Similar questions arose during the last decades of the nineteenth century when the second industrial revolution ushered in railroads, steel, oil, and electricity—and at the same time created vast economic combinations (then called “trusts”), concentrated wealth at the top, and fostered urban squalor and political corruption. The lackeys of robber barons literally deposited sacks of money on the desks of pliant legislators, prompting the great jurist Louis Brandeis to note that the nation had a choice: “We can have a democracy or we can have great wealth in the hands of a few,” he said, “but we cannot have both.”
America made the choice. Public outrage gave birth to the nation’s first progressive income tax. President Theodore Roosevelt, railing at the “malefactors of great wealth,” used government power to break up the trusts and impose new regulations barring impure food and drugs. He proposed “all contributions by corporations to any political committee or for any political purpose should be forbidden by law,” leading Congress to pass the Tillman Act, the first federal law to ban corporate political donations, and, three years later, the Publicity Act, requiring candidates to disclose the identities of all campaign contributors. Meanwhile, several states enacted America’s first labor protections, including the forty-hour workweek.
Another era of innovation in the 1920s centered on large-scale enterprise and the mass production of consumer goods—automobiles, telephones, refrigerators, and other durables powered by electricity. Here again, income and wealth became highly concentrated, and Wall Street’s riches and influence soared. By the time of the Great Crash of 1929, most Americans could not pay for all the new products and services without going deeply and hopelessly into debt—resulting in a bubble that loudly and inevitably popped. On the heels of this economic crisis came the reforms of the New Deal, giving organized labor the right to bargain collectively with employers, small investors protection from financial fraud, and small businesses protection from large retail chains. In the election of 1936, big business and Wall Street attacked Franklin D. Roosevelt. In a speech at Madison Square Garden he thundered, “Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.”
A similar sequence of events began in the late 1970s, when another wave of innovation—including container ships, satellite communications, new materials, computers, digital technologies, and, eventually, the Internet—spawned a new economy, along with great fortunes centering in a relatively few giant companies and individuals, and the effervescent resurgence of Wall Street. As I have noted, however, also beginning in the late 1970s, the real median household income stagnated. The vast American middle class employed several techniques to maintain its purchasing power notwithstanding.1 The first was for mothers to move into paid work; the second, for everyone to work longer hours; the third, to use rising home values to extract money through home equity loans or refinancing. By late 2007, debt reached 135 percent of disposable income. But none of these techniques was sustainable. In 2008, the debt bubble burst, just as a similar bubble had burst in 1929. It is not coincidental that 1928 and 2007 marked the two peaks of income concentration in America over the last hundred years, in which the richest 1 percent raked in more than 23 percent of total income. The economy cannot function without the purchasing power of a large and growing middle class.
The so-called recovery from the Great Recession has been among the most anemic recoveries in American economic history, especially given how far the economy fell in 2008 and 2009. The ongoing problem is inadequate overall demand, the same impediment that had delivered the economy into the Great Recession in the first place. After the crash of 2008, most Americans did not have the resources to buy enough goods and services to convince businesses to invest, expand, and hire. Hence, unemployment remained unusually high and most households’ incomes stagnated or dropped. And because American consumption is a critically important component of demand in the rest of the world, its relative weakness during the recovery was a drag on the global recovery. In consequence, U.S. exports could not make up for the shortfall in domestic demand.
As I write this, at the start of 2015, a recovery of sorts is under way in the United States. Jobs are returning. But most people’s wages still are not rising. And wealth and income are still at near record levels of concentration. The richest four hundred Americans have more wealth than the bottom 50 percent of Americans put together; the wealthiest 1 percent own 42 percent of the nation’s private assets; and the share of wealth held by the lower half of households has fallen from 3 percent in 1989 to 1 percent today. One way to get your mind around this is to compare a household at the top with the average household. In 1978, the typical household in the wealthiest 0.01 percent was 220 times richer than the average household. By 2012, the household at the top was 1,120 times richer. Since 2000, adjusted for inflation, the weekly earnings of full-time wage and salary workers at the median have dropped, and average hourly wages adjusted for inflation are lower than they were forty years ago.
As Thomas Piketty has shown in Capital in the Twenty-First Century, this was the pattern through much of the eighteenth and nineteenth centuries in Europe and, to a lesser extent, in America. And it is coming to be the pattern once again. Piketty is pessimistic that much can be done to reverse it (his sweeping economic data suggest that slow growth will almost automatically concentrate great wealth in relatively few hands). But he disregards the political upheavals and reforms that such wealth concentrations often inspire—such as America’s populist revolts of the 1890s followed by the Progressive Era, or even the German socialist movement in the 1870s followed by Otto von Bismarck’s creation of the first welfare state.
The phenomenon I have described transcends the business cycle. Figure 8 puts the current era into context by showing what has occurred during every expansion since World War II, and the portion of it going to the wealthiest 10 percent of households and the poorest 90 percent. Three things stand out. First, the bottom 90 percent’s share began to drop dramatically between 1982 and 1990. Second, with each upturn, more and more of the benefits have gone to the top. Third, the real incomes of the bottom 90 percent dropped for the first time in the recovery that began in 2009. Never before had median household incomes dropped during an economic recovery. The three-decade pattern suggests the vicious cycle has accelerated: Those with the most economic power have been able to use it to alter the rules of the game to their advantage, thereby adding to their economic power, while most Americans, lacking such power, have seen little or no increase in their real incomes.
FIGURE 8. DISTRIBUTION OF AVERAGE INCOME GROWTH DURING EXPANSIONS
Source: Pavlina R. Tcherneva, “Reorienting Fiscal Policy: A Bottom-up Approach,” Journal of Post Keynesian Economics 37, no. 1 (2014): 43–66.
This trend is not sustainable, neither economically nor politically. In economic terms, as the middle class and poor receive a declining share of total income, they will lack the purchasing power necessary to keep the economy moving forward. Direct redistributions from the rich sufficient to counter this would be politically infeasible. Meanwhile, as ever-larger numbers of Americans conclude that the game is rigged against them, the social fabric will start to unravel. Confidence in economic institutions is already falling precipitously. In 2001 a Gallup poll found 77 percent of Americans satisfied with opportunities to get ahead by working hard, and only 22 percent were dissatisfied. But since then satisfaction has steadily declined and dissatisfaction increased. By 2014, only 54 percent were satisfied and 45 percent dissatisfied. According to the Pew Research Center, the percentage of Americans who feel that most people who want to get ahead can do so through hard work has dropped by 13 points since 2000.
This pervasive sense of arbitrariness and unfairness undermines economic institutions in several ways. First, it leads to widespread rule breaking. If the game is perceived to be rigged in favor of those at the top, then others
are more likely to view cheating as acceptable—stealing and pilfering from employers, rigging time clocks, dissembling about lengths of time away from desk or office, overbilling, skimming off some of the profits, accepting small bribes and kickbacks for awarding a contract or making a deal. But an economy is based on trust. The cumulative effect of even small violations of trust can generate huge costs. Employers feel compelled to tighten rules, giving all employees less discretion; time-consuming screening and security checks are imposed at the end of the workday; additional reviews must be made of all accounts and additional oversight of all transactions; more legal steps and picayune procedures are required so no party will be surprised by opportunist moves of any other. Commercial dealings are hedged about by ever more elaborate contractual provision; creditors demand more burdensome guarantees for additional loans. Across the economy, red tape multiplies with the profusion of finagles it seeks to contain. The only beneficiaries from this economic sclerosis are the lawyers, accountants, auditors, and security staff and screeners whose services are increasingly in demand.
Second, when the game seems rigged and trust deteriorates, loyalty can no longer be assumed. That means less overall willingness to put in extra effort or go the extra mile, to do what is needed but not required, to report unexpected problems or devise novel solutions. Employees or contractors withhold technical information or economic insights that, if shared, could boost joint productivity but could just as easily line the pockets of top executives and reduce the number of jobs. And since investments in such additional knowledge cannot be protected like investments in real estate or machinery or even in intellectual property, generalized distrust reduces the incentives of everyone to make such investments for fear the new knowledge will be expropriated by others.
Third and finally, people who feel subjected to what they consider to be rigged games often choose to subvert the system in ways that cause everyone to lose. Consider, for example, the simulation I do with the students in my Wealth and Poverty class at Berkeley. I have them split up into pairs and ask them to imagine that I’m giving one of the people in each pair $1,000. They can keep some of the money only on the condition that they reach a deal with their partner on how it’s to be divided up between them. I explain that they can only make one offer and respond by accepting or declining and can only communicate by the initial recipient writing on a piece of paper how much he’ll share with the other, who must then either write “deal” or “no deal” on the paper.
You might think many initial recipients of the imaginary $1,000 would offer $1 or even less to their partner, which their partner would gladly accept. After all, even one dollar is better than ending up with nothing at all. Economic theory tells us such an outcome would be an improvement over the former status quo. But that’s not what happens. Most of the $1,000 recipients are far more generous to their partners, offering at least $250. Even more surprising is that most partners decline any offer under $250, even though “no deal” means neither of them will get to keep anything. This game and variations of it have been played by social scientists thousands of times with different groups and pairings, with remarkably similar results.
A far bigger version of the game has been played in recent years on the national stage. But it is for real, as a relative handful of Americans have received ever-larger slices of the total national income while most average Americans, working harder than ever, receive smaller ones. And just as in the simulations, the losers are starting to say “no deal.” According to polls, in 2015 most Americans were opposed to the Trans-Pacific Partnership, for example, which was devised by American and Asian trade negotiators to further open trade and commerce between the United States and the nations of the Pacific region. While history and policy point to overall benefits from expanded trade because all of us gain access to cheaper goods and services, in recent years the biggest gains from trade have gone to investors and executives while the burdens have fallen disproportionately on those in the middle and below who have lost good-paying jobs. By 2014, according to polls, most Americans no longer supported trade-opening agreements.
Why would people turn down a deal that makes them better off simply because it makes someone else far, far better off? Some might call this attitude envious or spiteful. But when I ask those of my students who refused to accept anything less than $250 in the distribution game why they did so, they explain that the outcome would otherwise be unfair. Remember, I gave out the $1,000 arbitrarily. The initial recipients didn’t have to work for it or be outstanding in any way. In other words, when a game seems rigged, losers are willing to sacrifice some gains in order to prevent winners from walking away with far more—a result that strikes them as unfair. Another explanation I get from students who refused anything less than $250 is they worry that if their partner ends up with more of the money, he’ll also end up with far more power, which will rig the game even more. So they’re willing to sacrifice some gain in order to avoid a steadily more lopsided and ever more corrupt politics. This suggests that if America’s distributional game continues to create a few big winners and many who consider themselves losers by comparison, the losers will try to stop the game—not out of envy but out of a deep-seated sense of unfairness and a fear of unchecked power and privilege.
In summary, when people feel that the system is unfair and arbitrary and that hard work does not pay off, we all end up losing. This is due to several related negative consequences, including widespread cheating or stealing, mounting distrust, and a willingness to forgo joint gains for the sake of preventing those who are well-off from becoming even better off. The gross national product may nonetheless rise due to additional spending on security personnel, accountants, auditors, lawyers, screening devices, monitoring equipment, and so on, but these defensive expenditures do not improve the quality of life of the typical American. The other negative consequence, as we have seen, is chronically inadequate demand for goods and services caused by insufficient purchasing power and economic insecurity. Together, these responses impose incalculable damage on an economic system. They turn an economy and a society into what mathematicians would call a “negative-sum” game. When capitalism ceases to deliver economic gains to the majority, it eventually stops delivering them at all—even to a wealthy minority at the top. It is unfortunate that few of those at the top have yet to come to understand this fundamental truth.
This dynamic threatens not only American capitalism; capitalism is failing elsewhere as well. By 2014, wages were stagnant or falling and economic insecurity rising in much of Europe and in Japan. Consumers in China were gaining ground, but consumption failed to grow as a share of China’s increasingly productive economy, while inequality in China soared. China’s wealthy elites were emulating the most conspicuous consumption of the rich in the West, and corruption there appeared to be endemic.
If history is any guide, reform is likely to begin in America and inspire reform elsewhere. That’s because Americans have always tended to choose pragmatism over ideology. When we have recognized a problem and understood the reason for it, our habit has been to get on with the messy job of solving it. Whenever capitalism has before reached points of crisis, we have not opted for communism or fascism or any other grand scheme. Again and again we have saved capitalism from its own excesses by making necessary corrections. We have counteracted whatever political and economic power has become too concentrated for the system to sustain itself. It is time for us to do so again.
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1 For an extended discussion, see my book Aftershock: The Next Economy and America’s Future (New York: Alfred A. Knopf, 2010).
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The Decline of Countervailing Power
The essential challenge is political rather than economic. It is impossible to reform an economic system whose basic rules are under the control of an economic elite without altering the allocation of political power that lies behind that control.
A study published in the fall of 2014 by Princeton
professor Martin Gilens and Professor Benjamin Page of Northwestern University reveals the scale of the challenge. Gilens and Page analyzed 1,799 policy issues in detail, determining the relative influence on them of economic elites, business groups, mass-based interest groups, and average citizens. Their conclusion: “The preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” Instead, lawmakers respond to the policy demands of wealthy individuals and moneyed business interests—those with the most lobbying prowess and deepest pockets to bankroll campaigns. It is sobering that Gilens and Page’s data come from the period 1981 to 2002, before the Supreme Court opened the floodgates to big money in its Citizens United and McCutcheon decisions, which we shall get to in a moment. The study also predated the advent of super PACs and “dark money,” and even the Wall Street bailout. Presumably their results would be even more skewed toward the moneyed interests if their sample was extended to today.
Some might claim that the average citizen never had much direct political power in America. Walter Lippmann argued in his 1922 book, Public Opinion, that the broad public did not know or care about public policy. The public’s consent was “manufactured” by an elite that manipulated it. “It is no longer possible to believe in the original dogma of democracy,” Lippmann concluded. Nevertheless, in subsequent years American democracy seemed robust compared to other nations that succumbed to communism or totalitarianism.
Saving Capitalism Page 17