Introduction
It should no longer come as a surprise that American society is marked by stark inequality. The circumstances of the Great Recession and the political resonance of the “We are the 99 Percent” movement have both underscored this uncomfortable fact. Inequality is worse now than it has been at almost any time in the last century. And it is worse here than in virtually any other democratic and developed economy. Yet, for all the jaw-dropping comparisons (between rich and poor, between then and now, between the US and everyone else), we hear very little about how and why we got to this point. Our current economic troubles have aimed a spotlight at the problem, but they are not responsible for it.
The story of American inequality often features one or both of these plotlines: One, somebody took the money. This version is animated largely by Wall Street greed and the Bush-era tax cuts, and features a plutocracy determined to claim more than its share of private wealth and shoulder less than its share of public goods. Or two, something happened to the economy. This version has both a backstory, the inexorable march of globalization and technological change, and a more recent plot twist: the recession that began in 2007 and—for most of us—has not yet ended.
These accounts are not so much wrong as they are misleadingly incomplete, inattentive to longer term historical trends and to the political choices made across that history. The dimensions of that fuller explanation are readily apparent if we consider the political and economic conditions that prevailed in the first generation after World War II. At that historical moment, the gaps between the rich and poor were much narrower.1 The gains of economic growth were broadly distributed. And working families (well, white working families at least2), enjoyed much greater economic security. Why?
The shared prosperity of those years was not a natural economic consequence (a rising tide lifting all boats) of postwar growth, but the result of political struggle and policy choices. Indeed, inequality had also been stark in the early years of the century; the gap began to close not when economic growth took off in the 1940s, but earlier—as a consequence of the political response to the Great Depression.3
The results, in a nutshell, were this: Federal support for collective bargaining rights sustained a surge in labor organization—dramatically improving the bargaining power of workers. Other political innovations of the New Deal—including social security and the minimum wage—secured a floor for working class incomes. Postwar social movements (especially civil rights and “second wave” feminism) girded that floor by closing off avenues for discrimination.4 The tax system and regulatory obstacles to speculative finance erected something of a ceiling for higher incomes. And substantial public investments—in things like the GI Bill, mortgage subsidies for veterans, housing projects, the interstate highway system, and the Cold War—kept the rest of the structure in pretty good repair.5
Since then, to put it bluntly, that house has been pretty much torn down. The conventional wisdom, of course, is to describe this as an unfortunate but necessary response to changing economic conditions: the world became a leaner and meaner and more competitive place, so the policies of the New Deal—and the costs they imposed on business—had to go. But there is little to support this account—indeed the initial handwringing over American economic decline came at a time when our principal competitors (Japan and Germany) boasted both higher wages and more expansive social programs than the United States.6
The dismantling of the New Deal was a political choice, not an economic necessity. The organizational and ideological dimensions of that effort, first sketched out in Lewis Powell’s infamous 1971 memorandum to friends at the American Chamber of Commerce, are now etched across the political landscape. And, more importantly, the policy consequences have been dramatic: steep cuts in social spending, the political abandonment of organized labor, deregulation and privatization, tax cuts, punitive cycles of unemployment—all justified in the name of lowering business costs, capturing economic efficiencies, and unleashing markets. But this was virtuous camouflage for the real goal, which was to redistribute income upwards by eroding the hard-fought bargaining power of ordinary Americans. Rising inequality was not a lamentable side effect of these policies; it was their intent.7
We can dispense with, or at least move past these arguments pretty easily. The question of course, is not whether we should strive for equal or unequal outcomes, but what kind or degree of inequality we are willing to live with. Americans accept the idea that the market will not reward all equally, but also dramatically underestimate how unequal those rewards are [see sidebar below]. The “market incentives” argument holds water only as long as hard work is reliably rewarded in the short term (wages) and in the long term (economic mobility)—a prospect that has unraveled in the last decade.9 And, we cannot pass off relative inequality on the grounds that everyone is doing better: the well documented rise in income inequality during the last thirty years has been accompanied by an increase in consumption inequality of nearly the same magnitude.10
The story of American inequality often features one or both of these plotlines: One, somebody took the money. This version is animated largely by Wall Street greed and the Bush-era tax cuts, and features a plutocracy determined to claim more than its share of private wealth and shoulder less than its share of public goods. Or two, something happened to the economy. This version has both a backstory, the inexorable march of globalization and technological change, and a more recent plot twist: the recession that began in 2007 and—for most of us—has not yet ended.
These accounts are not so much wrong as they are misleadingly incomplete, inattentive to longer term historical trends and to the political choices made across that history. The dimensions of that fuller explanation are readily apparent if we consider the political and economic conditions that prevailed in the first generation after World War II. At that historical moment, the gaps between the rich and poor were much narrower.1 The gains of economic growth were broadly distributed. And working families (well, white working families at least2), enjoyed much greater economic security. Why?
The shared prosperity of those years was not a natural economic consequence (a rising tide lifting all boats) of postwar growth, but the result of political struggle and policy choices. Indeed, inequality had also been stark in the early years of the century; the gap began to close not when economic growth took off in the 1940s, but earlier—as a consequence of the political response to the Great Depression.3
The results, in a nutshell, were this: Federal support for collective bargaining rights sustained a surge in labor organization—dramatically improving the bargaining power of workers. Other political innovations of the New Deal—including social security and the minimum wage—secured a floor for working class incomes. Postwar social movements (especially civil rights and “second wave” feminism) girded that floor by closing off avenues for discrimination.4 The tax system and regulatory obstacles to speculative finance erected something of a ceiling for higher incomes. And substantial public investments—in things like the GI Bill, mortgage subsidies for veterans, housing projects, the interstate highway system, and the Cold War—kept the rest of the structure in pretty good repair.5
Since then, to put it bluntly, that house has been pretty much torn down. The conventional wisdom, of course, is to describe this as an unfortunate but necessary response to changing economic conditions: the world became a leaner and meaner and more competitive place, so the policies of the New Deal—and the costs they imposed on business—had to go. But there is little to support this account—indeed the initial handwringing over American economic decline came at a time when our principal competitors (Japan and Germany) boasted both higher wages and more expansive social programs than the United States.6
The dismantling of the New Deal was a political choice, not an economic necessity. The organizational and ideological dimensions of that effort, first sketched out in Lewis Powell’s infamous 1971 memorandum to friends at the American Chamber of Commerce, are now etched across the political landscape. And, more importantly, the policy consequences have been dramatic: steep cuts in social spending, the political abandonment of organized labor, deregulation and privatization, tax cuts, punitive cycles of unemployment—all justified in the name of lowering business costs, capturing economic efficiencies, and unleashing markets. But this was virtuous camouflage for the real goal, which was to redistribute income upwards by eroding the hard-fought bargaining power of ordinary Americans. Rising inequality was not a lamentable side effect of these policies; it was their intent.7
Why it Matters
All of this has been accompanied by what might be described as a weak consensus that growing inequality was (and is) a serious problem. The weakness of this consensus rests in part on the recognition that market systems will always yield inequality, and that such inequality is an essential incentive to innovation and investment. In this view, people work hard to avoid poverty, and even harder to get rich. Equal outcomes (created for example, by a very high “guaranteed income” floor and a very low taxation ceiling) would stifle this, and with it the economic growth on which we all depend. In this view, even the poor are better off with a thin slice of a growing pie than with a thicker slice of a small one. A version of this argument, especially popular among the conservative think tanks, is that income or wealth gaps are less important than consumption and living standards—the “are you poor if you have a flatscreen TV?” defense.8We can dispense with, or at least move past these arguments pretty easily. The question of course, is not whether we should strive for equal or unequal outcomes, but what kind or degree of inequality we are willing to live with. Americans accept the idea that the market will not reward all equally, but also dramatically underestimate how unequal those rewards are [see sidebar below]. The “market incentives” argument holds water only as long as hard work is reliably rewarded in the short term (wages) and in the long term (economic mobility)—a prospect that has unraveled in the last decade.9 And, we cannot pass off relative inequality on the grounds that everyone is doing better: the well documented rise in income inequality during the last thirty years has been accompanied by an increase in consumption inequality of nearly the same magnitude.10
Sidebar: Thinking About Inequality
In turn, there is little credible evidence to suggest that inequalities (and the incentives they create) are essential to economic growth. In fact, nearly the reverse is true. In our own recent history, sustained economic growth is closely associated with a relatively equitable distribution of economic rewards. Higher levels of inequality lead to underinvestment in education (as those left behind are priced out of higher education) and in public goods and infrastructure (as skewed income distribution erodes tax revenues). Relative equality is more likely to sustain demand across the economy, and ensure that economic growth can be sustained. And, as recent experience makes abundantly clear, stark and sustained inequality is as likely to pervert incentives; to discourage those at the bottom of the income distribution (whose hard work goes unrewarded) and to encourage those at the top to engage in short-sighted speculation—much of which (think predatory lending and usurious credit card rates) exploits the poor and widens the gap.
In turn, there is little credible evidence to suggest that inequalities (and the incentives they create) are essential to economic growth. In fact, nearly the reverse is true. In our own recent history, sustained economic growth is closely associated with a relatively equitable distribution of economic rewards. Higher levels of inequality lead to underinvestment in education (as those left behind are priced out of higher education) and in public goods and infrastructure (as skewed income distribution erodes tax revenues). Relative equality is more likely to sustain demand across the economy, and ensure that economic growth can be sustained. And, as recent experience makes abundantly clear, stark and sustained inequality is as likely to pervert incentives; to discourage those at the bottom of the income distribution (whose hard work goes unrewarded) and to encourage those at the top to engage in short-sighted speculation—much of which (think predatory lending and usurious credit card rates) exploits the poor and widens the gap.
Inequality does matter. It matters, most obviously and directly, to those it leaves behind. This includes the very poor (characterized and described in recent American social science as the “underclass” or “the truly disadvantaged”), who have long been cordoned off from the rewards and opportunities enjoyed by most Americans. And this increasingly includes the broad middle class, for whom growing inequality has begun to erode wealth, incomes, living standards, and opportunities.11
As importantly, inequality matters more generally—to society at large, to the prosperity of the entire economy, and to its loser and its winners. The evidence on this point is diverse and damning. Citizens in unequal societies are more likely than others to be sick, fat, unhappy, unsafe, or in jail. These social outcomes, in turn, undercut the productivity and efficiency of the economy as a whole—whose resources are siphoned off by the demands of poor public health, policing, and mass incarceration, and whose human capital is underprepared and underutilized.
More directly, pervasive inequality undermines economic health and economic growth. At a certain point, stark income gaps begin to undermine consumption. “A millionaire cannot wear 10,000 pairs of $10 shoes,” as one advertiser warned on the eve of the Great Depression in 1929, “but a hundred thousand others can if they’ve got the $10 to pay for them, and the leisure to show them off. “ Rising inequality in the last generation has created the same tension, eased only temporarily by the availability of consumer credit or home equity.12 Efforts to patch together substitutes for aggregate demand, in turn, create their own inefficiencies—including a bloated and parasitic financial services sector, fed by both the desperate demand for credit from those falling behind and the frantic search for speculative returns by those leaping ahead.13
And finally, economic inequality is politically destructive. Again, we can expect and accept that market power will shape political outcomes—if only because the rich will always have both the resources and the stakes to play a role that is more influential than any votes they might cast. But pervasive or sustained inequality has broader political consequences. It tends to tilt public policy towards shortsighted rewards or special treatment (deregulation, tax breaks), and away from the public or collective goods (education, infrastructure) essential to future economic growth. Economic inequality breeds political inequality—whose highest goal, in turn, is a set of policies that make economic inequality even worse.
Democratic institutions, at their best, provide a basic infrastructure (physical, legal, and fiscal) in which markets can thrive, ameliorate or regulate the excesses of market competition, and provide the public goods and services that markets are unable or unwilling to generate on their own. Under conditions of stark economic and political inequality, all of this begins to fall apart. Shortsighted and speculative market activities are rewarded rather than restrained. Collective investment in the economy’s infrastructure—everything from good schools to good roads—withers. And, as economic inequality deepens, the political system is robbed of the collective will—and the resources--to do much about it.14
The goal of “Growing Apart” is, first and foremost, to lay out the political and institutional changes which have contributed to the stark rise of inequality in the last generation. The first task, (Part 1 below) is to identify and describe the problem; to lay out the various measures of inequality and to chart each in historical and comparative terms (how have things changed? how do we stack up against our international peers?). The second task (Part 2 below) is to make the case for the importance of those political and institutional changes by critically assessing other explanations—particularly those that lean on broad and immutable trends in global competition, technological change, or family structure. This clears the deck for Part 3, which traces the key policies (or policy reversals) that have brought us to this point. This involves both a summary historical account of what changed, and an assessment—drawing on the relevant economics literature—of how and when and to what degree each policy shift contributed to inequality. By way of conclusion, Part 4 touches on what the solutions might look like.
As importantly, inequality matters more generally—to society at large, to the prosperity of the entire economy, and to its loser and its winners. The evidence on this point is diverse and damning. Citizens in unequal societies are more likely than others to be sick, fat, unhappy, unsafe, or in jail. These social outcomes, in turn, undercut the productivity and efficiency of the economy as a whole—whose resources are siphoned off by the demands of poor public health, policing, and mass incarceration, and whose human capital is underprepared and underutilized.
More directly, pervasive inequality undermines economic health and economic growth. At a certain point, stark income gaps begin to undermine consumption. “A millionaire cannot wear 10,000 pairs of $10 shoes,” as one advertiser warned on the eve of the Great Depression in 1929, “but a hundred thousand others can if they’ve got the $10 to pay for them, and the leisure to show them off. “ Rising inequality in the last generation has created the same tension, eased only temporarily by the availability of consumer credit or home equity.12 Efforts to patch together substitutes for aggregate demand, in turn, create their own inefficiencies—including a bloated and parasitic financial services sector, fed by both the desperate demand for credit from those falling behind and the frantic search for speculative returns by those leaping ahead.13
And finally, economic inequality is politically destructive. Again, we can expect and accept that market power will shape political outcomes—if only because the rich will always have both the resources and the stakes to play a role that is more influential than any votes they might cast. But pervasive or sustained inequality has broader political consequences. It tends to tilt public policy towards shortsighted rewards or special treatment (deregulation, tax breaks), and away from the public or collective goods (education, infrastructure) essential to future economic growth. Economic inequality breeds political inequality—whose highest goal, in turn, is a set of policies that make economic inequality even worse.
Democratic institutions, at their best, provide a basic infrastructure (physical, legal, and fiscal) in which markets can thrive, ameliorate or regulate the excesses of market competition, and provide the public goods and services that markets are unable or unwilling to generate on their own. Under conditions of stark economic and political inequality, all of this begins to fall apart. Shortsighted and speculative market activities are rewarded rather than restrained. Collective investment in the economy’s infrastructure—everything from good schools to good roads—withers. And, as economic inequality deepens, the political system is robbed of the collective will—and the resources--to do much about it.14
The goal of “Growing Apart” is, first and foremost, to lay out the political and institutional changes which have contributed to the stark rise of inequality in the last generation. The first task, (Part 1 below) is to identify and describe the problem; to lay out the various measures of inequality and to chart each in historical and comparative terms (how have things changed? how do we stack up against our international peers?). The second task (Part 2 below) is to make the case for the importance of those political and institutional changes by critically assessing other explanations—particularly those that lean on broad and immutable trends in global competition, technological change, or family structure. This clears the deck for Part 3, which traces the key policies (or policy reversals) that have brought us to this point. This involves both a summary historical account of what changed, and an assessment—drawing on the relevant economics literature—of how and when and to what degree each policy shift contributed to inequality. By way of conclusion, Part 4 touches on what the solutions might look like.
Discussion of "Introduction"
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