science research. This is both a strength and a weakness. I'll talk about the weakness below - but I found the account of the current research convincing, readable and accurate. It builds on both Hacker and Pierson's own work and the work of others (e.g. the revisionist account of American party structures from Zaller et al. and the work of Bartels). This original body of work is not written in ways that make it easily accessible to non-professionals - while Bartels' book was both excellent and influential, it was not an easy read. Winner-Take-All Politics pulls off the tricky task of both presenting the key arguments underlying work without distorting them and integrating them into a highly readable narrative.
As noted above, the book sets out (in my view quite successfully) to reframe how we should think about American politics. It downplays the importance of electoral politics, without dismissing it, in favor of a focus on policy-setting, institutions, and organization.
First and most important - policy-setting. Hacker and Pierson argue that too many books on US politics focus on the electoral circus. Instead, they should be focusing on the politics of policy-setting. Government is important, after all, because it makes policy decisions which affect people's lives. While elections clearly play an important role in determining who can set policy, they are not the only moment of policy choice, nor necessarily the most important. The actual processes through which policy gets made are poorly understood by the public, in part because the media is not interested in them (in Hacker and Pierson's words, "[f]or the media, governing often seems like something that happens in the off-season").
And to understand the actual processes of policy-making, we need to understand institutions. Institutions make it more or less easy to get policy through the system, by shaping veto points. If one wants to explain why inequality happens, one needs to look not only at the decisions which are made, but the decisions which are not made, because they are successfully opposed by parties or interest groups. Institutional rules provide actors with opportunities both to try and get policies that they want through the system and to stymie policies that they do not want to see enacted. Most obviously in the current administration, the existence of the filibuster supermajority requirement, and the willingness of the Republican party to use it for every significant piece of legislation that it can be applied to means that we are seeing policy change through "drift." Over time, policies become increasingly disconnected from their original purposes, or actors find loopholes or ambiguities through which they can subvert the intention of a policy (for example - the favorable tax regime under which hedge fund managers are able to treat their income at a low tax rate). If it is impossible to rectify policies to deal with these problems, then drift leads to policy change - Hacker and Pierson suggest that it is one of the most important forms of such change in the US.
Finally - the role of organizations. Hacker and Pierson suggest that organizations play a key role in pushing through policy change (and a very important role in elections too). They typically trump voters (who lack information, are myopic, are not focused on the long term) in shaping policy decisions. Here, it is important that the organizational landscape of the US is dramatically skewed. There are many very influential organizations pushing the interests of business and of the rich. Politicians on both sides tend to pay a lot of attention to them, because of the resources that they have. There are far fewer - and weaker - organizations on the other side of the fight, especially given the continuing decline of unions (which has been hastened by policy decisions taken and not taken by Republicans and conservative Democrats).
In Hacker and Pierson's account, these three together account for the systematic political bias towards greater inequality. In simplified form: Organizations - and battles between organizations over policy as well as elections - are the structuring conflicts of American politics. The interests of the rich are represented by far more powerful organizations than the interests of the poor and middle class. The institutions of the US provide these organizations and their political allies with a variety of tools to promote new policies that reshape markets in their interests. This account is in some ways neo-Galbraithian (Hacker and Pierson refer in passing to the notion of `countervailing powers'). But while it lacks Galbraith's magisterial and mellifluous prose style, it is much better than he was on the details.
Even so (and here begin the criticisms) - it is not detailed enough. The authors set the book up as a whodunit: Who or what is responsible for the gross inequalities of American economic life? They show that the other major suspects have decent alibis (they may inadvertently have helped the culprit, but they did not carry out the crime itself. They show that their preferred culprit had the motive and, apparently, the means. They find good circumstantial evidence that he did it. But they do not find a smoking gun. For me, the culprit (the American political system) is like OJ. As matters stand, I'm pretty sure that he committed the crime. But I'm not sure that he could be convicted in a court of law, and I could be convinced that I was wrong, if major new exculpatory evidence was uncovered.
The lack of any smoking gun (or, alternatively, good evidence against a smoking gun) is the direct result of a major failure of American intellectual life. As the authors observe elsewhere, there is no field of American political economy. Economists have typically treated the economy as non-political. Political scientists have typically not concerned themselves with the American economy. There are recent efforts to change this, coming from economists like Paul Krugman and political scientists like Larry Bartels, but they are still in their infancy. We do not have the kinds of detailed and systematic accounts of the relationship between political institutions and economic order for the US that we have e.g. for most mainland European countries. We will need a decade or more of research to build the foundations of one.
Hence, while Hacker and Pierson show that political science can get us a large part of the way, it cannot get us as far as they would like us to go, for the simple reason that political science is not well developed enough yet. We can identify the causal mechanisms intervening between some specific political decisions and non-decisions and observed outcomes in the economy. We cannot yet provide a really satisfactory account of how these particular mechanisms work across a wider variety of settings and hence produce the general forms of inequality that they point to. Nor do we yet have a really good account of the precise interactions between these mechanisms and other mechanisms.
None of this is to discount the importance of this book. If it has the impact it deserves, it will transform American public arguments about politics and policymaking. I cannot see how someone who was fair minded could come away from reading this book and not be convinced that politics plays a key role in the enormous economic inequality that we see. And even if it is aimed at a general audience, it also challenges academics and researchers in economics, political science and economic sociology both to re-examine their assumptions about how economics and politics work, and to figure out ways better to engage with the key political debates of our time as Hacker and Pierson have done. If you can, buy it.
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Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class Hardcover – September 14, 2010
by
Paul Pierson
(Author),
Jacob S. Hacker
(Author)
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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.
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.
- Print length368 pages
- LanguageEnglish
- PublisherSimon & Schuster
- Publication dateSeptember 14, 2010
- Dimensions6.13 x 1.1 x 9.25 inches
- ISBN-101416588698
- ISBN-13978-1416588696
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Editorial Reviews
From Publishers Weekly
Perhaps you haven't heard: over the last 30 years the middle class has shriveled while the wealthy enjoy the skewed economics of the gilded age. The authors do their best to blow the dust off of their subject by taking a close look at this political "30 year war" and carefully parsing its roots. Corporate coalitions, lobbying, tax policies geared to the wealthy, and the extreme use of the "rule of 60" filibuster have tipped the scales and ultimately heaped blame onto the majority party. While Government can affect the distribution of wealth, it doesn't catch up with economic realities in time, and a changing Washington blocks attempts at reform. Where moderates used to rule the swing vote, now radical conservatives have taken hold. Unions are powerless, public interest groups prevail, and Christian conservatives drag Republicans ever right. Meanwhile, voters remain poorly informed. Though they never shed the sheen of "old news," Hacker and Pierson end on a note of optimism: the middle class can take the majority again with a "politics of renewal" shepherded in on a wave of "mass engagement" and "elite leadership."
(c) Copyright PWxyz, LLC. All rights reserved.
(c) Copyright PWxyz, LLC. All rights reserved.
From Booklist
How did the widening gap between haves and have-nots—even worse, the haves and have-mores—come about? In the past 30 years, the top 1 percent have enjoyed 36 percent of all the income growth generated in the U.S. economy. Treating the growing socioeconomic gap like a whodunit, Hacker and Pierson painstakingly detail the gap between the superrich and everyone else. They paint a portrait of a nation that has fallen behind other developed nations in the widening income gap among its citizens. Worse, the wealth gap cannot be explained away by a lack of education or skills. Even among the well educated, a chasm has developed between the middle class and the wealthy. Whodunit? The U.S. government, which details changes in taxation and public policy, particularly regarding the financial markets, which have favored the wealthy at the expense of others over the last 30 years. Finally, they consider the long-term implications of this troubling trend and offer some encouraging signs—health care and financial reform, however anemic—and a growing discontent with the status quo. --Vanessa Bush
Review
“Important. . . . The collapse of the American middle class and the huge transfer of wealth to the already wealthy is the biggest domestic story of our time.” —Jonathan Alter, The New York Times Book Review
“Hacker and Pierson argue strongly that the concentration of income at the top is not just the work of deep economic forces. It is aided and abetted by politicians who favor the very rich or allow policies that once favored the rest of us to erode. Hacker and Pierson look closely, sharply, and entertainingly at the way that interest-group politics and the political power of money have allowed this travesty of democracy to happen. This book is a wake-up call. Read it and wake up."—Robert Solow, winner of the Nobel Memorial Prize for Economics in 1987
“The clearest explanation yet of the forces that converged over the past three decades or so to undermine the economic well-being of ordinary Americans is contained in Winner-Take-All Politics.”—Bob Herbert, The New York Times
“Engrossing. . . . Hacker and Pierson . . . deliver the goods. . . . Their description of the organizational dynamics that have tilted economic policymaking in favor of the wealthy is convincing.”—Justin Fox, Harvard Business Review
“How the U.S. economic system has also moved ‘off center’ toward an extreme concentration of wealth, and how progressive efforts to reverse that trend have run aground. . . . A very valuable book.”—Ed Kilgore, Washington Monthly
“Buy a copy of Hacker and Pierson’s book and read it. Seriously. . . . This is the most complete and sustained explanation I’ve ever read of why, over the past 30 years, America has gone the direction it has even while most other countries haven’t. . . . For me, it was a 300-page ‘Aha!’ moment.”—Kevin Drum, Mother Jones
"The worst social change in America during my lifetime has been its shift from the land of middle-class opportunity to the land of super-rich privilege. The economic polarization of America is a familiar problem, but Jacob Hacker and Paul Pierson approach it in an original way, using detective-story procedure to identify an unsuspected culprit—one that has little to do with 'globalization' or 'technological revolution' or China or the like. Their case is convincing, and it builds to a recommendation of how Americans could organize to save their country's promise. I hope people read the book and follow its advice."—James Fallows, National Correspondent, The Atlantic
“Over the past generation, the middle class has been repeatedly battered, and its once-solid foundations have begun to tremble. Uncovering the hidden political story behind this great economic challenge, Jacob Hacker and Paul Pierson shed light on what has gone wrong—and why. Their book is must-reading for anyone who wants to understand how Washington stopped working for the middle class.”—Elizabeth Warren, Harvard Law School, Chair of the Congressional Oversight Panel on the U.S. banking bailout, and author of The Two-Income Trap
“Hacker and Pierson make a compelling case. If Marie Antoinette were alive, she might aver of today’s great economically challenged masses, ‘Let them nibble on passbook-savings-account interest’—if they can manage to save anything, that is.”—David Holahan, The Christian Science Monitor
“This is a transformative book. It’s the best book on American politics that I’ve read since Before the Storm. . . If it has the impact it deserves, it will transform American public arguments about politics and policymaking.”—Henry Farrell, Crookedtimber.org
“Two top political scientists tell us when America turned terribly wrong—and how the rich and powerful organized to do the turning. . . . Fascinating.”—Sam Pizzigagi, “Too Much,” an online newsletter of the Institute for Policy Studies
“Jacob Hacker and Paul Pierson combine enormous learning about how our political system actually works with a spritely facility for getting their ideas across—rare gifts in American political debate. Winner-Take-All Politics carries forward the argument from their path-breaking book Off-Center. It explains why the 2006 and 2008 elections only began a reform process that still has a ways to go. Hacker and Pierson have always stayed ahead of the conventional arguments and Winner-Take-All Politics keeps them in the lead.”—E.J. Dionne, Jr., author of Why Americans Hate Politics and Souled Out
“Hacker and Pierson deftly pose and solve a political mystery: How could our democracy have turned away from a politics of broadly shared prosperity that served most citizens? Clue: take a close look at the elite capture of the Democratic Party. Winner-Take-All Politics—stylishly written and well documented with evidence—is a must-read for understanding the great political puzzle of our time.”—Robert Kuttner, author of A Presidency in Peril and co-editor of The American Prospect
“Jacob Hacker and Paul Pierson brilliantly break the intellectual logjam over the causes of runaway inequality. Their findings put responsibility and control back into the hands of officeholders, elected and appointed. Winner-Take-All Politics is crucial reading for all those engaged in American politics.”—Thomas B. Edsall, political editor, Huffington Post, and correspondent, The New Republic
“Hacker and Pierson argue strongly that the concentration of income at the top is not just the work of deep economic forces. It is aided and abetted by politicians who favor the very rich or allow policies that once favored the rest of us to erode. Hacker and Pierson look closely, sharply, and entertainingly at the way that interest-group politics and the political power of money have allowed this travesty of democracy to happen. This book is a wake-up call. Read it and wake up."—Robert Solow, winner of the Nobel Memorial Prize for Economics in 1987
“The clearest explanation yet of the forces that converged over the past three decades or so to undermine the economic well-being of ordinary Americans is contained in Winner-Take-All Politics.”—Bob Herbert, The New York Times
“Engrossing. . . . Hacker and Pierson . . . deliver the goods. . . . Their description of the organizational dynamics that have tilted economic policymaking in favor of the wealthy is convincing.”—Justin Fox, Harvard Business Review
“How the U.S. economic system has also moved ‘off center’ toward an extreme concentration of wealth, and how progressive efforts to reverse that trend have run aground. . . . A very valuable book.”—Ed Kilgore, Washington Monthly
“Buy a copy of Hacker and Pierson’s book and read it. Seriously. . . . This is the most complete and sustained explanation I’ve ever read of why, over the past 30 years, America has gone the direction it has even while most other countries haven’t. . . . For me, it was a 300-page ‘Aha!’ moment.”—Kevin Drum, Mother Jones
"The worst social change in America during my lifetime has been its shift from the land of middle-class opportunity to the land of super-rich privilege. The economic polarization of America is a familiar problem, but Jacob Hacker and Paul Pierson approach it in an original way, using detective-story procedure to identify an unsuspected culprit—one that has little to do with 'globalization' or 'technological revolution' or China or the like. Their case is convincing, and it builds to a recommendation of how Americans could organize to save their country's promise. I hope people read the book and follow its advice."—James Fallows, National Correspondent, The Atlantic
“Over the past generation, the middle class has been repeatedly battered, and its once-solid foundations have begun to tremble. Uncovering the hidden political story behind this great economic challenge, Jacob Hacker and Paul Pierson shed light on what has gone wrong—and why. Their book is must-reading for anyone who wants to understand how Washington stopped working for the middle class.”—Elizabeth Warren, Harvard Law School, Chair of the Congressional Oversight Panel on the U.S. banking bailout, and author of The Two-Income Trap
“Hacker and Pierson make a compelling case. If Marie Antoinette were alive, she might aver of today’s great economically challenged masses, ‘Let them nibble on passbook-savings-account interest’—if they can manage to save anything, that is.”—David Holahan, The Christian Science Monitor
“This is a transformative book. It’s the best book on American politics that I’ve read since Before the Storm. . . If it has the impact it deserves, it will transform American public arguments about politics and policymaking.”—Henry Farrell, Crookedtimber.org
“Two top political scientists tell us when America turned terribly wrong—and how the rich and powerful organized to do the turning. . . . Fascinating.”—Sam Pizzigagi, “Too Much,” an online newsletter of the Institute for Policy Studies
“Jacob Hacker and Paul Pierson combine enormous learning about how our political system actually works with a spritely facility for getting their ideas across—rare gifts in American political debate. Winner-Take-All Politics carries forward the argument from their path-breaking book Off-Center. It explains why the 2006 and 2008 elections only began a reform process that still has a ways to go. Hacker and Pierson have always stayed ahead of the conventional arguments and Winner-Take-All Politics keeps them in the lead.”—E.J. Dionne, Jr., author of Why Americans Hate Politics and Souled Out
“Hacker and Pierson deftly pose and solve a political mystery: How could our democracy have turned away from a politics of broadly shared prosperity that served most citizens? Clue: take a close look at the elite capture of the Democratic Party. Winner-Take-All Politics—stylishly written and well documented with evidence—is a must-read for understanding the great political puzzle of our time.”—Robert Kuttner, author of A Presidency in Peril and co-editor of The American Prospect
“Jacob Hacker and Paul Pierson brilliantly break the intellectual logjam over the causes of runaway inequality. Their findings put responsibility and control back into the hands of officeholders, elected and appointed. Winner-Take-All Politics is crucial reading for all those engaged in American politics.”—Thomas B. Edsall, political editor, Huffington Post, and correspondent, The New Republic
About the Author
Jacob S. Hacker is the Stanley B. Resor Professor of Political Science at Yale University. A Fellow at the New America Foundation in Washington, DC, he is the author of The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream, The Divided Welfare State, and, with Paul Pierson, of American Amnesia: The Forgotten Roots of Our Prosperity; Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class; Off Center: The Republican Revolution and the Erosion of American Democracy. He has appeared recently on The NewsHour, MSNBC, All Things Considered, and Marketplace. He lives in New Haven, Connecticut.
Paul Pierson is the John Gross Professor of Political Science at the University of California at Berkeley. He is the author of Politics in Time, Dismantling the Welfare State?, and (with Jacob S. Hacker), American Amnesia: The Forgotten Roots of Our Prosperity; Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class; Off Center: The Republican Revolution and the Erosion of American Democracy. His commentary has appeared in The New York Times Magazine, The Washington Post, and The New York Review of Books. He lives in Berkeley, California.
Paul Pierson is the John Gross Professor of Political Science at the University of California at Berkeley. He is the author of Politics in Time, Dismantling the Welfare State?, and (with Jacob S. Hacker), American Amnesia: The Forgotten Roots of Our Prosperity; Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class; Off Center: The Republican Revolution and the Erosion of American Democracy. His commentary has appeared in The New York Times Magazine, The Washington Post, and The New York Review of Books. He lives in Berkeley, California.
Excerpt. © Reprinted by permission. All rights reserved.
Chapter 1
The Winner-Take-All Economy
Americans like crime dramas, and for good reasons. There is an exciting discovery that immediately creates mystery. The scene has clues to pore over (increasingly, with the latest in forensic technology). Suspects are found and interrogated, their motives questioned, their alibis probed. And if the crime drama is worth its salt, there are surprises along the way—unexpected twists and turns that hopefully lead to a satisfying explanation of the once-mysterious felony.
This book starts with a mystery every bit as puzzling as that of the typical crime drama, and far more important for the lives of Americans: Why, after a generation following World War II in which prosperity was broadly distributed up and down the income ladder, did the gains of economic growth start going mostly to those at the top? Why has the economy become more risky and unreliable for most Americans even as it has created vast riches for the well-positioned and well-off? The mystery is dramatic. The scene is strewn with clues. And yet this mystery has continued to bedevil some of the nation’s finest economic detectives.
It’s not as if the post-1970s transformation of our economy has gone unnoticed, of course: Even before the economic crisis that shook the nation in 2008, scores of economists and experts in allied fields, like sociology and political science, were creatively crunching the numbers and fiercely debating their meaning. Yet again and again, they have found themselves at dead ends or have missed crucial evidence. After countless arrests and interrogations, the demise of broad-based prosperity remains a frustratingly open case, unresolved even as the list of victims grows longer.
All this, we are convinced, is because a crucial suspect has largely escaped careful scrutiny: American politics. Understandably, investigators seeking to explain a set of economic events have sought out economic suspects. But the economic suspects, for the most part, have strong alibis. They were not around at the right time. Or they were in a lot of countries, doing just the same thing that they did in the United States, but without creating an American-style winner-take-all economy.
This chapter is not the place to pin the case on American politics—or spell out exactly how American politics did it. These are tasks for the rest of this book. But we will show what a convincing solution has to look like and introduce the clues that lead us to zero in on American politics as our prime suspect. In the next chapter, we will start laying out what we mean when we say, “American politics did it.” For, as will become clear, resolving our first mystery only raises a deeper one: How, in a political system built on the ideal of political equality and in which middle-class voters are thought to have tremendous sway, has democratic politics contributed so mightily to the shift toward winner-take-all?
Investigating the Scene
As in any investigation, we cannot find the suspects unless we know more or less what happened. A body dead for twenty-four hours yields a very different set of hunches than one dead for twenty-four years. Likewise, we need to be able to characterize the winner-take-all economy in clear, simple, and empirically verifiable terms to rule certain explanations out and others in. Unfortunately, much of the discussion of our current economic state of affairs has lacked such clarity.
Indeed, most of the economic investigators have actually been looking in the wrong place. Fixated on the widening gap between skilled and unskilled workers, they have divided the economic world into two large groups: the “haves” with college or advanced degrees; the “have-nots” without them. The clues suggest, however, that the real mystery is the runaway incomes and assets of the “have-it-alls”—those on the very highest rungs of the economic ladder. These fortunate few are, in general, no better educated or obviously more skilled than those on the rungs just below, who have experienced little or none of these meteoric gains.
The mystery, further, is not just why the have-it-alls have more and more. It is also how they have managed to restructure the economy to shift the risks of their new economic playground downward, saddling Americans with greater debt, tearing new holes in the safety net, and imposing broad financial risks on Americans as workers, investors, and taxpayers. The rising rewards at the top, as startling and important as they are, are only a symptom of a broader transformation of the American economy. The deeper mystery is how our economy stopped working to provide security and prosperity for the broad middle class. The deeper mystery, the mystery that has yet to be systematically outlined or unraveled, is the rise of the winner-take-all economy.
A big reason for the continuing confusion is that the largest body of evidence on which economic investigators have traditionally relied fails to capture the crucial facts. Most of those who have asked how the poor, middle class, and rich have fared have examined national surveys of income, such as the Census Bureau’s widely used Current Population Survey—the basis for those annual summaries of income and poverty trends that appear in the news late each summer. These surveys, however, have a serious problem: They do not reach many rich people and, even when they do, do not usually show their exact incomes. (Instead, they cap the maximum amount disclosed, a practice known as top coding.) As a result, most investigators are examining the winner-take-all economy without looking at the winners at all. It is as if Lifestyles of the Rich and Famous took you on an exciting tour of the financial life of a couple making $125,000 a year (“Look: their own washer and dryer!”).
Enter two young economists who have turned the investigation upside down: Thomas Piketty and Emmanuel Saez. They are a transcontinental team—Piketty is now based at the Paris School of Economics, while Saez is at the University of California, Berkeley (both are natives of France). In 2009, at age thirty-six, Saez was awarded the John Bates Clark Medal for the economist younger than forty making the greatest contribution to the discipline. The medal was, in large part, for pathbreaking work that he and Piketty have done using income tax statistics to paint a new and revealing portrait of the distribution of economic rewards in the United States and other rich nations.1
Piketty and Saez’s approach is simple but revolutionary. Rather than talking to witnesses, the most important of whom (the rich) cannot be easily found, they scour the scene itself. More precisely, Piketty and Saez tap into a source of data that is particularly good at revealing what the have-it-alls actually have: namely, income reported when paying taxes. Information that taxpayers provide about their wages, salaries, capital gains, and other income may contain errors—and sometimes deliberate errors. But tax forms require careful documentation that income surveys don’t, and taxpayers have strong legal inducements to get the numbers right. More important, the one group that the tax code generally singles out for special scrutiny is the rich, the very people whom income surveys tend to miss. To be sure, the tax data are not without flaws, and Piketty and Saez assiduously try to correct them (for example, they adjust the results to account for the fact that some people don’t file tax returns).1 But they are enormously better than survey results in capturing the full distribution of economic rewards.
And what the Piketty and Saez evidence uniquely shows is just how sharply our economy has tilted toward winner-take-all. Most of the gains of economic growth since the 1970s have gone precisely to those that the commonly used surveys miss—not just the top 10 percent, but especially the top 1 percent, and especially the highest reaches of the top 1 percent.
Three Big Clues
Compared with the standard surveys that portray the rich as earning upper-middle-class salaries, Piketty and Saez’s data are like DNA evidence in a case previously investigated using only eyewitness accounts. As it turns out, the DNA evidence reveals three essential clues that were previously neglected.
Clue #1: Hyperconcentration of Income
The first clue is that the gains of the winner-take-all economy, befitting its name, have been extraordinarily concentrated. Though economic gaps have grown across the board, the big action is at the top, especially the very top.
To grasp this point, consider an alternate reality in which income grows at the same pace for all groups in society. In this scenario, the rich get richer at the same rate as everyone else, so the share of national income earned by the rich stays constant. We might call this imaginary country Broadland—a counterfactual parallel to the real world of runaway gains at the top that the writer Robert Frank has evocatively termed “Richistan.”2
Broadland would not be some kind of egalitarian fantasy. It would simply be a country where economic growth was making the income distribution neither more equal nor less. It would, in fact, be pretty close to the situation that existed from the end of World War II until the early 1970s, a period in which incomes actually grew at a slightly faster rate at the bottom and middle of the economic distribution than at the top.
But Broadland is not the world of the past generation. Instead, the share of income earned by the top 1 percent has increased from around 8 percent in 1974 to more than 18 percent in 2007 (the last year covered by the data)—a more than twofold increase. If you include capital gains like investment and dividend income, the share of the top 1 percent has gone from just over 9 percent to 23.5 percent. The only time since 1913 (the first year of the data) that this share has been higher was 1928, on the eve of the stock market crash that ushered in the Great Depression, when it tickled 24 percent.
But the top 1 percent, while seemingly an exclusive group, is much too broad a category to pinpoint the most fortunate beneficiaries of the post-1970s income explosion at the top. The Piketty and Saez evidence allows us to climb higher up the economic ladder and peer into the pocketbooks of the richest tenth of a percent and even the richest hundredth of a percent—yes, 0.1 percent and 0.01 percent—of Americans. The latter comprise the highest-earning 15,000 or so families in the United States, a group in which we would expect Lifestyles of the Rich and Famous to have little trouble finding private jets and opulent mansions.
Plenty of jets and mansions, it turns out: The top 0.1 percent (the richest one in a thousand households) collectively rake in more than $1 trillion a year including capital gains—which works out to an average annual income of more than $7.1 million. In 1974, by comparison, the top 0.1 percent’s average income was just over $1 million. (All these incomes are adjusted for inflation by expressing them in 2007 dollars.) In terms of the share of national income earned, the top 0.1 percent have seen their slice of the pie grow from 2.7 percent to 12.3 percent of income—a more than fourfold increase.
We shall say more about who is in this rarefied group in the chapters to come, but for now, let us simply note that its denizens are not, for the most part, superstars and celebrities in the arts, entertainment, and sports. Nor are they rentiers, living off their accumulated wealth, as was true in the early part of the last century. A substantial majority are company executives and managers, and a growing share of these are financial company executives and managers. High earners in law, medicine, real estate, and other potentially lucrative fields also make an appearance, but they pale in prominence to the “working rich” of the executive world.3
By now it will come as no surprise that the gains within this superrich group are themselves highly concentrated. While things have been good for the top 0.1 percent, the top 0.01 percent (the richest one in ten thousand households) has seen an even more spectacular rise. From less than $4 million in average annual income in 1974, the average member of this select group now earns more than $35 million. From earning less than 1 of every 100 dollars, these supremely fortunate souls now earn more than 1 of every 17—or more than 6 percent of national income accruing to 0.01 percent of families. This is the highest share of income going to this group since the data began to be collected in 1913.
The more closely we look at changes in the distribution of economic rewards, the more it becomes clear that the big gains have been concentrated at the very, very top.4 According to Piketty and Saez’s revealing evidence regarding pre-tax incomes, we have gone from Broadland to Richistan—from a world in which most of the nation’s income gains accrue to the bottom 90 percent of households (the pattern of the economic expansion of the 1960s) to one in which more than half go to the richest 1 percent (the pattern of the last economic expansion from 2002 to 2007). For those in the tightly circumscribed winner’s circle of the winner-take-all economy, the last generation has truly been a golden age.
Clue #2: Sustained Hyperconcentration
The DNA evidence reveals a second important clue: The shift of income toward the top has been sustained, increasing steadily (and, by historical standards, extremely rapidly) since around 1980.
Figure 1 tells the story. The poor may not be getting poorer, but the rich have been steadily pulling away: in good times (the strong economy of the mid-to late 1990s) and in bad times (the very weak economy of the early 1980s); under Republican presidents (Reagan, George H. W. Bush, and George W. Bush, whose presidencies are shaded in gray on the figure) and under Democratic President Clinton. The only brief reversals occur during the dives in the stock market that occurred in the late 1980s and around 2000. But the occasional setback associated with a decline in the stock market has only been a springboard to new heights. For thirty years, the good times have just kept rolling.
The solution to our mystery, in short, needs to account for a simple fact: The rising share of national income captured by the richest Americans is a long-term trend beginning around 1980. It is a trend, moreover, that is not obviously related to either the business cycle or the shifting partisan occupancy of the White House.5 The partisan to-and-fro and economic ebb and flow surely had some part to play. But something else was at work in creating the winner-take-all economy—something that fostered a sharp divide between broadly shared prosperity and winner-take-all.
The Richest 1 Percent’s Share of National Income (Including Capital Gains), 1960–2007
Clue #3: Limited Benefits for the Nonrich
We come, finally, to the third clue—and perhaps the most puzzling of all. It is so puzzling, and potentially controversial, that we spend much of the rest of this chapter documenting and delving into it.
The third clue is this: In an era in which those at the top reaped massive gains, the economy stopped working for middle- and working-class Americans. We know that the rich grew fabulously richer over this period. We know that relative to the rich, the rest of Americans lost ground. But what we have not yet investigated is whether they lost ground overall. How well did they fare in an era in which so large a share of economic gains accrued to those above them? Did they become richer and more economically secure? Did they see their chance of rising to the top increase? How much, in other words, did they really benefit from the winner-take-all economy?
The evidence can be summarized in a two-word answer: Not much. When we look at the DNA evidence on U.S. incomes, we find that most Americans experienced extremely modest gains over the era in which the rewards at the top multiplied. This is true, surprisingly and revealingly, even for the mostly highly skilled individuals just below the very top rungs of the income ladder. But the evidence on income gains actually understates the case—by a lot. When we expand our view beyond income to take in the broader canvas of the winner-take-all economy, the argument for thinking that the gains of America’s top-heavy economic growth “trickled down” becomes even weaker. This is not just a story of relative income erosion. The fallout of the winner-take-all economy has reached broadly and deeply into the security of the middle class—and, as recent events reveal, the entire American economy.
Trickle-Up Economics
Ronald Reagan famously asked, “Are you better off than you were four years ago?” Our own version of the question is, “Are you better off than you were a generation ago?”—or, more specifically, “How much better off are middle- and lower-income Americans than they were a generation ago?” The answer has substantial implications for how we judge the economic trends of the last thirty years. After all, if everyone experienced very large gains and the rich just happened to experience even larger gains, this might not cause great concern. Indeed, this is the “trickle-down” scenario that advocates of helping the have-it-alls with tax cuts and other goodies constantly trot out: If a rising tide lifts dinghies as well as yachts, who cares if it does a bit more for yachts?
But trickle-down is not the only possibility. Another scenario might be called “trickle-up”: The rich are getting fabulously richer while the rest of Americans are basically holding steady or worse. What if the modern economy looks less like an open sea, where rising water lifts all boats, and more like a system of locks, where those who don’t get through the gates are left behind? Yachts are rising, but dinghies are largely staying put, locked out (so to speak) from higher waters. Indeed, in this alternative scenario, there is reason to suspect that the dinghies are staying put in part because the yachts are rising—that the rich are closing the locks behind them to capture resources that would otherwise have enhanced the living standards of everyone else.
So which of these scenarios is correct—trickle-down or trickle-up? The evidence is not completely consistent, and there is room for debate at the margins. But it’s increasingly clear that trickle-down economics is not working as its proponents promise. Trickle-up economics, by contrast, seems to be working all too well.
Bringing In Government Taxes and Benefits
To see trickle-up in action, we need a source of evidence slightly different from that provided by Piketty and Saez. As mentioned, Piketty and Saez look at tax records, so the family incomes they report basically add up the private sources of income that people list on their tax forms: wages, salaries, investment income, gifts, and so on. These income sources do not include government benefits, such as Social Security payments. Nor do they take into account the effect of taxes themselves: They are the incomes on which people pay taxes, not incomes after people pay taxes.
These omissions matter for studying inequality, because in all rich nations, including the United States, government taxes and benefits make the distribution of income more equal, taking more from those at the top and providing more to those at the bottom. These omissions also matter because some of the compensation that people receive in the workplace takes the form of noncash benefits like health insurance and retirement pensions. Thus, if we want the most accurate measure of the resources that middle- and lower-income Americans have at their disposal, we need to take into account government’s effect on incomes as well as tally up private noncash compensation. The basic tax data include neither.
Fortunately, the Congressional Budget Office—Congress’s nonpartisan budget agency, known as CBO—has developed these broader indicators. CBO does this by combining the basic tax data with the results of income surveys that ask people about government and private benefits. In addition, CBO calculates what people with different incomes are required to pay in federal taxes. The result is considered the gold standard for studying family income trends. Although available only back to 1979—unlike the Piketty and Saez data, which go back to 1913—this augmented DNA evidence is as close as we can get to an accurate picture of what happened to the income of American households at the bottom, middle, and top of the distribution over the last generation.6
This picture turns out to be stark: The bottom went nowhere, the middle saw a modest gain, and the top ran away with the grand prize.
How Much Did Family Incomes Grow
for the Poor, Middle Class, and Rich?
Let us start with the simplest measure of economic gains: the percentage increase in the inflation-adjusted incomes of households on different rungs of the economic ladder. The first point to make is that the overall economy expanded substantially over the twenty-seven years covered by CBO. Between 1979 and 2006—the last year currently available—real average household income, according to the augmented DNA evidence, rose by almost 50 percent, a compounded gain of 1.5 percent per year. A household earning exactly the average income had $47,900 in 1979 and $71,900 in 2006, or half again as much.
This is the happy story. The less happy story, at least for the nonrich, is where the gains of that growth went. Start with those at the bottom: As figure 2 shows, the average income of the poorest 20 percent, or quintile, of American households rose from $14,900 to $16,500, a meager 10 percent gain over twenty-seven years, even after taking into account government taxes and benefits and private employment-based benefits.
What about those in the middle? They did better, but not that much better: The middle quintile of households (that is, the 20 percent of households above the bottom 40 percent and below the top 40 percent) saw their average inflation-adjusted income rise from $42,900 to $52,100—a gain of 21 percent. This may sound good (and because families became smaller over this period, the gains per family member within households are a bit larger). But it works out to a real gain of just 0.7 percent a year, a rate of increase less than half the growth of average income over this period. Not much of a yearly raise.
These numbers look all the more striking when we consider a simple fact: American households are working many more hours today than they were in the late 1970s. This is because women are much more likely to work outside the home than they were a generation ago, augmenting both family income and the amount of time that household members spend in the workforce. Among working-age married couples with children, these extra hours totaled more than ten additional full-time weeks in the workforce (406 hours) in 2000, as compared with 1979. Without those additional hours and income, households in the middle of the distribution would have barely budged upward at all. The incomes of households at the bottom would actually have fallen.7
So who received the gains? The simple answer is those at the top, especially the very top. The average after-tax income of the richest 1 percent of households rose from $337,100 a year in 1979 to more than $1.2 million in 2006—an increase of nearly 260 percent. Put another way, the average income of the top 1 percent more than tripled in just over a quarter-century. Figure 2 graphically portrays the scale of the disparity. Just getting the 2006 average income of the top 1 percent on the same axis as the average incomes of other groups is a challenge, so stark is the difference.
Average Household After-Tax Income
Including Public and Private Benefits, 1979 and 2006
And, again, the gains enjoyed by the top 1 percent pale in comparison to those received by the top hundredth of 1 percent—a group CBO separated out in its analysis up through 2005. Between 1979 and 2005, the CBO numbers show, the average after-tax income of households in the top 0.01 percent increased from just over $4 million to nearly $24.3 million—more than quintupling in a little more than a quartercentury.
How Much Richer Are the Rich Because of Unequal Growth?
The statistics are stark: Most growth since the late 1970s has gone to the very richest Americans. But what does this mean in terms of the actual incomes of different income groups? Let us return to Broadland. How much more would the poor or middle class take home each year if incomes had grown at the same rate across all income groups between 1979 and 2006, as they more or less did for a generation after World War II? How much better off would Americans at different income levels be if they had stayed in Broadland over these twenty-seven years, rather than moving to Richistan?
The answer is summed up in table 1: Few of the benefits of economic growth at the top between 1979 and 2007 trickled down. If the economy had grown at the same rate as it actually did yet inequality had not increased, the average income of the middle fifth of households would be over $12,000 higher today. The average income of the bottom fifth of households would be more than $5,800 higher. Note, again, that we are assuming no change in the overall growth of the economy, just a broader distribution of the economy’s rewards. Note, too, that we are accounting here for all government taxes and benefits as well as private workplace benefits. And remember: Broadland is not some hyperegalitarian world in which the rich get “soaked”; rather it’s a world in which the rich simply experience the same income growth rate as everyone else, just as they basically had before the late 1970s.
Table 1: Richistan vs. Broadland Richistan (average actual income in 2006)Broadland (all groups experience the average rate of household income growth between 1979 and 2006)How Much Richer or Poorer in Broadland in 2006?Bottom Fifth $16,500 $22,366$5,866 RicherSecond Fifth $35,400 $45,181$9,781 RicherMiddle Fifth $52,100 $64,395$12,295 RicherThird Fifth $73,800 $84,209$10,409 Richer80th–90th Percentile $100,915 $106,696$5,781 Richer90th–95th Percentile $132,258 $128,714$3,544 Poorer95th–99th Percentile $211,768 $181,992$29,776 PoorerTop 1 Percent$1,200,300 $506,002$694,298 Poorer
So what would have happened to those at the top if they had experienced the same average growth of their income as everyone else? The answer is that they would be pulling down around $500,000 a year on average, rather than the more than $1.2 million the top 1 percent actually earned, on average, in 2006—a nearly $700,000 difference. Unequal growth has been very, very good for the have-it-alls.
When Richistan and Broadland are compared, another arresting conclusion comes into view. Other than the richest 10 percent of Americans, every income group would have done better if they had experienced the average growth of household income, that is, if they had lived in Broadland rather than Richistan. (The tipping point where Richistan delivers higher incomes than Broadland is somewhere between the 90th and 95th percentiles, though the gap between Richistan and Broadland is small until the very top of the distribution.) Put another way, the entire bottom 90 percent saw their incomes rise more slowly than average household income between 1979 and 2006. If trickle-up economics has a textbook case, this is it.
A Victimless Crime?
The DNA evidence shows that real household incomes for all groups but the very well-off have risen only modestly, and almost entirely because of increased family work hours. Meanwhile, the overall economy has expanded substantially. The explanation for this disconnect, mathematically speaking, is that most of the gains of growth have gone to Americans at the top of the economic ladder.
But this simple mathematical explanation leaves open an obvious objection: The economy is not zero-sum. Perhaps the gains of the rich, as impressive as they are, did not come at the expense of the rest of Americans. Maybe “Broadland” is not just an imaginary but an unimaginable country. After all, didn’t the United States grow much more quickly than other rich nations during this period, allowing the rich to get richer even as the rest of Americans moved ahead as well? In particular, didn’t the United States grow a lot faster than Europe, where incomes are generally much more equal and where the massive rise in income inequality seen in the United States did not occur?
The answer is no. The American economic engine ran hotter in some years than the European economic engine. But on average, between 1979 and 2006, economic growth per capita was essentially the same in the fifteen core nations of Europe as it was in the United States.8 The United States is richer than these nations, but the gap has been surprisingly stable since the late 1970s.
The historical evidence certainly doesn’t suggest an American economic miracle alongside European sclerosis. This lends strength to the supposition that the outsized gains of the rich came at the expense of those lower on the economic ladder, who found themselves enjoying less and less of the economic pie. On average, the economic pie grew at essentially the same rate in the United States as it did in nations where the poor and middle class have continued to enjoy a much larger piece.
Indeed, in one important respect, the pie actually grew more quickly in Europe than it did in the United States. Recall that American households are working more hours than they did in the past. The same is true in Europe, but not nearly to the same extent. Women have entered the workforce to roughly the same degree—in fact, the share of the population in the workforce grew more quickly in Europe than in the United States between 1979 and 2006.9 Yet in Europe average work hours for those in the workforce have declined, so the net effect is only a small increase in overall work hours, compared with a much more substantial rise in the United States.10 As a result, GDP per hour worked—perhaps the best single measure of a country’s economic health—actually rose faster in Europe than in the United States between 1979 and 2006.
To be sure, the story of divergent work hours is complicated: Some of the decline in work hours in Europe is involuntary, due to higher levels of unemployment. But the basic story is that the United States did not grow markedly faster than Europe even as American inequality skyrocketed. Adjusted for the growing work hours of American families—with all the attendant stress and strains that those increased hours have caused—the American economic pie actually grew slightly more slowly.
The Big Zero
If there is a nail in the coffin of the dismissive view about middle-class economic problems, it is the decade that shall not be named: the 2000s. Some call these years the “aughts,” others “the aughties,” still others “the big zero.”11 The last moniker may be the most appropriate. The decade closed with the nation mired in the worst economic downturn in more than seventy years, with the unemployment rate around 10 percent and with the share of Americans unemployed for more than six months at the highest level ever recorded.12 Economically speaking, the 2000s was truly a lost decade. At its end, the stock market was partying like it was 1999. Housing prices had crashed. Home ownership was at 2000 levels.13 Even the most optimistic estimates suggested it would take years to recover from the hemorrhaging of jobs and incomes triggered by the collapse.
Here’s the kicker: The aughties were awful even before the economy began to crumble in late 2007. They featured six years of consecutive economic growth (from the end of 2001 until the end of 2007) in which the median income of non-elderly households actually fell while the share of Americans living in poverty actually rose. This was the first economic expansion on record in which the typical non-elderly household lost economic ground.14 Yet it wasn’t all bad news. Between 2002 and 2007, the real pretax incomes of those in the top 1 percent rose by 10 percent. Per year.15
Beyond Income
Those who are inclined to be dismissive of the evidence just reviewed frequently respond by insisting that the focus on income is short-sighted: We should also look at the chance people will rise up the economic ladder, at their workplace benefits, at their spending and wealth, and so on. True enough. Unfortunately, when we take a broader perspective, the conclusion that our economy has become increasingly winner-take-all only becomes stronger.
Stagnant Social Mobility
Americans have always believed in upward social mobility—both as an ideal and a description of reality. And if social mobility had been rising along with inequality over the last generation, then the growing concentration of income at the top might be less of a concern. One year’s poor household might be next year’s middle-class or even rich household. Social mobility would soften the sharp edges of a growing class divide.
Alas, the evidence is overwhelming that upward social mobility has not increased at the same time that inequality has skyrocketed. Indeed, according to a number of innovative new studies, American mobility may well have declined over the last generation, even as inequality has risen. This is true of both individual mobility (“Am I richer than I was a decade or two ago?”) and of intergenerational mobility (“Am I richer than my parents were?”).16 Over a typical decade, for example, just under four in five people stay in the same income quintile or move a single quintile up or down.
We know less about the long-term mobility of the top 1 percent, but all indications are that people in this rarefied group usually don’t drop very far down the ladder for any length of time. Looking just at wage and salary income, for example, more than 70 percent of the highest-earning 1 percent of American households in 2004 were among the highest-earning 5 percent of households in 1994. Only around one in ten had risen from the bottom 80 percent—down from around one in seven in the 1970s.17 And of course, as the gains of economic growth become ever more concentrated, almost by definition fewer individuals will be able to move into the shrinking ranks of the economic winners.
Compared with other rich nations, moreover, U.S. intergenerational mobility is surprisingly low, in part because the gap between income groups is so much bigger. The American Dream portrays the United States as a classless society where anyone can rise to the top, regardless of family background. Yet there is more intergenerational mobility in Australia, Sweden, Norway, Finland, Germany, Spain, France, and Canada. In fact, of affluent countries studied, only Britain and Italy have lower intergenerational mobility than the United States does (and they are basically even with the U.S.).18
The differences are often stark. In the United States, more than half of the earnings advantage (or disadvantage) of fathers is passed on to sons. In Canada, only about a fifth or less is. And almost all of the difference is accounted for by the fact that Americans are much more likely to be stuck at the bottom or secure at the top than are Canadians. In short, when mobility is accounted for, the picture of the winner-take-all economy looks no better. If anything, it looks worse.
Broken Benefits
It is often argued that workplace benefits, like health insurance and retirement pensions, alter the story of the winner-take-all economy—and that, in particular, the middle class does better when you take into account the growing share of compensation that comes in the form of such benefits, rather than cold, hard cash. Actually, the CBO numbers we have been looking at already take into account health and pension benefits, so the anemic gains of working- and middle-class Americans cannot be explained away by suggesting that they are getting better and better benefits at their place of work.
But let’s take the argument a little further. Are Americans getting better benefits tied to their jobs? Not when it comes to retirement benefits. Employers contribute less to such benefits than they did in the 1970s, and workers are less likely to have an employer-sponsored pension than they were in the late 1970s.19 And many fewer have a guaranteed defined-benefit pension that pays them a fixed income in retirement. Instead, most Americans who have pensions rely on defined-contribution plans that place all the risk of retirement savings on them. This risk has been driven home by the recent stock market drop, which reduced the median balance in 401(k)s by a third between 2007 and 2008.20 As notable as the decline is the end point: the typical amount in a 401(k) in 2008 was a paltry $12,655. Given this, it’s no shock that the share of Americans who are at risk of retiring without adequate income has risen substantially since the early 1980s.21
On the other side of the benefits equation, employers and workers are certainly spending more on health insurance—much, much more. The question is what this spending has bought. Are Americans better insulated against medical costs than they were a generation ago? No. Are they more secure against the medical crises and costs that, studies suggest, are associated with more than half of the rising number of personal bankruptcies?22 No. Health costs that outstrip the growth of earnings year after year after year—pushing more people out of coverage and more people into hardship—can hardly be seen as an unqualified benefit for the middle class.
That’s especially so because these higher costs are not inevitable. The United States spends vastly more than any other rich nation on health care—both as a share of the overall economy and on a per-person basis—even though we are the only affluent democracy that doesn’t guarantee insurance to all its citizens. In 2007, the price tag for our exorbitant system came to $7,290 per person. The next most profligate nation, Norway, featured spending of $4,763 per person. Canada’s spending per capita is essentially half the U.S. level.23
Yet the United States has fewer doctors, hospital beds, and nurses per person than the norm among rich nations, and Americans (while less healthy overall) visit doctors and hospitals less often and have shorter hospital stays. Indeed, by some measures our care looks surprisingly substandard. For example, recent analyses of “amenable mortality”—deaths that could have been prevented with timely care—find that the United States has the highest rate of preventable death before age seventy-five among rich nations, and that it is falling farther and farther behind.24
And, of course, the United States has had a higher share of citizens without coverage than any other rich nation, and that share has been growing. In 2006, more than 46 million Americans younger than sixty-five were uninsured—nearly 18 percent of the non-elderly population. Back in 1979, the number of uninsured was 27.5 million, or less than 15 percent of the nonelderly population.25 Add in workplace benefits and the situation of most Americans looks even more dire than when we focus on income alone.
Consumption to the Rescue?
Can another definition of economic well-being come to the rescue? It has long been known that inequality of spending (or “consumption”) is less than inequality of income. The reasons are obvious: The rich save more of their money than the poor; at the same time, two major groups in society—retirees and young adults—often spend more than they earn, thanks to savings and loans. So we should expect less consumption inequality than income inequality. The issue is whether we see the same basic trends in inequality of consumption that we do in inequality of income, namely, a big increase.
Tackling this issue turns out to be extremely difficult, in part because the main source of evidence, the Consumer Expenditure Survey, largely misses the high-income folks who’ve benefited from the winner-take-all economy. Still, it is increasingly clear there is no “consumption paradox.” Consumption inequality is not as great as income inequality, as we’d expect (especially since the evidence fails to capture the big winners at the top). But the two have grown at more or less the same rate over time.26
Here again we find smart analysts ignoring the most notable feature of the winner-take-all economy—that it’s, well, winner-take-all. Have lower-income Americans been borrowing more to sustain their spending? Definitely. Are the less affluent experiencing lower price inflation than richer Americans thanks to cheap Chinese goods?27 Perhaps. But none of this is going to alter fundamentally our view of American inequality. The access of the poor to easy credit or Wal-Mart prices has little bearing on the growing gap between the superrich and the merely well-to-do.
Drowning in Debt
Furthermore, the flip side of consumption is savings and investment—and the wealth that comes with savings and investment. After all, it’s not as if the rich are giving all the money they don’t spend to charities for the poor. In fact, money that high earners do not spend gets turned into wealth, and the share of wealth held by the rich is both high and growing. In 2004, the wealthiest 1 percent of households had an average net worth of nearly $15 million.28 (At the very top of the ladder, the wealthiest 400 Americans—according to the famous Forbes 400 list—had an average net worth of $3.9 billion in 2008, more than six times the 1985 average for the Forbes 400.)29
The average net worth of the bottom 80 percent of households, in contrast, was around $82,000, and that includes the wealth that households had in their homes. Average net worth for the bottom 40 percent of households was a paltry $2,200 in 2004, less than half the $5,400 that this group enjoyed in 1983. Strikingly, over the entire period between 1983 and 2004, only 10 percent of all wealth gains went to the bottom 80 percent of Americans, an even more skewed pattern of growth than seen in income.30
Perhaps more striking, 17 percent of households in 2004 had zero or negative net worth—they owed more than they had. (And this was before the collapse of real estate prices put more homes “underwater”—with home loans exceeding home values—than at any time in U.S. history.) Here we find a major clue to why consumption is not always a good measure of income: For a time, at least, people can spend beyond their income by borrowing, and before the 2007 downturn, Americans were borrowing at record rates. But, as the late economist Herbert Stein is reported to have said, “If something can’t go on forever, it won’t.” The inexorable increase in household debt was not sustainable without comparable income gains—and those gains did not occur. Once again, scouring the scene turns up plenty of additional proof that the winner-take-all economy has produced limited gains for those outside the winner’s circle.
The clues are undeniable: Not only did those below the top reaches of the economic ladder find themselves falling ever farther behind the have-it-alls; they reaped surprisingly few of the gains of the massive expansion at the top.
This is an economic puzzle. It is also a political puzzle. Democracy may not be good at a lot of things. But one thing it is supposed to be good at is responding to problems that affect broad majorities. How could events and trends like these evolve with so little response from democratically elected leaders? Indeed, as we shall see, the puzzle is even deeper. For government was no mere bystander in many of these developments. It actually pushed them along. Why?
Before we turn to these questions, however, we have one last piece of unfinished business: We need to explain why the prime suspect that America’s economic detectives have fingered is, at most, a modest accomplice to the crime.
The Usual (but Wrong) Suspect
Tune into the cable money stations or read the business press and you are likely to hear an account of rising inequality that goes something like this:
“Education is the key to understanding broad inequality trends.”31
“To explain increasing inequality we must explain why the economic return to education and to the development of skills more generally has continued to rise.”32
“We have an economy that increasingly rewards education and skills because of that education.”33
These quotes were not chosen at random. They are the pronouncements, respectively, of the former head of President George W. Bush’s Council of Economic Advisers, Gregory Mankiw, a Harvard economist; Fed chairman Ben Bernanke (another economist, formerly of Princeton); and, finally, former President George W. Bush himself.
It might seem that the common element connecting these quotes is that those responsible for them have ties to the Republican Party. After all, rising inequality was an inconvenient reality for a GOP president (and, before 2006, a GOP Congress) intent on cutting taxes for the wealthy. The fact is, however, that these three quotes express what was, until recently at least, the overwhelming consensus view on inequality among economists, a view summarized in the ungainly acronym SBTC.
The SBTC Seduction
SBTC is not a regional telephone company. It stands for “skill-biased technological change,” and it is still by far the dominant explanation for American inequality trends.34 According to the SBTC argument, the last thirty or so years have witnessed a massive shift toward more knowledge-based employment. In the popular version of the argument, this shift has been greatly accelerated by the globalization of the American economy. This transformation has made formal education and advanced skills much more valuable, fueling a growing divide between the highly educated and the rest of American workers.
In some versions of the argument, skill-biased technological change is driven by computers and the Internet. In others, the main culprit is the failure of the educational advancement of most workers to keep pace with the growing skill demands of a global knowledge economy.35 The account of the crime, however, is the same: SBTC did it.
There are just two problems: SBTC isn’t even charged with the right crime. And the suspect has an alibi.
Why Educational Gaps Can’t Explain
American Top-Heavy Inequality
If there is an Exhibit A in the case that SBTC did it, it is the rising “college wage premium”—the extra amount that college graduates earn relative to their less educated peers. Each year, the College Board publishes a report entitled, “Education Pays,” in which it announces that the gap between those who have finished college and those who have not is large and growing. More sophisticated economic analyses usually emphasize the effects of education across the full spectrum of educational achievement, before college and beyond. But they reach the same conclusion: a growing “return to schooling.” From here, it’s a short leap to the view that the rising bang for one’s educational buck is the main cause of growing inequality.
Only it’s not. The return to schooling—and especially to a college degree—has risen. But, as we’ve seen, rising American inequality is not mainly about the gap between the college-educated and the rest, or indeed about educational gaps in general. It is about the pulling away of the very top. Those at the top are often highly educated, yes, but so, too, are those just below them who have been left increasingly behind.
There’s more: The college educated did well relative to those below them, but not because they experienced massive economic gains. Rather, they merely managed to avoid the devastatingly slow growth at the bottom.
Assume that the story about a new educational elite is true. The top 20 percent of the income distribution should therefore be composed almost entirely of college graduates. (The share of Americans with a college degree was 29 percent in 2007.) What, then, happened to the household income of someone at the 80th percentile, the starting point for entry into this supposedly favored class? The answer is that it has grown extremely slowly compared with the income of folks at the very top—roughly one-fourth as quickly per year as the average income of the top 1 percent.
That middle-class income growth, moreover, is mostly because of increased household work hours, not increased individual earnings. Hard as it may be to believe, a typical entry-level worker (ages 25–34) with a bachelor’s degree or higher earned only $1,000 more for full-time, full-year work in 2006 than did such a worker in 1980 ($45,000 versus $44,000, adjusted for inflation).36 And college-educated workers are substantially less likely to receive health insurance in their first job than they once were—almost four in ten now start out in the labor market without health benefits.37 So much for the enormous general rewards of a college degree.
To be sure, some workers with advanced education make enormous sums. But that’s exactly the point: A huge amount of inequality occurs among workers who have heeded the advice of “Education Pays” and sought a college degree. Economists call this “within-group inequality” (that is, inequality among people with the same education or skills), and it is one of the strongest pieces of exculpatory evidence on SBTC’s side. That is because within-group inequality, by definition, cannot be explained with reference to education, since it occurs among people with the same basic characteristics. And within-group inequality accounts for a major part of the rise in inequality since the 1970s, especially at the very top—where almost everyone has a good education.38
Maybe SBTC was at work among these workers in more subtle ways—some argue that college-educated workers with the skills to do routine tasks have lost out to those who do higher-level “abstract tasks”—but the case against SBTC, considered so strong at the outset, becomes harder to make.
But forget about the weak case, because the suspect has a strong alibi.
Why Didn’t Other Rich Nations Experience SBTC’s Wrath?
SBTC is attractive to economic detectives because it is an all-purpose criminal—one that, its prosecutors argue, can explain both the decline in American inequality in the first half of the twentieth century and its rise in the last thirty years. It is a suspect whose influence should be seen over long spans of time and, more important for the present discussion, across national borders. After all, other rich nations have computers and the Internet too—indeed, quite a few are more networked than we are—and most rich nations are more exposed to the global economy than we are. If SBTC did it here, it should have done it elsewhere, where the same technological and global shifts were taking place.
Embarrassingly for the SBTC-did-it consensus, however, SBTC seems to be picky about where to strike. When it comes to rising inequality, the world isn’t flat after all. American income inequality is the highest in the advanced industrial world. As one labor economist wryly puts it, “If there were a gold medal for inequality, the United States would win hands down… [S]tandard measures show that the United States more closely resembles a developing country than an advanced country on this measure of economic performance.”39
Yet gaps in skills, as measured by years of schooling, are not larger in the United States than they are in other affluent nations. They are actually smaller. Inequality is dramatically higher in the United States not because of greater skill gaps or greater returns to education, but because within-group inequality is greater than it is in other rich nations. Indeed, there is more inequality among workers with the same level of skills (measured by age, education, and literacy) in the United States than there is among all workers in some of the more equal rich nations.40
The Uniqueness of America’s Winner-Take-All Economy
SBTC’s alibi appears even stronger when it comes to the meteoric rise of earnings at the very top, because that rise has been substantially more meteoric in the United States than in other rich nations.
Figure 3 shows the share of income, excluding capital gains, going to the top 1 percent of households in twelve nations: Australia, Canada, France, Germany, Ireland, Japan, the Netherlands, New Zealand, Sweden, Switzerland, the United Kingdom, and, of course, the United States.41 The first bar shows the average share in the mid-1970s (1973–1975); the second shows the average share around the millennium (1998–2000).
One feature of figure 3 that jumps out is that the United States did not look all that exceptional in the early 1970s. Germany, Switzerland, Canada, even France—all had a higher share of national income going to the top 1 percent a generation ago.
Yet that has changed dramatically. The United States is now at the top of the advanced industrial pack, with regard to both the level (16 percent) and the increase (virtually a doubling) of the top 1 percent’s share of income. Half of the nations in figure 3—a diverse group that includes France, Germany, Japan, the Netherlands, Sweden, and Switzerland—experienced little or no increase in the share of income going to the top 1 percent. Apparently in these countries SBTC was AWOL.
It’s true that the other English-speaking nations in this group—Australia, Canada, Ireland, and the United Kingdom—have followed a path more like the United States’. Still, the United States is well in the lead in the competition for the gold medal for inequality. Whereas the United States experienced a doubling of the income share of the top 1 percent, the other English-speaking nations saw only an average rise of around half that in percentage terms.
The English-speaking world has certainly emulated the American pattern more closely than other nations have. But this is hardly proof that government policy doesn’t matter, since these nations have also generally emulated U.S. public policy more than other nations have. What’s more, the trajectory of the two countries that are most often compared to the United States, the United Kingdom and Canada, cannot be viewed as wholly independent of the rise of America’s winner-take-all-economy. As we saw when we started to parse the composition of the top 0.1 percent, the rise in the compensation of the highest earners, especially corporate executives and financial managers, drives much of the outsized gains at the top in the United States. Companies in English-speaking nations compete for these workers, and thus have faced the most pressure to match the massive salaries on offer in the States.42 This appears to hold particularly true for Canada.2 While this contagion effect is hard to pin down, there is little doubt that some of the increase in top incomes in other English-speaking nations reflects competitive pressure to match the more dramatic rise in the United States—a rise that we shall see has a great deal to do with U.S. public policy.
The Top 1 Percent’s Share of National Income (Excluding Capital Gains), Mid-’70s vs. Circa 2000
The cross-national window just opened puts the rise of the winner-take-all economy in surprising perspective. The hyperconcentration of income in the United States—the proximate cause of the death of America’s broad-based prosperity—is a relatively recent development. It is also a development that sets the United States apart from other rich nations, calling into serious doubt the usual explanation for America’s winner-take-all economy, SBTC.
But if SBTC didn’t do it, who did? Enter the unusual suspect: American politics.
[
*] We should emphasize that the Piketty and Saez data only allow us to say how well different income groups are doing, not how well individual households fare over time—an issue with traditional surveys of income as well. We can say the rich of today are richer than in the past, not how much change there is from year to year in who is rich and who is not. But, as we shall see, taking into account the upward or downward income mobility of households does not change this basic picture. It may even strengthen it, since long-term income mobility is much more limited than Americans believe, and may have declined since the 1960s. In any case, income groups are not statistical fictions. If the rich grow much richer, while the poor and middle class do not, the structure of society will look very different.
[
*] Perhaps most telling, there is little sign of the same meteoric rise at the top among French-speaking portions of Canada. Executives in Quebec do not appear to be competing in the same common labor market that has allowed American pay levels at the top to diffuse to the rest of Canada.
© 2010 Jacob S. Hacker
The Winner-Take-All Economy
Americans like crime dramas, and for good reasons. There is an exciting discovery that immediately creates mystery. The scene has clues to pore over (increasingly, with the latest in forensic technology). Suspects are found and interrogated, their motives questioned, their alibis probed. And if the crime drama is worth its salt, there are surprises along the way—unexpected twists and turns that hopefully lead to a satisfying explanation of the once-mysterious felony.
This book starts with a mystery every bit as puzzling as that of the typical crime drama, and far more important for the lives of Americans: Why, after a generation following World War II in which prosperity was broadly distributed up and down the income ladder, did the gains of economic growth start going mostly to those at the top? Why has the economy become more risky and unreliable for most Americans even as it has created vast riches for the well-positioned and well-off? The mystery is dramatic. The scene is strewn with clues. And yet this mystery has continued to bedevil some of the nation’s finest economic detectives.
It’s not as if the post-1970s transformation of our economy has gone unnoticed, of course: Even before the economic crisis that shook the nation in 2008, scores of economists and experts in allied fields, like sociology and political science, were creatively crunching the numbers and fiercely debating their meaning. Yet again and again, they have found themselves at dead ends or have missed crucial evidence. After countless arrests and interrogations, the demise of broad-based prosperity remains a frustratingly open case, unresolved even as the list of victims grows longer.
All this, we are convinced, is because a crucial suspect has largely escaped careful scrutiny: American politics. Understandably, investigators seeking to explain a set of economic events have sought out economic suspects. But the economic suspects, for the most part, have strong alibis. They were not around at the right time. Or they were in a lot of countries, doing just the same thing that they did in the United States, but without creating an American-style winner-take-all economy.
This chapter is not the place to pin the case on American politics—or spell out exactly how American politics did it. These are tasks for the rest of this book. But we will show what a convincing solution has to look like and introduce the clues that lead us to zero in on American politics as our prime suspect. In the next chapter, we will start laying out what we mean when we say, “American politics did it.” For, as will become clear, resolving our first mystery only raises a deeper one: How, in a political system built on the ideal of political equality and in which middle-class voters are thought to have tremendous sway, has democratic politics contributed so mightily to the shift toward winner-take-all?
Investigating the Scene
As in any investigation, we cannot find the suspects unless we know more or less what happened. A body dead for twenty-four hours yields a very different set of hunches than one dead for twenty-four years. Likewise, we need to be able to characterize the winner-take-all economy in clear, simple, and empirically verifiable terms to rule certain explanations out and others in. Unfortunately, much of the discussion of our current economic state of affairs has lacked such clarity.
Indeed, most of the economic investigators have actually been looking in the wrong place. Fixated on the widening gap between skilled and unskilled workers, they have divided the economic world into two large groups: the “haves” with college or advanced degrees; the “have-nots” without them. The clues suggest, however, that the real mystery is the runaway incomes and assets of the “have-it-alls”—those on the very highest rungs of the economic ladder. These fortunate few are, in general, no better educated or obviously more skilled than those on the rungs just below, who have experienced little or none of these meteoric gains.
The mystery, further, is not just why the have-it-alls have more and more. It is also how they have managed to restructure the economy to shift the risks of their new economic playground downward, saddling Americans with greater debt, tearing new holes in the safety net, and imposing broad financial risks on Americans as workers, investors, and taxpayers. The rising rewards at the top, as startling and important as they are, are only a symptom of a broader transformation of the American economy. The deeper mystery is how our economy stopped working to provide security and prosperity for the broad middle class. The deeper mystery, the mystery that has yet to be systematically outlined or unraveled, is the rise of the winner-take-all economy.
A big reason for the continuing confusion is that the largest body of evidence on which economic investigators have traditionally relied fails to capture the crucial facts. Most of those who have asked how the poor, middle class, and rich have fared have examined national surveys of income, such as the Census Bureau’s widely used Current Population Survey—the basis for those annual summaries of income and poverty trends that appear in the news late each summer. These surveys, however, have a serious problem: They do not reach many rich people and, even when they do, do not usually show their exact incomes. (Instead, they cap the maximum amount disclosed, a practice known as top coding.) As a result, most investigators are examining the winner-take-all economy without looking at the winners at all. It is as if Lifestyles of the Rich and Famous took you on an exciting tour of the financial life of a couple making $125,000 a year (“Look: their own washer and dryer!”).
Enter two young economists who have turned the investigation upside down: Thomas Piketty and Emmanuel Saez. They are a transcontinental team—Piketty is now based at the Paris School of Economics, while Saez is at the University of California, Berkeley (both are natives of France). In 2009, at age thirty-six, Saez was awarded the John Bates Clark Medal for the economist younger than forty making the greatest contribution to the discipline. The medal was, in large part, for pathbreaking work that he and Piketty have done using income tax statistics to paint a new and revealing portrait of the distribution of economic rewards in the United States and other rich nations.1
Piketty and Saez’s approach is simple but revolutionary. Rather than talking to witnesses, the most important of whom (the rich) cannot be easily found, they scour the scene itself. More precisely, Piketty and Saez tap into a source of data that is particularly good at revealing what the have-it-alls actually have: namely, income reported when paying taxes. Information that taxpayers provide about their wages, salaries, capital gains, and other income may contain errors—and sometimes deliberate errors. But tax forms require careful documentation that income surveys don’t, and taxpayers have strong legal inducements to get the numbers right. More important, the one group that the tax code generally singles out for special scrutiny is the rich, the very people whom income surveys tend to miss. To be sure, the tax data are not without flaws, and Piketty and Saez assiduously try to correct them (for example, they adjust the results to account for the fact that some people don’t file tax returns).1 But they are enormously better than survey results in capturing the full distribution of economic rewards.
And what the Piketty and Saez evidence uniquely shows is just how sharply our economy has tilted toward winner-take-all. Most of the gains of economic growth since the 1970s have gone precisely to those that the commonly used surveys miss—not just the top 10 percent, but especially the top 1 percent, and especially the highest reaches of the top 1 percent.
Three Big Clues
Compared with the standard surveys that portray the rich as earning upper-middle-class salaries, Piketty and Saez’s data are like DNA evidence in a case previously investigated using only eyewitness accounts. As it turns out, the DNA evidence reveals three essential clues that were previously neglected.
Clue #1: Hyperconcentration of Income
The first clue is that the gains of the winner-take-all economy, befitting its name, have been extraordinarily concentrated. Though economic gaps have grown across the board, the big action is at the top, especially the very top.
To grasp this point, consider an alternate reality in which income grows at the same pace for all groups in society. In this scenario, the rich get richer at the same rate as everyone else, so the share of national income earned by the rich stays constant. We might call this imaginary country Broadland—a counterfactual parallel to the real world of runaway gains at the top that the writer Robert Frank has evocatively termed “Richistan.”2
Broadland would not be some kind of egalitarian fantasy. It would simply be a country where economic growth was making the income distribution neither more equal nor less. It would, in fact, be pretty close to the situation that existed from the end of World War II until the early 1970s, a period in which incomes actually grew at a slightly faster rate at the bottom and middle of the economic distribution than at the top.
But Broadland is not the world of the past generation. Instead, the share of income earned by the top 1 percent has increased from around 8 percent in 1974 to more than 18 percent in 2007 (the last year covered by the data)—a more than twofold increase. If you include capital gains like investment and dividend income, the share of the top 1 percent has gone from just over 9 percent to 23.5 percent. The only time since 1913 (the first year of the data) that this share has been higher was 1928, on the eve of the stock market crash that ushered in the Great Depression, when it tickled 24 percent.
But the top 1 percent, while seemingly an exclusive group, is much too broad a category to pinpoint the most fortunate beneficiaries of the post-1970s income explosion at the top. The Piketty and Saez evidence allows us to climb higher up the economic ladder and peer into the pocketbooks of the richest tenth of a percent and even the richest hundredth of a percent—yes, 0.1 percent and 0.01 percent—of Americans. The latter comprise the highest-earning 15,000 or so families in the United States, a group in which we would expect Lifestyles of the Rich and Famous to have little trouble finding private jets and opulent mansions.
Plenty of jets and mansions, it turns out: The top 0.1 percent (the richest one in a thousand households) collectively rake in more than $1 trillion a year including capital gains—which works out to an average annual income of more than $7.1 million. In 1974, by comparison, the top 0.1 percent’s average income was just over $1 million. (All these incomes are adjusted for inflation by expressing them in 2007 dollars.) In terms of the share of national income earned, the top 0.1 percent have seen their slice of the pie grow from 2.7 percent to 12.3 percent of income—a more than fourfold increase.
We shall say more about who is in this rarefied group in the chapters to come, but for now, let us simply note that its denizens are not, for the most part, superstars and celebrities in the arts, entertainment, and sports. Nor are they rentiers, living off their accumulated wealth, as was true in the early part of the last century. A substantial majority are company executives and managers, and a growing share of these are financial company executives and managers. High earners in law, medicine, real estate, and other potentially lucrative fields also make an appearance, but they pale in prominence to the “working rich” of the executive world.3
By now it will come as no surprise that the gains within this superrich group are themselves highly concentrated. While things have been good for the top 0.1 percent, the top 0.01 percent (the richest one in ten thousand households) has seen an even more spectacular rise. From less than $4 million in average annual income in 1974, the average member of this select group now earns more than $35 million. From earning less than 1 of every 100 dollars, these supremely fortunate souls now earn more than 1 of every 17—or more than 6 percent of national income accruing to 0.01 percent of families. This is the highest share of income going to this group since the data began to be collected in 1913.
The more closely we look at changes in the distribution of economic rewards, the more it becomes clear that the big gains have been concentrated at the very, very top.4 According to Piketty and Saez’s revealing evidence regarding pre-tax incomes, we have gone from Broadland to Richistan—from a world in which most of the nation’s income gains accrue to the bottom 90 percent of households (the pattern of the economic expansion of the 1960s) to one in which more than half go to the richest 1 percent (the pattern of the last economic expansion from 2002 to 2007). For those in the tightly circumscribed winner’s circle of the winner-take-all economy, the last generation has truly been a golden age.
Clue #2: Sustained Hyperconcentration
The DNA evidence reveals a second important clue: The shift of income toward the top has been sustained, increasing steadily (and, by historical standards, extremely rapidly) since around 1980.
Figure 1 tells the story. The poor may not be getting poorer, but the rich have been steadily pulling away: in good times (the strong economy of the mid-to late 1990s) and in bad times (the very weak economy of the early 1980s); under Republican presidents (Reagan, George H. W. Bush, and George W. Bush, whose presidencies are shaded in gray on the figure) and under Democratic President Clinton. The only brief reversals occur during the dives in the stock market that occurred in the late 1980s and around 2000. But the occasional setback associated with a decline in the stock market has only been a springboard to new heights. For thirty years, the good times have just kept rolling.
The solution to our mystery, in short, needs to account for a simple fact: The rising share of national income captured by the richest Americans is a long-term trend beginning around 1980. It is a trend, moreover, that is not obviously related to either the business cycle or the shifting partisan occupancy of the White House.5 The partisan to-and-fro and economic ebb and flow surely had some part to play. But something else was at work in creating the winner-take-all economy—something that fostered a sharp divide between broadly shared prosperity and winner-take-all.
The Richest 1 Percent’s Share of National Income (Including Capital Gains), 1960–2007
Clue #3: Limited Benefits for the Nonrich
We come, finally, to the third clue—and perhaps the most puzzling of all. It is so puzzling, and potentially controversial, that we spend much of the rest of this chapter documenting and delving into it.
The third clue is this: In an era in which those at the top reaped massive gains, the economy stopped working for middle- and working-class Americans. We know that the rich grew fabulously richer over this period. We know that relative to the rich, the rest of Americans lost ground. But what we have not yet investigated is whether they lost ground overall. How well did they fare in an era in which so large a share of economic gains accrued to those above them? Did they become richer and more economically secure? Did they see their chance of rising to the top increase? How much, in other words, did they really benefit from the winner-take-all economy?
The evidence can be summarized in a two-word answer: Not much. When we look at the DNA evidence on U.S. incomes, we find that most Americans experienced extremely modest gains over the era in which the rewards at the top multiplied. This is true, surprisingly and revealingly, even for the mostly highly skilled individuals just below the very top rungs of the income ladder. But the evidence on income gains actually understates the case—by a lot. When we expand our view beyond income to take in the broader canvas of the winner-take-all economy, the argument for thinking that the gains of America’s top-heavy economic growth “trickled down” becomes even weaker. This is not just a story of relative income erosion. The fallout of the winner-take-all economy has reached broadly and deeply into the security of the middle class—and, as recent events reveal, the entire American economy.
Trickle-Up Economics
Ronald Reagan famously asked, “Are you better off than you were four years ago?” Our own version of the question is, “Are you better off than you were a generation ago?”—or, more specifically, “How much better off are middle- and lower-income Americans than they were a generation ago?” The answer has substantial implications for how we judge the economic trends of the last thirty years. After all, if everyone experienced very large gains and the rich just happened to experience even larger gains, this might not cause great concern. Indeed, this is the “trickle-down” scenario that advocates of helping the have-it-alls with tax cuts and other goodies constantly trot out: If a rising tide lifts dinghies as well as yachts, who cares if it does a bit more for yachts?
But trickle-down is not the only possibility. Another scenario might be called “trickle-up”: The rich are getting fabulously richer while the rest of Americans are basically holding steady or worse. What if the modern economy looks less like an open sea, where rising water lifts all boats, and more like a system of locks, where those who don’t get through the gates are left behind? Yachts are rising, but dinghies are largely staying put, locked out (so to speak) from higher waters. Indeed, in this alternative scenario, there is reason to suspect that the dinghies are staying put in part because the yachts are rising—that the rich are closing the locks behind them to capture resources that would otherwise have enhanced the living standards of everyone else.
So which of these scenarios is correct—trickle-down or trickle-up? The evidence is not completely consistent, and there is room for debate at the margins. But it’s increasingly clear that trickle-down economics is not working as its proponents promise. Trickle-up economics, by contrast, seems to be working all too well.
Bringing In Government Taxes and Benefits
To see trickle-up in action, we need a source of evidence slightly different from that provided by Piketty and Saez. As mentioned, Piketty and Saez look at tax records, so the family incomes they report basically add up the private sources of income that people list on their tax forms: wages, salaries, investment income, gifts, and so on. These income sources do not include government benefits, such as Social Security payments. Nor do they take into account the effect of taxes themselves: They are the incomes on which people pay taxes, not incomes after people pay taxes.
These omissions matter for studying inequality, because in all rich nations, including the United States, government taxes and benefits make the distribution of income more equal, taking more from those at the top and providing more to those at the bottom. These omissions also matter because some of the compensation that people receive in the workplace takes the form of noncash benefits like health insurance and retirement pensions. Thus, if we want the most accurate measure of the resources that middle- and lower-income Americans have at their disposal, we need to take into account government’s effect on incomes as well as tally up private noncash compensation. The basic tax data include neither.
Fortunately, the Congressional Budget Office—Congress’s nonpartisan budget agency, known as CBO—has developed these broader indicators. CBO does this by combining the basic tax data with the results of income surveys that ask people about government and private benefits. In addition, CBO calculates what people with different incomes are required to pay in federal taxes. The result is considered the gold standard for studying family income trends. Although available only back to 1979—unlike the Piketty and Saez data, which go back to 1913—this augmented DNA evidence is as close as we can get to an accurate picture of what happened to the income of American households at the bottom, middle, and top of the distribution over the last generation.6
This picture turns out to be stark: The bottom went nowhere, the middle saw a modest gain, and the top ran away with the grand prize.
How Much Did Family Incomes Grow
for the Poor, Middle Class, and Rich?
Let us start with the simplest measure of economic gains: the percentage increase in the inflation-adjusted incomes of households on different rungs of the economic ladder. The first point to make is that the overall economy expanded substantially over the twenty-seven years covered by CBO. Between 1979 and 2006—the last year currently available—real average household income, according to the augmented DNA evidence, rose by almost 50 percent, a compounded gain of 1.5 percent per year. A household earning exactly the average income had $47,900 in 1979 and $71,900 in 2006, or half again as much.
This is the happy story. The less happy story, at least for the nonrich, is where the gains of that growth went. Start with those at the bottom: As figure 2 shows, the average income of the poorest 20 percent, or quintile, of American households rose from $14,900 to $16,500, a meager 10 percent gain over twenty-seven years, even after taking into account government taxes and benefits and private employment-based benefits.
What about those in the middle? They did better, but not that much better: The middle quintile of households (that is, the 20 percent of households above the bottom 40 percent and below the top 40 percent) saw their average inflation-adjusted income rise from $42,900 to $52,100—a gain of 21 percent. This may sound good (and because families became smaller over this period, the gains per family member within households are a bit larger). But it works out to a real gain of just 0.7 percent a year, a rate of increase less than half the growth of average income over this period. Not much of a yearly raise.
These numbers look all the more striking when we consider a simple fact: American households are working many more hours today than they were in the late 1970s. This is because women are much more likely to work outside the home than they were a generation ago, augmenting both family income and the amount of time that household members spend in the workforce. Among working-age married couples with children, these extra hours totaled more than ten additional full-time weeks in the workforce (406 hours) in 2000, as compared with 1979. Without those additional hours and income, households in the middle of the distribution would have barely budged upward at all. The incomes of households at the bottom would actually have fallen.7
So who received the gains? The simple answer is those at the top, especially the very top. The average after-tax income of the richest 1 percent of households rose from $337,100 a year in 1979 to more than $1.2 million in 2006—an increase of nearly 260 percent. Put another way, the average income of the top 1 percent more than tripled in just over a quarter-century. Figure 2 graphically portrays the scale of the disparity. Just getting the 2006 average income of the top 1 percent on the same axis as the average incomes of other groups is a challenge, so stark is the difference.
Average Household After-Tax Income
Including Public and Private Benefits, 1979 and 2006
And, again, the gains enjoyed by the top 1 percent pale in comparison to those received by the top hundredth of 1 percent—a group CBO separated out in its analysis up through 2005. Between 1979 and 2005, the CBO numbers show, the average after-tax income of households in the top 0.01 percent increased from just over $4 million to nearly $24.3 million—more than quintupling in a little more than a quartercentury.
How Much Richer Are the Rich Because of Unequal Growth?
The statistics are stark: Most growth since the late 1970s has gone to the very richest Americans. But what does this mean in terms of the actual incomes of different income groups? Let us return to Broadland. How much more would the poor or middle class take home each year if incomes had grown at the same rate across all income groups between 1979 and 2006, as they more or less did for a generation after World War II? How much better off would Americans at different income levels be if they had stayed in Broadland over these twenty-seven years, rather than moving to Richistan?
The answer is summed up in table 1: Few of the benefits of economic growth at the top between 1979 and 2007 trickled down. If the economy had grown at the same rate as it actually did yet inequality had not increased, the average income of the middle fifth of households would be over $12,000 higher today. The average income of the bottom fifth of households would be more than $5,800 higher. Note, again, that we are assuming no change in the overall growth of the economy, just a broader distribution of the economy’s rewards. Note, too, that we are accounting here for all government taxes and benefits as well as private workplace benefits. And remember: Broadland is not some hyperegalitarian world in which the rich get “soaked”; rather it’s a world in which the rich simply experience the same income growth rate as everyone else, just as they basically had before the late 1970s.
Table 1: Richistan vs. Broadland Richistan (average actual income in 2006)Broadland (all groups experience the average rate of household income growth between 1979 and 2006)How Much Richer or Poorer in Broadland in 2006?Bottom Fifth $16,500 $22,366$5,866 RicherSecond Fifth $35,400 $45,181$9,781 RicherMiddle Fifth $52,100 $64,395$12,295 RicherThird Fifth $73,800 $84,209$10,409 Richer80th–90th Percentile $100,915 $106,696$5,781 Richer90th–95th Percentile $132,258 $128,714$3,544 Poorer95th–99th Percentile $211,768 $181,992$29,776 PoorerTop 1 Percent$1,200,300 $506,002$694,298 Poorer
So what would have happened to those at the top if they had experienced the same average growth of their income as everyone else? The answer is that they would be pulling down around $500,000 a year on average, rather than the more than $1.2 million the top 1 percent actually earned, on average, in 2006—a nearly $700,000 difference. Unequal growth has been very, very good for the have-it-alls.
When Richistan and Broadland are compared, another arresting conclusion comes into view. Other than the richest 10 percent of Americans, every income group would have done better if they had experienced the average growth of household income, that is, if they had lived in Broadland rather than Richistan. (The tipping point where Richistan delivers higher incomes than Broadland is somewhere between the 90th and 95th percentiles, though the gap between Richistan and Broadland is small until the very top of the distribution.) Put another way, the entire bottom 90 percent saw their incomes rise more slowly than average household income between 1979 and 2006. If trickle-up economics has a textbook case, this is it.
A Victimless Crime?
The DNA evidence shows that real household incomes for all groups but the very well-off have risen only modestly, and almost entirely because of increased family work hours. Meanwhile, the overall economy has expanded substantially. The explanation for this disconnect, mathematically speaking, is that most of the gains of growth have gone to Americans at the top of the economic ladder.
But this simple mathematical explanation leaves open an obvious objection: The economy is not zero-sum. Perhaps the gains of the rich, as impressive as they are, did not come at the expense of the rest of Americans. Maybe “Broadland” is not just an imaginary but an unimaginable country. After all, didn’t the United States grow much more quickly than other rich nations during this period, allowing the rich to get richer even as the rest of Americans moved ahead as well? In particular, didn’t the United States grow a lot faster than Europe, where incomes are generally much more equal and where the massive rise in income inequality seen in the United States did not occur?
The answer is no. The American economic engine ran hotter in some years than the European economic engine. But on average, between 1979 and 2006, economic growth per capita was essentially the same in the fifteen core nations of Europe as it was in the United States.8 The United States is richer than these nations, but the gap has been surprisingly stable since the late 1970s.
The historical evidence certainly doesn’t suggest an American economic miracle alongside European sclerosis. This lends strength to the supposition that the outsized gains of the rich came at the expense of those lower on the economic ladder, who found themselves enjoying less and less of the economic pie. On average, the economic pie grew at essentially the same rate in the United States as it did in nations where the poor and middle class have continued to enjoy a much larger piece.
Indeed, in one important respect, the pie actually grew more quickly in Europe than it did in the United States. Recall that American households are working more hours than they did in the past. The same is true in Europe, but not nearly to the same extent. Women have entered the workforce to roughly the same degree—in fact, the share of the population in the workforce grew more quickly in Europe than in the United States between 1979 and 2006.9 Yet in Europe average work hours for those in the workforce have declined, so the net effect is only a small increase in overall work hours, compared with a much more substantial rise in the United States.10 As a result, GDP per hour worked—perhaps the best single measure of a country’s economic health—actually rose faster in Europe than in the United States between 1979 and 2006.
To be sure, the story of divergent work hours is complicated: Some of the decline in work hours in Europe is involuntary, due to higher levels of unemployment. But the basic story is that the United States did not grow markedly faster than Europe even as American inequality skyrocketed. Adjusted for the growing work hours of American families—with all the attendant stress and strains that those increased hours have caused—the American economic pie actually grew slightly more slowly.
The Big Zero
If there is a nail in the coffin of the dismissive view about middle-class economic problems, it is the decade that shall not be named: the 2000s. Some call these years the “aughts,” others “the aughties,” still others “the big zero.”11 The last moniker may be the most appropriate. The decade closed with the nation mired in the worst economic downturn in more than seventy years, with the unemployment rate around 10 percent and with the share of Americans unemployed for more than six months at the highest level ever recorded.12 Economically speaking, the 2000s was truly a lost decade. At its end, the stock market was partying like it was 1999. Housing prices had crashed. Home ownership was at 2000 levels.13 Even the most optimistic estimates suggested it would take years to recover from the hemorrhaging of jobs and incomes triggered by the collapse.
Here’s the kicker: The aughties were awful even before the economy began to crumble in late 2007. They featured six years of consecutive economic growth (from the end of 2001 until the end of 2007) in which the median income of non-elderly households actually fell while the share of Americans living in poverty actually rose. This was the first economic expansion on record in which the typical non-elderly household lost economic ground.14 Yet it wasn’t all bad news. Between 2002 and 2007, the real pretax incomes of those in the top 1 percent rose by 10 percent. Per year.15
Beyond Income
Those who are inclined to be dismissive of the evidence just reviewed frequently respond by insisting that the focus on income is short-sighted: We should also look at the chance people will rise up the economic ladder, at their workplace benefits, at their spending and wealth, and so on. True enough. Unfortunately, when we take a broader perspective, the conclusion that our economy has become increasingly winner-take-all only becomes stronger.
Stagnant Social Mobility
Americans have always believed in upward social mobility—both as an ideal and a description of reality. And if social mobility had been rising along with inequality over the last generation, then the growing concentration of income at the top might be less of a concern. One year’s poor household might be next year’s middle-class or even rich household. Social mobility would soften the sharp edges of a growing class divide.
Alas, the evidence is overwhelming that upward social mobility has not increased at the same time that inequality has skyrocketed. Indeed, according to a number of innovative new studies, American mobility may well have declined over the last generation, even as inequality has risen. This is true of both individual mobility (“Am I richer than I was a decade or two ago?”) and of intergenerational mobility (“Am I richer than my parents were?”).16 Over a typical decade, for example, just under four in five people stay in the same income quintile or move a single quintile up or down.
We know less about the long-term mobility of the top 1 percent, but all indications are that people in this rarefied group usually don’t drop very far down the ladder for any length of time. Looking just at wage and salary income, for example, more than 70 percent of the highest-earning 1 percent of American households in 2004 were among the highest-earning 5 percent of households in 1994. Only around one in ten had risen from the bottom 80 percent—down from around one in seven in the 1970s.17 And of course, as the gains of economic growth become ever more concentrated, almost by definition fewer individuals will be able to move into the shrinking ranks of the economic winners.
Compared with other rich nations, moreover, U.S. intergenerational mobility is surprisingly low, in part because the gap between income groups is so much bigger. The American Dream portrays the United States as a classless society where anyone can rise to the top, regardless of family background. Yet there is more intergenerational mobility in Australia, Sweden, Norway, Finland, Germany, Spain, France, and Canada. In fact, of affluent countries studied, only Britain and Italy have lower intergenerational mobility than the United States does (and they are basically even with the U.S.).18
The differences are often stark. In the United States, more than half of the earnings advantage (or disadvantage) of fathers is passed on to sons. In Canada, only about a fifth or less is. And almost all of the difference is accounted for by the fact that Americans are much more likely to be stuck at the bottom or secure at the top than are Canadians. In short, when mobility is accounted for, the picture of the winner-take-all economy looks no better. If anything, it looks worse.
Broken Benefits
It is often argued that workplace benefits, like health insurance and retirement pensions, alter the story of the winner-take-all economy—and that, in particular, the middle class does better when you take into account the growing share of compensation that comes in the form of such benefits, rather than cold, hard cash. Actually, the CBO numbers we have been looking at already take into account health and pension benefits, so the anemic gains of working- and middle-class Americans cannot be explained away by suggesting that they are getting better and better benefits at their place of work.
But let’s take the argument a little further. Are Americans getting better benefits tied to their jobs? Not when it comes to retirement benefits. Employers contribute less to such benefits than they did in the 1970s, and workers are less likely to have an employer-sponsored pension than they were in the late 1970s.19 And many fewer have a guaranteed defined-benefit pension that pays them a fixed income in retirement. Instead, most Americans who have pensions rely on defined-contribution plans that place all the risk of retirement savings on them. This risk has been driven home by the recent stock market drop, which reduced the median balance in 401(k)s by a third between 2007 and 2008.20 As notable as the decline is the end point: the typical amount in a 401(k) in 2008 was a paltry $12,655. Given this, it’s no shock that the share of Americans who are at risk of retiring without adequate income has risen substantially since the early 1980s.21
On the other side of the benefits equation, employers and workers are certainly spending more on health insurance—much, much more. The question is what this spending has bought. Are Americans better insulated against medical costs than they were a generation ago? No. Are they more secure against the medical crises and costs that, studies suggest, are associated with more than half of the rising number of personal bankruptcies?22 No. Health costs that outstrip the growth of earnings year after year after year—pushing more people out of coverage and more people into hardship—can hardly be seen as an unqualified benefit for the middle class.
That’s especially so because these higher costs are not inevitable. The United States spends vastly more than any other rich nation on health care—both as a share of the overall economy and on a per-person basis—even though we are the only affluent democracy that doesn’t guarantee insurance to all its citizens. In 2007, the price tag for our exorbitant system came to $7,290 per person. The next most profligate nation, Norway, featured spending of $4,763 per person. Canada’s spending per capita is essentially half the U.S. level.23
Yet the United States has fewer doctors, hospital beds, and nurses per person than the norm among rich nations, and Americans (while less healthy overall) visit doctors and hospitals less often and have shorter hospital stays. Indeed, by some measures our care looks surprisingly substandard. For example, recent analyses of “amenable mortality”—deaths that could have been prevented with timely care—find that the United States has the highest rate of preventable death before age seventy-five among rich nations, and that it is falling farther and farther behind.24
And, of course, the United States has had a higher share of citizens without coverage than any other rich nation, and that share has been growing. In 2006, more than 46 million Americans younger than sixty-five were uninsured—nearly 18 percent of the non-elderly population. Back in 1979, the number of uninsured was 27.5 million, or less than 15 percent of the nonelderly population.25 Add in workplace benefits and the situation of most Americans looks even more dire than when we focus on income alone.
Consumption to the Rescue?
Can another definition of economic well-being come to the rescue? It has long been known that inequality of spending (or “consumption”) is less than inequality of income. The reasons are obvious: The rich save more of their money than the poor; at the same time, two major groups in society—retirees and young adults—often spend more than they earn, thanks to savings and loans. So we should expect less consumption inequality than income inequality. The issue is whether we see the same basic trends in inequality of consumption that we do in inequality of income, namely, a big increase.
Tackling this issue turns out to be extremely difficult, in part because the main source of evidence, the Consumer Expenditure Survey, largely misses the high-income folks who’ve benefited from the winner-take-all economy. Still, it is increasingly clear there is no “consumption paradox.” Consumption inequality is not as great as income inequality, as we’d expect (especially since the evidence fails to capture the big winners at the top). But the two have grown at more or less the same rate over time.26
Here again we find smart analysts ignoring the most notable feature of the winner-take-all economy—that it’s, well, winner-take-all. Have lower-income Americans been borrowing more to sustain their spending? Definitely. Are the less affluent experiencing lower price inflation than richer Americans thanks to cheap Chinese goods?27 Perhaps. But none of this is going to alter fundamentally our view of American inequality. The access of the poor to easy credit or Wal-Mart prices has little bearing on the growing gap between the superrich and the merely well-to-do.
Drowning in Debt
Furthermore, the flip side of consumption is savings and investment—and the wealth that comes with savings and investment. After all, it’s not as if the rich are giving all the money they don’t spend to charities for the poor. In fact, money that high earners do not spend gets turned into wealth, and the share of wealth held by the rich is both high and growing. In 2004, the wealthiest 1 percent of households had an average net worth of nearly $15 million.28 (At the very top of the ladder, the wealthiest 400 Americans—according to the famous Forbes 400 list—had an average net worth of $3.9 billion in 2008, more than six times the 1985 average for the Forbes 400.)29
The average net worth of the bottom 80 percent of households, in contrast, was around $82,000, and that includes the wealth that households had in their homes. Average net worth for the bottom 40 percent of households was a paltry $2,200 in 2004, less than half the $5,400 that this group enjoyed in 1983. Strikingly, over the entire period between 1983 and 2004, only 10 percent of all wealth gains went to the bottom 80 percent of Americans, an even more skewed pattern of growth than seen in income.30
Perhaps more striking, 17 percent of households in 2004 had zero or negative net worth—they owed more than they had. (And this was before the collapse of real estate prices put more homes “underwater”—with home loans exceeding home values—than at any time in U.S. history.) Here we find a major clue to why consumption is not always a good measure of income: For a time, at least, people can spend beyond their income by borrowing, and before the 2007 downturn, Americans were borrowing at record rates. But, as the late economist Herbert Stein is reported to have said, “If something can’t go on forever, it won’t.” The inexorable increase in household debt was not sustainable without comparable income gains—and those gains did not occur. Once again, scouring the scene turns up plenty of additional proof that the winner-take-all economy has produced limited gains for those outside the winner’s circle.
The clues are undeniable: Not only did those below the top reaches of the economic ladder find themselves falling ever farther behind the have-it-alls; they reaped surprisingly few of the gains of the massive expansion at the top.
This is an economic puzzle. It is also a political puzzle. Democracy may not be good at a lot of things. But one thing it is supposed to be good at is responding to problems that affect broad majorities. How could events and trends like these evolve with so little response from democratically elected leaders? Indeed, as we shall see, the puzzle is even deeper. For government was no mere bystander in many of these developments. It actually pushed them along. Why?
Before we turn to these questions, however, we have one last piece of unfinished business: We need to explain why the prime suspect that America’s economic detectives have fingered is, at most, a modest accomplice to the crime.
The Usual (but Wrong) Suspect
Tune into the cable money stations or read the business press and you are likely to hear an account of rising inequality that goes something like this:
“Education is the key to understanding broad inequality trends.”31
“To explain increasing inequality we must explain why the economic return to education and to the development of skills more generally has continued to rise.”32
“We have an economy that increasingly rewards education and skills because of that education.”33
These quotes were not chosen at random. They are the pronouncements, respectively, of the former head of President George W. Bush’s Council of Economic Advisers, Gregory Mankiw, a Harvard economist; Fed chairman Ben Bernanke (another economist, formerly of Princeton); and, finally, former President George W. Bush himself.
It might seem that the common element connecting these quotes is that those responsible for them have ties to the Republican Party. After all, rising inequality was an inconvenient reality for a GOP president (and, before 2006, a GOP Congress) intent on cutting taxes for the wealthy. The fact is, however, that these three quotes express what was, until recently at least, the overwhelming consensus view on inequality among economists, a view summarized in the ungainly acronym SBTC.
The SBTC Seduction
SBTC is not a regional telephone company. It stands for “skill-biased technological change,” and it is still by far the dominant explanation for American inequality trends.34 According to the SBTC argument, the last thirty or so years have witnessed a massive shift toward more knowledge-based employment. In the popular version of the argument, this shift has been greatly accelerated by the globalization of the American economy. This transformation has made formal education and advanced skills much more valuable, fueling a growing divide between the highly educated and the rest of American workers.
In some versions of the argument, skill-biased technological change is driven by computers and the Internet. In others, the main culprit is the failure of the educational advancement of most workers to keep pace with the growing skill demands of a global knowledge economy.35 The account of the crime, however, is the same: SBTC did it.
There are just two problems: SBTC isn’t even charged with the right crime. And the suspect has an alibi.
Why Educational Gaps Can’t Explain
American Top-Heavy Inequality
If there is an Exhibit A in the case that SBTC did it, it is the rising “college wage premium”—the extra amount that college graduates earn relative to their less educated peers. Each year, the College Board publishes a report entitled, “Education Pays,” in which it announces that the gap between those who have finished college and those who have not is large and growing. More sophisticated economic analyses usually emphasize the effects of education across the full spectrum of educational achievement, before college and beyond. But they reach the same conclusion: a growing “return to schooling.” From here, it’s a short leap to the view that the rising bang for one’s educational buck is the main cause of growing inequality.
Only it’s not. The return to schooling—and especially to a college degree—has risen. But, as we’ve seen, rising American inequality is not mainly about the gap between the college-educated and the rest, or indeed about educational gaps in general. It is about the pulling away of the very top. Those at the top are often highly educated, yes, but so, too, are those just below them who have been left increasingly behind.
There’s more: The college educated did well relative to those below them, but not because they experienced massive economic gains. Rather, they merely managed to avoid the devastatingly slow growth at the bottom.
Assume that the story about a new educational elite is true. The top 20 percent of the income distribution should therefore be composed almost entirely of college graduates. (The share of Americans with a college degree was 29 percent in 2007.) What, then, happened to the household income of someone at the 80th percentile, the starting point for entry into this supposedly favored class? The answer is that it has grown extremely slowly compared with the income of folks at the very top—roughly one-fourth as quickly per year as the average income of the top 1 percent.
That middle-class income growth, moreover, is mostly because of increased household work hours, not increased individual earnings. Hard as it may be to believe, a typical entry-level worker (ages 25–34) with a bachelor’s degree or higher earned only $1,000 more for full-time, full-year work in 2006 than did such a worker in 1980 ($45,000 versus $44,000, adjusted for inflation).36 And college-educated workers are substantially less likely to receive health insurance in their first job than they once were—almost four in ten now start out in the labor market without health benefits.37 So much for the enormous general rewards of a college degree.
To be sure, some workers with advanced education make enormous sums. But that’s exactly the point: A huge amount of inequality occurs among workers who have heeded the advice of “Education Pays” and sought a college degree. Economists call this “within-group inequality” (that is, inequality among people with the same education or skills), and it is one of the strongest pieces of exculpatory evidence on SBTC’s side. That is because within-group inequality, by definition, cannot be explained with reference to education, since it occurs among people with the same basic characteristics. And within-group inequality accounts for a major part of the rise in inequality since the 1970s, especially at the very top—where almost everyone has a good education.38
Maybe SBTC was at work among these workers in more subtle ways—some argue that college-educated workers with the skills to do routine tasks have lost out to those who do higher-level “abstract tasks”—but the case against SBTC, considered so strong at the outset, becomes harder to make.
But forget about the weak case, because the suspect has a strong alibi.
Why Didn’t Other Rich Nations Experience SBTC’s Wrath?
SBTC is attractive to economic detectives because it is an all-purpose criminal—one that, its prosecutors argue, can explain both the decline in American inequality in the first half of the twentieth century and its rise in the last thirty years. It is a suspect whose influence should be seen over long spans of time and, more important for the present discussion, across national borders. After all, other rich nations have computers and the Internet too—indeed, quite a few are more networked than we are—and most rich nations are more exposed to the global economy than we are. If SBTC did it here, it should have done it elsewhere, where the same technological and global shifts were taking place.
Embarrassingly for the SBTC-did-it consensus, however, SBTC seems to be picky about where to strike. When it comes to rising inequality, the world isn’t flat after all. American income inequality is the highest in the advanced industrial world. As one labor economist wryly puts it, “If there were a gold medal for inequality, the United States would win hands down… [S]tandard measures show that the United States more closely resembles a developing country than an advanced country on this measure of economic performance.”39
Yet gaps in skills, as measured by years of schooling, are not larger in the United States than they are in other affluent nations. They are actually smaller. Inequality is dramatically higher in the United States not because of greater skill gaps or greater returns to education, but because within-group inequality is greater than it is in other rich nations. Indeed, there is more inequality among workers with the same level of skills (measured by age, education, and literacy) in the United States than there is among all workers in some of the more equal rich nations.40
The Uniqueness of America’s Winner-Take-All Economy
SBTC’s alibi appears even stronger when it comes to the meteoric rise of earnings at the very top, because that rise has been substantially more meteoric in the United States than in other rich nations.
Figure 3 shows the share of income, excluding capital gains, going to the top 1 percent of households in twelve nations: Australia, Canada, France, Germany, Ireland, Japan, the Netherlands, New Zealand, Sweden, Switzerland, the United Kingdom, and, of course, the United States.41 The first bar shows the average share in the mid-1970s (1973–1975); the second shows the average share around the millennium (1998–2000).
One feature of figure 3 that jumps out is that the United States did not look all that exceptional in the early 1970s. Germany, Switzerland, Canada, even France—all had a higher share of national income going to the top 1 percent a generation ago.
Yet that has changed dramatically. The United States is now at the top of the advanced industrial pack, with regard to both the level (16 percent) and the increase (virtually a doubling) of the top 1 percent’s share of income. Half of the nations in figure 3—a diverse group that includes France, Germany, Japan, the Netherlands, Sweden, and Switzerland—experienced little or no increase in the share of income going to the top 1 percent. Apparently in these countries SBTC was AWOL.
It’s true that the other English-speaking nations in this group—Australia, Canada, Ireland, and the United Kingdom—have followed a path more like the United States’. Still, the United States is well in the lead in the competition for the gold medal for inequality. Whereas the United States experienced a doubling of the income share of the top 1 percent, the other English-speaking nations saw only an average rise of around half that in percentage terms.
The English-speaking world has certainly emulated the American pattern more closely than other nations have. But this is hardly proof that government policy doesn’t matter, since these nations have also generally emulated U.S. public policy more than other nations have. What’s more, the trajectory of the two countries that are most often compared to the United States, the United Kingdom and Canada, cannot be viewed as wholly independent of the rise of America’s winner-take-all-economy. As we saw when we started to parse the composition of the top 0.1 percent, the rise in the compensation of the highest earners, especially corporate executives and financial managers, drives much of the outsized gains at the top in the United States. Companies in English-speaking nations compete for these workers, and thus have faced the most pressure to match the massive salaries on offer in the States.42 This appears to hold particularly true for Canada.2 While this contagion effect is hard to pin down, there is little doubt that some of the increase in top incomes in other English-speaking nations reflects competitive pressure to match the more dramatic rise in the United States—a rise that we shall see has a great deal to do with U.S. public policy.
The Top 1 Percent’s Share of National Income (Excluding Capital Gains), Mid-’70s vs. Circa 2000
The cross-national window just opened puts the rise of the winner-take-all economy in surprising perspective. The hyperconcentration of income in the United States—the proximate cause of the death of America’s broad-based prosperity—is a relatively recent development. It is also a development that sets the United States apart from other rich nations, calling into serious doubt the usual explanation for America’s winner-take-all economy, SBTC.
But if SBTC didn’t do it, who did? Enter the unusual suspect: American politics.
[
*] We should emphasize that the Piketty and Saez data only allow us to say how well different income groups are doing, not how well individual households fare over time—an issue with traditional surveys of income as well. We can say the rich of today are richer than in the past, not how much change there is from year to year in who is rich and who is not. But, as we shall see, taking into account the upward or downward income mobility of households does not change this basic picture. It may even strengthen it, since long-term income mobility is much more limited than Americans believe, and may have declined since the 1960s. In any case, income groups are not statistical fictions. If the rich grow much richer, while the poor and middle class do not, the structure of society will look very different.
[
*] Perhaps most telling, there is little sign of the same meteoric rise at the top among French-speaking portions of Canada. Executives in Quebec do not appear to be competing in the same common labor market that has allowed American pay levels at the top to diffuse to the rest of Canada.
© 2010 Jacob S. Hacker
Product details
- Publisher : Simon & Schuster; 3rd Edition (September 14, 2010)
- Language : English
- Hardcover : 368 pages
- ISBN-10 : 1416588698
- ISBN-13 : 978-1416588696
- Item Weight : 1.1 pounds
- Dimensions : 6.13 x 1.1 x 9.25 inches
- Best Sellers Rank: #685,203 in Books (See Top 100 in Books)
- #485 in General Elections & Political Process
- #597 in Economic Policy & Development (Books)
- #1,044 in Economic Conditions (Books)
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Top reviews from the United States
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Reviewed in the United States on September 16, 2010
Reviewed in the United States on August 8, 2012
I usually like to write lengthy, in depth reviews, particularly when I really like a book (and I really liked this book). Unfortunately I listened to this book in the car and was unable to take my usual detailed notes so I am going to have to settle for a more succinct review.
This book is one of the best political books I have ever read (or, in this case, listened to). The book attempts to figure out why inequality has been steadily rising in the United States since at least the mid-1970s, and why wealth has been redistributed steadily upward, especially to the top 1% or even top .01% of the income bracket. The answer is complex and has to do with greater organization on the part of business interests since the mid-1970s and a failure of organization on the part of the interests of labor and the working classes. The book makes its case with a great deal of data and there are many very interesting facts presented along the way as well as a very interesting analysis of the nature of our political system in the United States.
The authors argue, correctly in my opinion, that the economy cannot be separated from politics. The question about growing inequality cannot be answered if one limits one's view to the economy. The rules of the economy are determined in the political sphere. The authors also argue that the standard focus on elections in analyses of our political system is misleading. Elections are, in some ways, merely a sideshow. When it comes to actual policy-making organization is what matters, and since the mid-1970s business interests have been far more successful in organizing lobbying efforts than the interests of labor and the middle classes. This means that the policies that are able to make it through the political process and actually become law have overwhelmingly been policies that favor the interests of the wealthy.
The authors diagnose a number of problems in our current political system. One of the most important has been the growing importance of obstruction. The growing use of the filibuster, for example, has made it possible for small minorities, representing very limited interests, to obstruct progressive change. This is a serious problem when one takes into consideration the notion of "drift", which is a major principle of the book. Drift occurs when the political process fails to keep up with changing economic conditions. It turns out that one of the most effective ways to block progressive change is to simply do nothing. The proponents of progressive change, therefore, often wind up needing a super majority in order to overcome obstruction, while the enemies of progressive change have a distinct advantage since it only requires a small minority to obstruct change leading to inherent drift.
The authors manage, somehow, to remain relatively optimistic about our situation despite all these obstacles to progressive change. If growing inequality is, in fact, largely a political problem then it is possible for us to do something about it. The problem, of course, is that we have to use a political system that is already heavily weighted towards business interests and the interests of the wealthy to reform the political system itself, which is analogous to lifting oneself up by one's own bootstraps. The challenges are real, but the more we know about the obstacles in our way, the better our chances for overcoming them, and this book sheds a great deal of light on the current obstacles to progressive change in our current political system.
There is far more in this book than I have been able to summarize. It is one of the few books on political science that I fully intend to read again at some point. I highly recommend this work to anyone interested in our current political and economic situation.
This book is one of the best political books I have ever read (or, in this case, listened to). The book attempts to figure out why inequality has been steadily rising in the United States since at least the mid-1970s, and why wealth has been redistributed steadily upward, especially to the top 1% or even top .01% of the income bracket. The answer is complex and has to do with greater organization on the part of business interests since the mid-1970s and a failure of organization on the part of the interests of labor and the working classes. The book makes its case with a great deal of data and there are many very interesting facts presented along the way as well as a very interesting analysis of the nature of our political system in the United States.
The authors argue, correctly in my opinion, that the economy cannot be separated from politics. The question about growing inequality cannot be answered if one limits one's view to the economy. The rules of the economy are determined in the political sphere. The authors also argue that the standard focus on elections in analyses of our political system is misleading. Elections are, in some ways, merely a sideshow. When it comes to actual policy-making organization is what matters, and since the mid-1970s business interests have been far more successful in organizing lobbying efforts than the interests of labor and the middle classes. This means that the policies that are able to make it through the political process and actually become law have overwhelmingly been policies that favor the interests of the wealthy.
The authors diagnose a number of problems in our current political system. One of the most important has been the growing importance of obstruction. The growing use of the filibuster, for example, has made it possible for small minorities, representing very limited interests, to obstruct progressive change. This is a serious problem when one takes into consideration the notion of "drift", which is a major principle of the book. Drift occurs when the political process fails to keep up with changing economic conditions. It turns out that one of the most effective ways to block progressive change is to simply do nothing. The proponents of progressive change, therefore, often wind up needing a super majority in order to overcome obstruction, while the enemies of progressive change have a distinct advantage since it only requires a small minority to obstruct change leading to inherent drift.
The authors manage, somehow, to remain relatively optimistic about our situation despite all these obstacles to progressive change. If growing inequality is, in fact, largely a political problem then it is possible for us to do something about it. The problem, of course, is that we have to use a political system that is already heavily weighted towards business interests and the interests of the wealthy to reform the political system itself, which is analogous to lifting oneself up by one's own bootstraps. The challenges are real, but the more we know about the obstacles in our way, the better our chances for overcoming them, and this book sheds a great deal of light on the current obstacles to progressive change in our current political system.
There is far more in this book than I have been able to summarize. It is one of the few books on political science that I fully intend to read again at some point. I highly recommend this work to anyone interested in our current political and economic situation.
Top reviews from other countries
john hertweck
4.0 out of 5 stars
I enjoyed this book
Reviewed in Australia on November 2, 2016
I enjoyed this book. I find it hard to believe the people of the ,U.S.A. CONTINUE TO COP THIS.
Vicky Leclair
5.0 out of 5 stars
Excellent livre portant sur les inégalités aux États-Unis
Reviewed in Canada on March 19, 2013
Très bon livre que j'ai eu à lire pour mon cours universitaire de niveau maîtrise en matière de bonne gouvernance et de gestion publique. Dresse un portrait horrifiant de la matière dont sont conduites certaines politiques aux États-Unis, qui ont des effets dévastateurs sur les classes les plus pauvres, mais surtout sur la classe moyenne, qui disparaît de plus en plus. Les disparités entre les revenus des ménages sont classées parmi les plus importantes au monde! Livre très intéressant, à lire absolument si on s'intéresse de près à la politique américaine et sur comment sont menées les politiques sociales américaines.
SJur Kasa
5.0 out of 5 stars
Great book!
Reviewed in Germany on July 14, 2013
This book really deserves 5 stars. Only thing that males me sad is that Amazon appears to be part of the same anti-tax movement that has spurred inequality so much over the last 20 years.
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John Petherbridge
5.0 out of 5 stars
A great book for those who want to understand US politics.
Reviewed in the United Kingdom on December 31, 2012
This is a book about US politics but it has many insights which apply equally to politics in the UK. Its perspective is different from the many books which analyse the current promlems from an economist's angle, nevertheless its observations and conclusions are wholly convincing. This is also a very easy to read book.
arnaud c k
5.0 out of 5 stars
Analyse pertinente d'un paradigme central
Reviewed in France on December 3, 2012
L'ouvrage met en évidence la déviance inégalitaire du monde d'aujourd'hui à travers l'étude pertinente de facteurs sociaux et politiques sous-estimés.
