Winner-Take-All Politics: Why the Ultra Rich are Getting Ultra Richer

Charlotte Cavaille reviews Hacker and Pierson’s latest book, which looks set to be a cornerstone of debate on inequality in the US and beyond.

Previous posts by Ben and Rob have examined controversies over the Wilkinson and Pickett book on the social consequences of income inequalities. The book I am reviewing today, Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class, examines the causes of the increase in income inequalities in the United States. The sharp increase in the share of the national income captured by the ultra-rich cannot be explained by changes in the economy… They argue that only a focus on government policy and the private interests that shape it can explain the extreme concentration at the top.

It came out only two weeks ago but has already been blogged about extensively. Many predict that it will make significant waves both in the political and academic world.

For readers interested in the contribution of this book to political science, I would recommend to also read the special issue of Politics & Society published in June 2010 (vol 38, issue 2). For European readers who are only aware of the broad lines of American political life in the past 40 years, the book is a must read for its fascinating account of the interaction between interests groups and the American party system.

As someone who has only recently become more acquainted with American domestic issues, I do not have the knowledge to examine the book’s take on DC politics. As a (candidate) scholar of comparative politics I will focus on three issues 1) the theoretical argument of the book (independent from the evidence used) and its contribution to the research on the causes of income inequality, 2) the larger theoretical implications it has for future research on this topic and3) my thoughts on how social science research can contribute to the emergence of a more egalitarian political project. The first point will be addressed in this post and the two last ones in a post to follow.

The Ultra Rich are Getting Ultra-Richer

But first of all, what is this book about, and what do its authors argue?

The first chapter is a skillful summary of the very influential work of Thomas Piketty and Emmanuel Saez on the growing income inequality between the ultra-rich and everybody else.

Most of the income data available to researchers is top-coded, meaning that the incomes of the highest earners in a survey are capped at some threshold (usually to protect the respondent’s confidentiality). This, for example, does not allow the researcher to distinguish Bill Gates from a successful cosmetic surgeon.

Thanks to a smart use of tax return data, Piketty and Saez are able to describe in more detail what is going on among the very rich. And the results are striking:  “the richest 15,000 or so families have seen their share of income rise from less than one in every one hundred dollars in 1974 to more than one of every 17.” Thus, 6 % of national income is now accruing to 0.01 percent of families.

This was not achieved overnight but through the steady increase in the share of income captured by the very top over a period ranging from the end of the 1970’s to 2008 (I have not see any account of the impact of the recent financial crisis on top income yet). It did not matter which political party was in power: the richest people got even richer.

My own favorite quote comes from a recent overview of the available data by Atkinson, Piketty and Saez:

“US real income per family grew at a modest 1.2% annual rate from 1976 to 2007. However, when excluding the top 1%, the average real income of the bottom 99% grew at an annual rate of only 0.6% which implies that the top 1% captured 58% of real economic growth per family during that period (column 4 in Table 1).”(p 5)

The Political Origins of the Winner Take All Economy

What are the causes of this “Winner-take-all” outcome (meaning the first gets everything and the second only the crumbs)? Hacker and Pierson argue that a focus on structural changes in the economy (skilled bias technological change for the economists in the audience) does not explain the specific shape of the income distribution. De-industrialization, outsourcing, globalization and technological change have increased the return to high skills, fueling the increase in the wage premium to higher education. However this cannot account for the hyper concentration at the top and the large income inequality among highly skilled individuals. The explanation is political, meaning that the causal mechanisms that have triggered and sustained this unequal outcome are to be found in changes in Washington DC, not in de-industrialization, globalization, skill supply or new technologies.

They first show how specific policies have directly impacted income shares at the very top. These policies are financial de-regulation, changes in marginal taxation rates, corporate governance reform and industrial relations. They then look for the actors behind these policy changes. These actors are business interests groups, trade-unions, the main political parties and elected officials. Changes in the way they interact and influence each other can in turn explain changes in policy.

The spark was business interests’ counter-offensive against increased government intervention in the 60’s and early 70’s.  Business-friendly interest groups and lobbyists were successful in increasing the organizational capabilities of capital owners and firm managers, especially when compared to that of labor. These groups targeted the Republicans and re-shaped the electoral incentives facing Republican candidates both through money and grassroots pressure. This impacted not only the Republicans but the whole party system, which shifted to the right.

Democrats reacted by becoming more attuned to business interests as well. This was facilitated by the decline of trade-unions, itself accelerated by the Democrats failure to pass important pro-union laws. Business association successfully lobbied against labor market regulation that was meant to be supportive of unions in an economy shifting from industry to the non-unionized service sector.

Businesses Interests Writing Themselves into the Political Process

One interesting element in the authors’ thesis is the focus not only on business interests’ proactive lobbying aimed at changing the existing legislation, but also on their capacity to lobby Democrats to avoid new regulations. The outcome of the latter is what Hacker and Pierson call policy drift, i.e. when the absence of reform, in a changing economic environment, has huge redistributive consequences. Such political strategy is easy for “red” Democrats to follow because it is less costly in terms of votes than taking on a proactive pro-business agenda. The results however still serve the interests of firm owners and managers.

In addition, most of this legislative activism and blockage occurred in the arcane realm of finance regulation and complex taxation legislation. These policies, despite their important redistributive impact, did not (and still do not) attract the attention of voters.

The existence of multiple veto points in the American political system also made things easier for business interests. The most familiar to readers might be the rise of the filibuster. A super majority is now required for any new major law to pass through Congress. The type of law that could correct the balance of power thus has little prospect in such a system, provided that they could enlist the support of even a handful of senators.

Bringing Politics Back into the Picture

What do I like about their argument?

First, Hacker and Pierson convincingly argue that there is no such thing as a “depoliticized process of economic change.” What does it mean for change to be “politicized”? It means that the names of the winners and losers of such economic change are not written in stone. They are a function of the interaction between political institutions and the relative power of social groups affected by this change. To point out, like economists do, that high skills are comparatively more rewarded today than during the 60’s and 70’s, does not explain why the reward has been so high in the US or the UK, compared to other countries.

Second, it locates the conflictual relationship between capital and labor not just in the workplace but also in DC and in political parties’ internal politics. This is not the story of the decline of labor’s bargaining power over wages, a story that would in turn explain the stagnation in the share of profits that goes to labor. This is a story of a conflict over non-wage related policies, a conflict that is mediated by the party system and that is only remotely linked to change in the relative power of labor as a result of globalization and de-industrialization.

Third, it makes clear how the market is a construct, enabled by state policies. This key insight by Polanyi is coming back into fashion among political scientists though I am not sure if anyone has found the right concepts to theorize about the economy’s embeddedness in state legislation and regulation. (see the critique by Levy et al of the variety of capitalism literature)

More importantly, Pierson and Hacker challenge political scientists to ask the million dollar question. They remind us of why economics and political science departments are usually in different buildings. The questions we care about are different from that of economists’. We do not care that changes in the economy might be favoring an increase in inequalities. What we do care about is that politics influence the extent to which this is the case. How politics do it and to what consequences is what we want to know.

I will come back to this issue in my next post. This book and its many provocative claims have larger implications for the research on the causes of income inequality. This deserves a section of its own. Stay tuned!

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4 Responses to Winner-Take-All Politics: Why the Ultra Rich are Getting Ultra Richer

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