Growing Apart develops an historical explanation for our growing divide. The early chapters trace the dimensions of American inequality and discount the importance of the “usual suspects” in this story: globalization, technology, and demography. (Because these trends have been experienced generally and gradually across the democratic and industrialized world, they are not much help in explaining either the uneven historical trajectory of American inequality or the gap between the United States—where inequality is especially stark—and most of its peers.) The chapters that follow turn their attention to the politics of American inequality, developing the argument that policy and political choices—including our political responses to the challenges listed above—make up a more important part of the story.

A crude schematic of that political explanation would go something like this. Union decline (especially for men) and the declining value of the minimum wage (especially for women) drove inequality at the bottom of the wage spectrum in the 1970s and 1980s. This collapse in bargaining power was compounded by the meagerness of U.S. social programs (most pronounced after the end of the AFDC program in 1996), the steady decline in job-based benefits, and the determination (since the 1970s) to sacrifice full employment on the altar of price stability at every dip in the business cycle. As the floor of the midcentury social compact collapsed, economic rewards were increasingly hoarded at the top—an advantage hardened (especially across the last twenty years) by financialization, shifts in the tax burden, and the collapse of meaningful corporate governance. Simply put, public policy narrowed the ability of ordinary Americans to bargain for their fair share while widening the opportunity afforded the richest Americans to extract extraordinary rewards.

Identifying causes, of course, is not the same as identifying solutions. Narrating the long collapse of the New Deal system of labor, social, and regulatory policy does not imply that we can run the reel backwards and restore it all. Our policy retreat has been accompanied by changes in patterns of production, consumption, trade, and labor force participation; some important political and institutional changes—the decline of organized labor jumps to mind—may be much harder to reverse than others. The policies that ensured shared prosperity in the past may be insufficient to tackle the economic, political, social, and environmental challenges of our century. It would be folly to pursue a “New New Deal” without rethinking its administrative, economic, and redistributive premises. 

This is, in some respects, the task tackled by Thomas Piketty’s Capital in the Twenty-First Century, which combines a graceful (if disheartening) account of the logic of modern capitalism—in which the rate of return to capital outstrips the rate of growth, yielding greater and greater inequality—with a running commentary on important differences across national settings and a modest suggestion for turning things around: a global wealth tax. For Piketty, the contraction of income inequality in the middle years of the twentieth century is explained largely by “shocks to capital” delivered by two world wars and the Great Depression—not by the political and institutional response to the same events. Accordingly, the only recourse is another shock—a tax on wealth both steep and progressive enough to drag the rate of return on capital back below the rate of growth, and sufficiently global in reach to minimize evasion.

The result is a curious mismatch between the causal elements of this story (where labor standards, education, retirement security, and social policy are all duly mentioned) and a prescriptive punchline that seems both insufficient to the task and wildly infeasible. The consensus, at least among the institutional economists upon which Growing Apart leans so heavily, is that Piketty underestimates the importance of politics and policy in widening (or narrowing) inequality. One can easily imagine a wide array of policies besides a global wealth tax that stand a chance of dampening capital’s returns—either by bolstering the bargaining power of those at the bottom of the wage and income spectrum, or by constraining the rent-seeking of those at the top.

What would such a set of policies this look like? In light of the history sketched across this series and drawing on the work of those who have come up with more sweeping blueprints for reform (see the short reading list below), the key elements and strategies are pretty clear:

As our recent history reminds us, nothing sustains shared prosperity better than sustained economic growth. The “golden years” of the 1950s and 1960s delivered broad economic rewards. The sole interruption in the misery of the last generation, on the other hand, was the brief spell of full employment we enjoyed in the late 1990s.

We tend to hear that efforts to dampen inequality can only come at the expense of growth. This is the core logic of austerity politics, in which tax cuts, eviscerated social programs, and deregulation are meant to unleash markets and entrepreneurial innovation. But our own recent history—in which the era of sustained growth occurred when the labor, tax, and regulatory policies of the New Deal were at full force—refutes austerity’s basic premise. Growth is sustained not by unshackled capital (whose efforts often devolve into short-sighted rent-seeking), but by the security and stability that come with broadly shared prosperity.

Such growth, of course, needs to focus on the production of goods and services of real and lasting value; there is not much to gain by running any more GDP through Wall Street or our health care system. For this reason, it is important that we look not for the next bubble, but to sustained investments in infrastructure, energy efficiency, and the like. 

At the core of our current woes is the dramatic collapse in the security and bargaining power of U.S. workers since the 1970s. Inequality is rooted in the labor market, where we have seen not only wage stagnation but also the steady erosion of job-based benefits—which, in the absence of robust public benefits, Americans depend on much more than their peers. Strong labor standards sustain not only the core assumption that hard work should be rewarded, but also economic growth (by ensuring a stable demand for goods and services) and inclusive political institutions.

Restoring decent labor standards could proceed on a number of fronts. A substantial bump in the minimum wage, coupled with a more systematic commitment to the earned income tax credit, could raise the wage floor. This should be accompanied by a renewed commitment to enforcing the labor standards we do have—in particular, combatting wage theft in all its forms. While rebuilding union density in the private sector (or sustaining it in the public sector) is a stiffer challenge, we can level the playing field through labor law reform while exploring variations on the older collective bargaining model, such as open source forms of organization. 

We could go a long way toward redressing wage and income inequality by relieving workers—and their employers—of the costs and expectations of our “private welfare state.” The organization of basic social benefits—health care, retirement security, and the like—through employment made some sense in a world dominated by career employment for male breadwinners in large firms. But we don’t live in that world anymore. Changes in employment patterns, firm size, health care costs, and family structure make it much harder to sustain a broad-based system of job-based benefits. And, as the coverage of job-based benefits narrows, the gap between good jobs and bad jobs—and underlying inequality—grows apace.

We need to disentangle health care and pensions from job-based eligibility or participation. This would mean moving towards a sort of “Medicare for All” health care system—towards which the Affordable Care Act is just a small step—and a system of universal and portable retirement accounts, which would relieve workers of the uneven availability and fiduciary uncertainty of private plans. And we need to reinvent our compensatory social programs (unemployment insurance, TANF, food stamps) so that they are a better match—in terms of eligibility, coverage, and duration—for the challenges faced by the current generation of working families.

4. Restraining, and Tapping into, the 1 Percent

The concentration of wealth and incomes at the upper end of the scale is as bad for our democracy as it is for our economy. Curbing it will mean redistributing both economic and political resources; indeed any real progress on the economic side of the equation is likely to be tenuous unless we can sever the ties (exacerbated, but hardly invented, by the one-two punch of Citizens United and McCutcheon) between economic affluence and political influence.

Much higher taxes on the rich are the starting point here—both to sustain (and regain) progressivity in the tax code and to raise the revenues that make other inequality-fighting policies possible. The form of such taxes is as important as their rates: taxes that penalize or restrain rent-seeking (any income beyond that needed to efficiently provide a good or service), such as a financial transactions tax, could both raise money and encourage investment in more productive forms of economic activity. Changes in the tax code could be accompanied by checks on executive pay, either through more transparent and active forms of corporate governance or through public leverage (public contracts, subsidies, or bailouts). And efforts to chip away at concentration of wealth at the very top should be accompanied by efforts to build the wealth and assets of ordinary Americans.

* * *

What we are up against, then, are political obstacles, as any hint of raising the wage floor or patching the regulatory ceiling is met by shrill warnings that such repairs will bring the whole house down. Hopefully this series has helped to dismantle such claims. The question is not whether we can afford such policy interventions, but how much longer we can do without them.

Further Reading:

Jacob Hacker and Nate Lowienthal, Prosperity Economics (2012)

Richard Kirsch et al, Ten Ways to Rebuild the Middle Class (2012)

Joel Rogers, Productive Democracy (2012)

Larry Mishel et al, Putting American Back to Work (2011)

Demos Foundation, Millions to the Middle (2012)

Center for American Progress, 300 Million Engines of Growth (2013)

Joshua Freedman and Michael Lind, Beyond the Low Wage Social Contract (2013)

Center for American Progress, States at Work: Progressive State Policies to Rebuild the Middle Class (2013)

Center on Wisconsin Strategy and Center for American Progress, Cities at Work: Progressive Local Policies to Rebuild the Middle Class (2014)

Congressional Progressive Caucus, Better Off Budget (2014)