Unequal Democracy: The Political Economy of the New Gilded Age

Economic in equality clearly has profound ramifications for democratic politics. However, that is only half the story of this book. The other half of the story is that politics also profoundly shapes economics. While technological change, globalization, demographic shifts, and other economic and social forces have produced powerful pressures toward greater in equality in recent decades, politics and public policy can and do significantly reinforce or mitigate those pressures, depending on the po liti cal aims and priorities of elected officials. I trace the impact of public policies on changes in the U.S. income distribution over the past half- century, from the tripled income share of Dahl's "economic notables" at the top to the plight of minimum wage workers at the bottom. I find that partisan politics and the ideological convictions of po liti cal elites have had a substantial impact on the American economy, especially on the economic fortunes of middle- class and poor people. Economic in equality is, in substantial part, a political phenomenon.
In theory, public opinion constrains the ideological convictions of po liti cal elites in democratic po liti cal systems. In practice, however, elected officials have a great deal of political leeway. This fact is strikingly illustrated by the behavior of Democratic and Republican senators from the same state, who routinely pursue vastly different policies while "representing" precisely the same constituents. On a broader historical scale, political latitude is also demonstrated by consistent, marked shifts in economic priorities and perfor mance when Democrats replace Republicans, or when Republicans replace Democrats, in the White House. In these respects, among others, conventional democratic theory misses much of what is most interesting and important about the actual workings of the American po liti cal system.
My examination of the partisan politics of economic in equality, in chapter 2, reveals that Democratic and Republican presidents over the past half-century have presided over dramatically different patterns of income growth. On average, the real incomes of middle- class families have grown twice as fast under Democrats as they have under Republicans, while the real incomes of working poor families have grown six times as fast under Democrats as they have under Republicans. These substantial partisan differences persist even after allowing for differences in economic circumstances and historical trends beyond the control of individual presidents. They suggest that escalating in equality is not simply an inevitable economic trend-- and that a great deal of economic in equality in the contemporary United States is specifically attributable to the policies and priorities of Republican presidents.
Any satisfactory account of the American political economy must therefore explain how and why Republicans have had so much success in the American electoral arena despite their startling negative impact on the economic fortunes of middle- class and poor people. Thus, in chapter 3, I examine contemporary class politics and partisan change, testing the popu lar belief that the white working class has been lured into the Republican ranks by hot-button social issues such as abortion and gay marriage. Contrary to this familiar story, I find that low- income whites have actually become more Democratic in their presidential voting behavior over the past half-century, partially counterbalancing Republican gains among more affluent white voters. Moreover, low- income white voters continue to attach less weight to social issues than to economic issues--and they attach less weight to social issues than more affluent white voters do. The familiar image of a party system transformed by Republican gains among working- class cultural conservatives turns out to be largely mythical.
Then why have Republican presidential candidates fared so well over the past half- century? My analysis in chapter 4 identifies three distinct biases in politi cal accountability that explain much of their success. One is a myopic focus of voters on very recent economic perfor mance, which rewards Republicans' surprising success in concentrating income growth in election years. Another is the peculiar sensitivity of voters at all income levels to high- income growth rates, which rewards Republicans' success in generating election- year income growth among affluent families specifically. Finally, the responsiveness of voters to campaign spending rewards Republicans' consistent advantage in fundraising. Together, these biases account three times over for the Republican Party's net advantage in presidential elections in the post- war era. Voters' seemingly straightforward tendency to reward or punish the incumbent government at the polls for good or bad economic perfor mance turns out to be warped in ways that are both fascinating and politically crucial.
In chapter 5, I turn to citizens' views about equality; their attitudes toward salient economic groups such as rich people, poor people, big business, and labor unions; and their perceptions of the extent, causes, and consequences of economic in equality in contemporary America. My analysis reveals considerable concern about in equality among ordinary Americans and considerable sympathy for working- class and poor people. However, it also reveals a good deal of ignorance and misconnection between values, beliefs, and policy preferences among people who pay relatively little attention to politics and public affairs, and a good deal of politically motivated misperception among better-informed people. As a result, political elites retain considerable latitude to pursue their own policy ends.
Chapters 6, 7, and 8 provide a series of case studies of politics and policy making in issue areas with important ramifications for economic in equality. Chapter 6 focuses on the Bush tax cuts of 2001 and 2003, which dramatically reduced the federal tax burdens of wealthy Americans. I find that public opinion regarding the Bush tax cuts was remarkably shallow and confused, considering the multitrillion- dollar stakes. More than three years after the 2001 tax cut took effect, 40% of the public said they had not thought about whether they favored or opposed it, and those who did take a position did so largely on the basis of how they felt about their own tax burden. Views about the tax burden of the rich had no apparent impact on public opinion, despite the fact that most of the benefits went to the top 5% of taxpayers; egalitarian values reduced support for the tax cut, but only among strong egalitarians who were also politically well informed.
Chapter 7 focuses on the campaign to repeal the federal estate tax. As with the Bush tax cuts more generally, I find that repeal of the estate tax is remarkably popu lar among ordinary Americans, regardless of their political views and economic circumstances, and despite the fact that the vast majority of them never have been or would be subject to estate taxation. Moreover, the strange appeal of estate tax repeal long predates the efforts of conservative interest groups in the 1990s to manufacture public opposition to the estate tax. Thus, the real political mystery is not why the estate tax was phased out in 2001, but why it survived for more than 80 years--and will likely return when the phaseout expires in 2011. The simple answer is that the views of liberal elites determined to prevent repeal have been more consequential than the views of ordinary citizens.
In chapter 8, I turn from wealthy heirs to working poor people and the eroding minimum wage. Here, too, the views of ordinary citizens seem to have had very little impact on public policy. The real value of the minimum wage has declined by more than 40% since the late 1960s, despite remarkably strong and consistent public support for minimum wage increases. My analysis attributes this erosion to the declining political clout of labor unions and to shifts in partisan control of Congress and the White House. As with the estate tax, the politics of the minimum wage underscores the ability of determined elites in the American political system to postpone or prevent policy shifts. However, in this case the determined elites have not been liberal Democrats intent on taxing the bequests of millionaires, but conservative Republicans intent on protecting the free market (and low- wage employers) from the predations of people earning $5.15 per hour.
My case studies of the Bush tax cuts, estate tax repeal, and the eroding minimum wage shed light on both the political causes and the political consequences of escalating economic in equality in contemporary America. In chapter 9, I attempt to provide a more general answer to Dahl's fundamental question: Who governs? I examine broad patterns of policy making across a wide range of issues, focusing on disparities in the responsiveness of elected officials to the views of their constituents. I find that the roll call votes cast by U.S. senators are much better accounted for by their own partisanship than by the preferences of their constituents. Moreover, insofar as constituents' views do matter, political influence seems to be limited entirely to affluent and middle- class people. The opinions of millions of ordinary citizens in the bottom third of the income distribution have no discernible impact on the behavior of their elected representatives. These disparities in repre sen ta tion persist even after allowing for differences between high- and low- income citizens in turnout, political knowledge, and contact with public officials.
Writing in the 1980s, at an early stage in the most recent wave of escalating in equality, political scientists Sidney Verba and Gary Orren depicted an ongoing back- and- forth between the powerful forces of economic in equality and political equality: "political equality . . . poses a constant challenge to economic in equality as disadvantaged groups petition the state for redress. Egalitarian demands lead to equalizing legislation, such as the progressive income tax. But the continuing disparities in the economic sphere work to limit the effectiveness of such laws, as the eco nom ical ly advantaged groups unleash their greater resources in the political sphere. These groups lobby for tax loopholes, hire lawyers and accountants to maximize their benefit from tax laws, and then deduct the costs."7
In the long run of American political history, Verba and Orren's depiction seems apt. However, in the current economic and political environment it is easy to wonder whether the "constant challenge to economic in equality" posed by the ideal of political equality is really so constant or, in the end, so effective. This book provides strong evidence that economic in equality impinges powerfully on the political process, frustrating the egalitarian ideals of American democracy. The countervailing impact of egalitarian ideals in constraining disparities in the economic sphere seems considerably more tenuous.
ESCALATING ECONOMIC IN EQUALITY
Most Americans have only a vague sense of the contours of the nation's income distribution--especially for parts of the income distribution that extend beyond their personal experience. Annual tabulations published by the U.S. Census Bureau provide a useful summary of the incomes of families at different points in the distribution. For example, in 2005 (the most recent year for which such tabulations are available), the typical American family had a total pre- tax income of $56,200. More than 15 million families--one out of every five--earned less than $25,600. A similar number earned more than $103,100. Even higher in the distribution, the richest 5% of American families had incomes of more than $184,500.8
The Census Bureau provides parallel annual family income tabulations going back to 1947 for families at the 20th, 40th, 60th, 80th, and 95th percentiles of the income distribution. These tabulations constitute the longest consistent data series included in the Census Bureau's Historical Income Tables.9 Although they do not reflect the economic fortunes of very poor families at one extreme or very wealthy families at the other extreme, they do represent a broad range of economic circumstances, encompassing working poor families at the 20th percentile, middle- class families at the 40th and 60th percentiles, affluent families at the 80th percentile, and even more affluent families at the 95th percentile. Thus, they provide an invaluable record of the changing economic fortunes of American families over a period of almost six de cades.10
The distribution of income in American society has shifted markedly in that time. The broad outlines of this transformation are evident in figure 1.1, which shows how the real pre- tax incomes (in thousands of 2006 dollars) of families at various points in the income distribution have changed since 1947. It is clear from figure 1.1 that the period since World War II has seen substantial gains in real income for families throughout the income distribution, but especially for those who were already well off. The average rate of real income growth over the entire period covered by the figure increased uniformly with each step up the income distribution, from about 1.4% per year for families at the 20th percentile to 2% per year for families at the 95th percentile.
The difference between 1.4% and 2% may sound small, but it has compounded into a dramatic difference in cumulative real income growth over the past half- century: 118% for families at the 20th percentile versus 199% for families at the 95th percentile. Of course, the contrast in economic gains between poor families and rich families is much starker in absolute terms than it is in percentage terms. Mea sured in 2006 dollars, the real incomes of families at the 20th percentile increased by less than $15,000 over this period, while the real incomes of families at the 95th percentile increased by almost $130,000.
These figures convey a striking disparity in the economic fortunes of rich and poor American families over the past half- century. However, they fail to capture another important difference in the experience of families near the bottom of the income distribution and those near the top: poor families have been subject to considerably larger fluctuations in income growth rates. For example, families at the 20th percentile experienced declining real incomes in 20 of the 58 years represented in figure 1.1, including seven declines of 3% or more; by comparison, families at the 95th percentile have experienced only one decline of 3% or more in their real incomes since 1951.
Although it may not be immediately apparent in figure 1.1, the pattern of income growth in the past three de cades has differed sharply from the pattern in the first half of the post- war era. In the 1950s and 1960s families in every part of the income distribution experienced robust income growth. Since the mid- 1970s income growth has been a good deal slower and a good deal less evenly distributed. These differences are evident in figure 1.2, which compares cumulative rates of real income growth for families in various parts of the income distribution from 1947 to 1974 and from 1974 to 2005.11
From the late 1940s through the early 1970s American income growth was rapid and remarkably egalitarian, at least in percentage terms. Indeed, the real incomes of working poor families (at the 20th percentile of the income distribution) and affluent families (at the 80th percentile) both grew by the same 98% over this period. Income growth was slightly higher for middle- class families and slightly lower for families at the 95th percentile, but every income group experienced real income growth between 2.4% and 2.7% per year.
Over the past three de cades, income growth has been much slower and much less evenly distributed. Even for families near the top of the income distribution, the average rate of real income growth slowed substantially (from 2.4% per year to 1.6% per year for families at the 95th percentile). For less affluent families, real income growth slowed to a crawl. Families at the 60th percentile experienced real income growth of less than 1% per year--down from 2.7% in the earlier period. The real incomes of families at the 20th percentile grew by only 0.4% per year--down from 2.6% in the earlier period. Much of the income growth that did occur was attributable to increases in working hours, especially from the increasing participation of women in the workforce.
Even the disparities in income growth for affluent, middle- class, and poor American families charted in figures 1.1 and 1.2 understate the extent of escalating in equality over the past 30 years, since much of the real action has been concentrated at the very top of the income distribution. While the Census Bureau figures document the experience of families affluent enough to have reached the 95th percentile of the national income distribution, they shed no light on what has happened to people with much higher incomes. As it turns out, income gains among the ultra- rich have vastly outpaced those among the merely affluent.
Economists Thomas Piketty and Emmanuel Saez have used information collected by the Internal Revenue Ser vice to track the economic fortunes of people much higher up the economic ladder than the Census Bureau tabulations reach. Figure 1.3 presents their tabulations of the real incomes (in millions of 2006 dollars) of taxpayers at the 95th, 99th, 99.5th, 99.9th, and 99.99th percentiles of the income distribution since 1947.12
What is most striking in figure 1.3 is that, even at this elevated income level, income growth over the past 25 years has accelerated with every additional step up the economic ladder. For example, while the real income of taxpayers at the 99th percentile doubled between 1981 and 2005, the real income of taxpayers at the 99.9th percentile nearly tripled, and the real income of taxpayers at the 99.99th percentile--a hyper-rich stratum comprising about 13,000 taxpayers--increased fivefold. The real income cutoff for this hyper-rich stratum (not the average income but the lowest income of taxpayers in this group) was virtually constant for three de cades following the end of World War II; but around 1980 it began to escalate rapidly, from about $1.2 million to $6.2 million by 2000. Although the real incomes of people in this group declined significantly in the stock market slump of 2000-2002, by 2005 they were once again in excess of $6 million.
In 2005, the New York Times published a 20- year retrospective on the list of the 400 wealthiest Americans produced annually by Forbes magazine. The Times noted that the average net worth of these 400 economic luminaries increased more than fourfold over that period (from $600 million in 1985 to $2.81 billion in 2005) and that their combined net wealth in 2005 exceeded the gross domestic product of Canada. "The median house hold income of Americans has been stuck at around $44,000 for five years now. The poverty rate is up. Members of the Forbes 400, meanwhile, are richer than Croesus, and every hour they are getting richer."13
Another illuminating way to look at Piketty and Saez's tabulations is in terms of the shares of total income going to people in different economic strata. Figure 1.4 shows these income shares for the top 5% of taxpayers (the solid line) and the top 1% (the dotted line) over a period of almost 90 years. For the period since World War II the picture here is quite consistent with the picture presented in figures 1.1 and 1.3. The share of income going to the rich remained remarkably constant from the mid- 1940s through the 1970s and then began to escalate rapidly. For example, the top 5% of taxpayers accounted for 23.0% of total income in 1981 but 37.2% in 2005. The top 1% accounted for 10.0% of total income in 1981 but 21.8% in 2005; after declining gradually over most of the twentieth century, their share of the pie more than doubled in the course of a single generation.14
Two other features of the historical trends in income shares stand out in figure 1.4. One is that the increasing share of income going to people in the top 5% of the distribution is entirely accounted for by the increasing share going to the top 1%; the distance between the solid and dotted lines, which represents the share going to people between the 95th and 99th percentiles, remained virtually constant. As in figure 1.3, it is clear here that the really dramatic economic gains over the past 30 years have been concentrated among the extremely rich, largely bypassing even the vast majority of ordinary rich people in the top 5% of the income distribution. Indeed, economists Frank Levy and Peter Temin have used Piketty and Saez's data to show that more than four- fifths of the total increase in Americans' real pre- tax income between 1980 and 2005 went to the top 1% of taxpayers. As a front-page story in the New York Times put it, "The hyper-rich have emerged in the last three de cades as the biggest winners in a remarkable transformation of the American economy."15
Because Piketty and Saez's tabulations go back to the advent of the federal income tax system, they also provide important historical perspective on the absolute magnitude of in equality in the contemporary American income distribution. Although it is impossible to compare current levels of in equality with those prevailing in the original Gilded Age in the late nineteenth century, it is possible to compare the position of today's economic elite with their counterparts in what most economic historians consider the other notable highpoint of economic in equality in American history, the 1920s. Whether we focus on the share of income going to the top 5% of taxpayers or the share going to the even richer top 1%, figure 1.4 suggests that current levels of in-equality rival those of the Roaring Twenties, before the Great Depression wiped out much of the financial wealth of the nation's reigning upper class. By this metric, America's New Gilded Age is a retrogression of historic scope.16