Hunting the Elephant in the Room: Inequality (Part I)

In Budget Politics, Democratic Governance, Economic Planning, Economics, Inequality, Liberalism, Living Wage, Political Ideology, Politics, Politics of Policy, Poverty, Progressivism, Public Policy, Regulation, Social Democracy, Social Policy, Social Security, Taxes, Welfare State on April 7, 2011 at 1:00 am

Introduction:

Sometimes in the history of public policy, an intellectual critical mass on how to deal with a problem is achieved in advance of the political system’s readiness to incorporate this new knowledge. One of the best examples of this is the “rediscovery” of poverty in the U.S during the late 1950s by writers like Michael Harrington, Oscar Lewis, Gabriel Kolko, and others. All of these writers laid the groundwork for the War on Poverty several years before Lyndon Johnson would assemble the necessary Democratic majority to make it happen.

We can see something of a similar moment today in regards with inequality. Scholars are increasingly turning their attention to the issue and returning with novel insights, the issue of inequality is becoming more pressing in the popular press despite the conventional wisdom-makers’ resistance to talking about it, and we are beginning to see the outlines of an intellectual critical mass that could serve as the basis for a policy agenda.

In part 1 of “Hunting the Elephant in the Room,” I’ll talk about what what the current trend in inequality studies can teach us, and whether there’s an opening in public opinion for this new approach. In part 2, I’ll discuss how this knowledge can be applied to our taxation system, and in part 3, how to extend anti-inequality thinking into the murky area of “pre-tax inequality;” i.e, the world we live in.

New Thinking About Inequality:

To begin with, Emmanuel Saez‘ work has been extremely useful in demonstrating the change and scope of inequality, in large part because Saez’ study of tax returns allows a more fine-tuned analysis of changes within fractions of a decile (10%) of Americans, as opposed older Census-driven studies that have looked at broad differences between quintiles (20%). As Saez shows, the increase in inequality (which he shows has reached and now surpassed 1929 levels) is being driven by nigh-universal stagnation of income and wealth for 95% of the population and growing (and increasingly rapid) concentration of income and wealth in the hands of the very richest. It is this hyper-concentration of wealth and income that is perhaps Saez’ most significant contribution. Given that the previous dominant theory of inequality stressed uneven returns to education and skill levels, the fact that the top 5% are winning most of the gains within the top 10%, the top 1% within the top 5%, the top .1% in the top 1%, and so on is highly significant.

While there are clear educational differences between the top and bottom quintiles, or even the first and second quintiles, the top 10% of Americans are all similar to one another when it comes to attending elite universities and having advanced degrees and become virtually identical when we’re talking about the top 1%; yet their income and wealth gains have been markedly different. One clue to the source of this differentiation is the change in composition of income among the very wealthy:

Source: Saez and Picketty

While all forms of income for the very wealthiest have changed, we can see a massive spike in capital gains income starting in the early 1980s and peaking in 1986 and then again in 1994-2000; similarly a widening in business income, and an increase albeit from a slower starting point in incomes. In other words, the key to runaway incomes at the top is access to capital, either in stock options and the distribution of profits into executive salaries or through ownership of corporations.

One of the most significant recent works on inequality is Richard Wilkinson and Kate Pickett’s The Spirit Level. In this rather remarkable book, Wilkinson and Pickett argue that inequality – above and beyond the poverty and deprivation it creates – is responsible for higher rates of illness, mortality and child mortality, stress and other forms of mental illness, obesity, teenage pregnancy, dropouts, violence and imprisonment, and lower rates of social mobility. In itself, this is a rather dramatic argument. But Wilkinson and Pickett argue further that these social ills are not merely the province of the poor in unequal societies; the middle class and the rich suffer alongside the poor, no matter how much they try to wall themselves off from their peers, no matter how much they try to spend their way out of the consequences of inequality. Finally, they point out that reducing inequality, eliminating it as far as we can, will not only be a moral act, an act of social justice, but also a great balm to heal us.

When looking into the causes an enormous amount of conventional wisdom needs to be swept away before policies can begin to be formed. Jacob Hacker and Paul Pierson’s book, Winner-Take-All Politics, while a popularization of previous academic work, if very helpful in demonstrating that inequality is not due to education or skill (since, as Saez’ work shows huge inequalities within similarly educated groups, but also by showing that the wages of college graduates have been just as stagnant as high-school graduates albeit at a higher level, and that inequality varies dramatically between countries of similar education and skill levels). They’ve also shown that it’s not the result of globalization-induced competition (another popular theory), given the broad differences in inequality between industrialized countries facing similar pressures, and high levels of inequality within economic groups facing economic pressures.

Instead, Hacker and Pierson argue that public policy is the major driver in American inequality. Essentially based off of a class-capture analysis of American politics (similar to Larry Bartel’s work in Unequal Democracy that demonstrates how elite policy goals have become increasingly dominant in influencing elected officials), Hacker and Pierson point to both active efforts to reduce¬† and eliminate barriers to accumulation and to policy drift (deliberate inactivity) where inequality-reducing measures are allowed to lose ground or regulatory agencies are starved for funding. This perspective is broadly shared by other scholars of inequality: Josh Bivens of the EPI’s State of Working America Project points to the erosion of the minimum wage, the de-enforcement of labor rights, the elimination of tariffs, the deregulation of the financial sector, and the abandonment of full employment policies in favor of low-inflation policies as core policy mechanisms by which inequality has been increased.

Likewise, in The Solidarity Society, Tim Horton and James Gregory of the Fabian Society in the U.K show how trans-national differences in inequality are primarily related to policy decisions, such that even very similar nations like Denmark, Holland, Sweden, Norway, and Finland can nevertheless show significant differences in poverty and inequality – especially whether nations distribute benefits like housing allowances or social assistance broadly or narrowly.

To summarize, here’s what inequality experts have come to understand:

  1. Inequality in the U.S is worse than its been since the 1929 market crash.
  2. Inequality is making us sicker, less trusting, more fearful, and it’s literally taking years off our lives.
  3. Inequality, or at least its extent and its rate of change, is ultimately the result of public policy.

Political Support?

The thrust of inequality research is therefore rather hopeful. If inequality is caused by policy, it should be curable by policy; the question is whether there’s any political support for the intellectual consensus. Americans, after all, are widely believed to be hostile to taxation, redistribution, and European-welfare states and more tolerant of inequality due to their attachment to the American Dream of equal opportunity and upward mobility.

The reality is quite different. As Larry Bartels points out in Unequal Democracy, Americans are actually quite strongly egalitarian: 85% of Americans back “whatever is necessary” to achieve equal opportunity; feel more favorably towards the working class (by 30%) or the poor (by 10%) than they do towards the rich and corporations do even worse; 60% of Americans feel that the wealthy pay too little in taxes (compared to only 10% who think they pay too much); 75% of Americans think that the gap between rich and poor has increased, and so on.

And when we ask Americans what kind of society they want to live in, what we see is a strong preference for a radical transformation in the distribution of wealth in society:

On it’s own, moving from our current economic order to the one that Americans think exists would be a dramatic redistribution of wealth amounting to a social revolution.¬† But the fact that Americans are unsatisfied with even that more egalitarian distribution should stand as all the proof we need. Our ideal is not exact equality (the richest 20% are allowed 30% of all wealth, the bottom 20% only 10%), but the old republican ideal of a “rough equality of means” still holds force in American minds.

Conclusion:

Academic consensus doesn’t always track with popular opinion. The scholars of poverty succeeded in pushing the Kennedy/Johnson Administration into launching a War on Poverty, but found out to their dismay that the public toleration for federal anti-poverty policy was quite limited. In 1966, the War on Poverty walked headfirst into a political backlash of the comfortable against the afflicted, and haven’t recovered to this day.

But here we have a rare alignment of the spheres. Inequality experts have not merely “rediscovered” inequality, but have done so in a way that accords with public sympathies. Of itself, it guarantees nothing – political work needs to be done to transmute latent sympathies into active political allegiance, and allegiances into votes.

But it’s so rare that this conjunction happens – can we let it go to waste?

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  1. […] In part 1 of “Hunting the Elephant in the Room,” I discussed the emerging critical mass in inequality studies and how that might be harnessed to the public’s unheralded egalitarian values. However, coming to the realization that “policy can reduce inequality” is not the same thing as knowing what kind of policy to push for. […]

  2. […] part 1, I discussed the emerging intellectual critical mass on inequality; in part 2, I discussed how our […]

  3. […] discussion of inequality is a good starting point, but I particularly like their posts on the politics or urban design and […]

  4. […] I’ve written before about why we’ve seen a rapid acceleration of a longer-term pattern in wage deterioration for ordinary workers and the mirror-image trend among executives. The short story is that this disjuncture is basically cause by a massive and growing inequality of relative power between those who rely solely on labor and those who have access to capital, which has created a maldistribution of income and wealth, which in turns exacerbates this inequality by making the overall health of the economy more and more reliant on credit, which further enhances the value of capital and the likelihood of recessions caused by credit crunches. […]

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