The Political Roots of Inequality

 Last Thursday I was at an event on the issue of rising income inequality, sponsored by Canada 2020. It featured one of the authors of the recent OECD report on inequality, who highlighted the “skills biased technological change or SBT ” hypothesis so favoured by mainstream economists who desperately avoid discussion of inequality as a political as well as economic phenomenon.

 I find this interpretation pretty unconvincing for the same reasons as Hacker and Pierson in their recent book on the political determinants of soaring income inequality in the US. (Jacob S. Hacker and Paul Pierson, Winner Take All Politics, Simon and Schuster, 2010.) Any rising pay gap between the college and non college educated in the US cannot possibly explain the huge wage gap between the top 1% and top 0.1% on the one hand and the many highly educated workers to be found below the extreme top end of the income distribution. And SBT cannot explain the hyper inequality of the US as compared to many European advanced capitalist countries similarly exposed to the big economic forces of globalization and technological change. (The US top 1% now grab 16% of income vs 13% Canada, 6% in Sweden and 10% in Germany.)

 Hacker and Pierson argue that the key underlying cause of the winner take all US economy has been winner take all politics – the growing political power and then ascendancy of the very rich, dating back to about 1980 precisely when the income share of the top 1% began to rise. Economic policies have increasingly reflected their interests and their interests alone, and have not counteracted any structural economic forces increasing inequality.

 As they argue, it is far too narrow a view of the role of government to look just at changes to tax and transfer policies which directly shape the distribution of income (and which have indeed contributed to growing inequality, especially through tax cuts for the rich.) Even more important is what governments have done, or not done, to counter increased inequality of wages and soaring returns to capital.

 One key example they cite is the huge impact of the decline of US unions, which represented one in four workers in the private sector in the late 1970s compared to one in fourteen today. Declining union density and bargaining power not only led to stagnant wages for middle class workers, but also to a much weakened political voice for the middle class.

 Unions were, of course, a key force behind the New Deal and remained a major force in Washington until the early 1980s, championing pocket book issues and supporting Democratic dominance of the House and Senate. But labour was unable to secure labour law reform even with Democratic majorities in Congress, laying the basis for the frontal attack on union rights and influence which began under Reagan and then gathered pace.

 Unions brought their members into sustained engagement with politics. Ordinary voters, Hacker and Pierson argue, need narratives to interpret day to day political issues. The decline of labour eclipsed class based narratives for the middle class. And no organized force has replaced unions as grass roots organizations pressing for equality increasing policies and acting as a counterweight to the strongly organized interests of the rich. The new social movements which have become increasingly influential in the Democratic party did not replace the organizational muscle of labour on the ground, and do not focus on pocket book issues, leading much of the working class to become alienated from politics (and allowing the Republicans to gradually capture the South and the social conservative vote on cultural rather than economic issues.)

 Hacker and Pierson document the rising power of US business in politics, especially in terms of ideological influence, lobbying, and campaign finance. With that rising power, corporate elite interests more or less completely captured the Republican Party, and all but neutered the Democratic party as a counter-weight. While somewhat less beholden to the top 0.1%, Democrats did little or nothing to counter the forces of rising inequality by, for example, regulating the rise of finance or taxing the stock options and capital gains of the corporate elite. Wall Street Democrats continue to determine the economic agenda of the Obama Administration.

 Hacker and Pierson make a pretty convincing case that dominant class interests have captured the US political system, and ensured that economic policies respond to their interests rather than middle and working class economic interests. Call it the class politics hypothesis. Search for it in vain in the mainstream economic literature.