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The Political Roots of Widening Inequality
Robert Reich
Monday, May 4, 2015
The American Prospect
Victor Juhasz
This article appears in the Spring 2015 issue of The American Prospect magazine. Subscribe here [1].
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For the past quarter-century—at least since Bob Kuttner, Paul Starr, and I
founded The American Prospect—I’ve offered in articles, books, and lectures an
explanation for why average working people in advanced nations like the United
States have failed to gain ground and are under increasing economic stress: Put
simply, globalization and technological change have made most of us less
competitive. The tasks we used to do can now be done more cheaply by lower-paid
workers abroad or by computer-driven machines.
My solution—and I’m hardly alone in suggesting this—has been an activist
government that raises taxes on the wealthy, invests the proceeds in excellent
schools and other means people need to become more productive, and
redistributes to the needy. These recommendations have been vigorously opposed
by those who believe the economy will function better for everyone if
government is smaller and if taxes and redistributions are curtailed.
While the explanation I offered a quarter-century ago for what has happened
is still relevant—indeed, it has become the standard, widely accepted
explanation—I’ve come to believe it overlooks a critically important
phenomenon: the increasing concentration of political power in a corporate and
financial elite that has been able to influence the rules by which the economy
runs. And the governmental solutions I have propounded, while I believe them
still useful, are in some ways beside the point because they take insufficient
account of the government’s more basic role in setting the rules of the
economic game.
Worse yet, the ensuing debate over the merits of the “free market” versus
an activist government has diverted attention from how the market has come to
be organized differently from the way it was a half-century ago, why its
current organization is failing to deliver the widely shared prosperity it
delivered then, and what the basic rules of the market should be. It has
allowed America to cling to the meritocratic tautology that individuals are
paid what they’re “worth” in the market, without examining the legal and
political institutions that define the market. The tautology is easily confused
for a moral claim that people deserve what they are paid. Yet this claim has
meaning only if the legal and political institutions defining the market are
morally justifiable.
Most fundamentally, the standard explanation for what has
happened ignores power.
Most fundamentally, the standard explanation for what has happened ignores
power. As such, it lures the unsuspecting into thinking nothing can or should
be done to alter what people are paid because the market has decreed it.
The standard explanation has allowed some to argue, for example, that the
median wage of the bottom 90 percent—which for the first 30 years after World
War II rose in tandem with productivity—has stagnated for the last 30 years,
even as productivity has continued to rise, because middle-income workers are
worth less than they were before new software technologies and globalization
made many of their old jobs redundant. They therefore have to settle for lower
wages and less security. If they want better jobs, they need more education and
better skills. So hath the market decreed.
Yet this market view cannot be the whole story because it fails to account
for much of what we have experienced. For one thing, it doesn’t clarify why the
transformation occurred so suddenly. The divergence between productivity gains
and the median wage began in the late 1970s and early 1980s, and then took off.
Yet globalization and technological change did not suddenly arrive at America’s
doorstep in those years. What else began happening then?
Nor can the standard explanation account for why other advanced economies
facing similar forces of globalization and technological change did not succumb
to them as readily as the United States. By 2011, the median income in Germany,
for example, was rising faster than it was in the United States, and Germany’s
richest 1 percent took home about 11 percent of total income, before taxes,
while America’s richest 1 percent took home more than 17 percent. Why have
globalization and technological change widened inequality in the United States
to a much greater degree?
Nor can the standard explanation account for why the compensation packages
of the top executives of big companies soared from an average of 20 times that
of the typical worker 40 years ago to almost 300 times. Or why the denizens of
Wall Street, who in the 1950s and 1960s earned comparatively modest sums, are
now paid tens or hundreds of millions annually. Are they really “worth” that
much more now than they were worth then?
Finally and perhaps most significantly, the market explanation cannot
account for the decline in wages of recent college graduates. If the market
explanation were accurate, college graduates would command higher wages in line
with their greater productivity. After all, a college education was supposed to
boost personal incomes and maintain American prosperity.
To be sure, young people with college degrees have continued to do better
than people without them. In 2013, Americans with four-year college degrees
earned 98 percent more per hour on average than people without a college
degree. That was a bigger advantage than the 89 percent premium that college
graduates earned relative to non-graduates five years before, and the 64
percent advantage they held in the early 1980s.
But since 2000, the real average hourly wages of young college graduates
have dropped. (See chart below.) The entry-level wages of female college
graduates have dropped by more than 8 percent, and male graduates by more than
6.5 percent. To state it another way, while a college education has become a
prerequisite for joining the middle class, it is no longer a sure means for
gaining ground once admitted to it. That’s largely because the middle class’s
share of the total economic pie continues to shrink, while the share going to
the top continues to grow.
Chart data source: Economic Policy Institute Analysis of
Current Population Survey Outgoing Rotation Group Microdata
Data are for college graduates ages 21-24 who do not have an advanced
degree and are not enrolled in further schooling. Shaded areas denote
recessions. Data for 2014 represent 12-month average from April 2013-March
2014.
A deeper understanding of what has happened to American incomes over the
last 25 years requires an examination of changes in the organization of the
market. These changes stem from a dramatic increase in the political power of
large corporations and Wall Street to change the rules of the market in ways
that have enhanced their profitability, while reducing the share of economic
gains going to the majority of Americans.
This transformation has amounted to a redistribution upward, but not as
“redistribution” is normally defined. The government did not tax the middle
class and poor and transfer a portion of their incomes to the rich. The government
undertook the upward redistribution by altering the rules of the game.
Intellectual property rights—patents, trademarks, and copyrights—have been
enlarged and extended, for example. This has created windfalls for
pharmaceuticals, high tech, biotechnology, and many entertainment companies,
which now preserve their monopolies longer than ever. It has also meant high
prices for average consumers, including the highest pharmaceutical costs of any
advanced nation.At the same time, antitrust laws have been relaxed for
corporations with significant market power. This has meant large profits for
Monsanto, which sets the prices for most of the nation’s seed corn; for a
handful of companies with significant market power over network portals and
platforms (Amazon, Facebook, and Google); for cable companies facing little or
no broadband competition (Comcast, Time Warner, AT&T, Verizon); and for the
largest Wall Street banks, among others. And as with intellectual property
rights, this market power has simultaneously raised prices and reduced services
available to average Americans. (Americans have the most expensive and slowest
broadband of any industrialized nation, for example.)
Financial laws and regulations instituted in the wake of the Great Crash of
1929 and the consequential Great Depression have been abandoned—restrictions on
interstate banking, on the intermingling of investment and commercial banking,
and on banks becoming publicly held corporations, for example—thereby allowing
the largest Wall Street banks to acquire unprecedented influence over the
economy. The growth of the financial sector, in turn, spawned junk-bond
financing, unfriendly takeovers, private equity and “activist” investing, and
the notion that corporations exist solely to maximize shareholder value.
Chart Data Source: Bureau of Economic Analysis
Bankruptcy laws have been loosened for large corporations—notably airlines
and automobile manufacturers—allowing them to abrogate labor contracts,
threaten closures unless they receive wage concessions, and leave workers and
communities stranded. Notably, bankruptcy has not been extended to homeowners
who are burdened by mortgage debt and owe more on their homes than the homes
are worth, or to graduates laden with student debt. Meanwhile, the largest
banks and auto manufacturers were bailed out in the downturn of 2008–2009. The
result has been to shift the risks of economic failure onto the backs of
average working people and taxpayers.
Contract laws have been altered to require mandatory arbitration before
private judges selected by big corporations. Securities laws have been relaxed
to allow insider trading of confidential information. CEOs have used stock
buybacks to boost share prices when they cash in their own stock options. Tax
laws have created loopholes for the partners of hedge funds and private-equity
funds, special favors for the oil and gas industry, lower marginal income-tax
rates on the highest incomes, and reduced estate taxes on great wealth.
All these instances represent distributions upward—toward big corporations
and financial firms, and their executives and shareholders—and away from
average working people.
Meanwhile, corporate executives and Wall Street managers and traders have
done everything possible to prevent the wages of most workers from rising in
tandem with productivity gains, in order that more of the gains go instead
toward corporate profits. Higher corporate profits have meant higher returns
for shareholders and, directly and indirectly, for the executives and bankers
themselves.
Workers worried about keeping their jobs have been compelled to accept this
transformation without fully understanding its political roots. For example,
some of their economic insecurity has been the direct consequence of trade
agreements that have encouraged American companies to outsource jobs abroad.
Since all nations’ markets reflect political decisions about how they are
organized, so-called “free trade” agreements entail complex negotiations about
how different market systems are to be integrated. The most important aspects
of such negotiations concern intellectual property, financial assets, and
labor. The first two of these interests have gained stronger protection in such
agreements, at the insistence of big U.S. corporations and Wall Street. The
latter—the interests of average working Americans in protecting the value of
their labor—have gained less protection, because the voices of working people
have been muted.
Rising job insecurity can also be traced to high levels of unemployment.
Here, too, government policies have played a significant role. The Great
Recession, whose proximate causes were the bursting of housing and debt bubbles
brought on by the deregulation of Wall Street, hurled millions of Americans out
of work. Then, starting in 2010, Congress opted for austerity because it was
more interested in reducing budget deficits than in stimulating the economy and
reducing unemployment. The resulting joblessness undermined the bargaining
power of average workers and translated into stagnant or declining wages.
Some insecurity has been the result of shredded safety nets and
disappearing labor protections. Public policies that emerged during the New
Deal and World War II had placed most economic risks squarely on large
corporations through strong employment contracts, along with Social Security,
workers’ compensation, 40-hour workweeks with time-and-a-half for overtime, and
employer-provided health benefits (wartime price controls encouraged such tax-free
benefits as substitutes for wage increases). But in the wake of the junk-bond
and takeover mania of the 1980s, economic risks were shifted to workers.
Corporate executives did whatever they could to reduce payrolls—outsource
abroad, install labor-replacing technologies, and utilize part-time and
contract workers. A new set of laws and regulations facilitated this
transformation.
As a result, economic insecurity became baked into
employment.
As a result, economic insecurity became baked into employment. Full-time
workers who had put in decades with a company often found themselves without a
job overnight—with no severance pay, no help finding another job, and no health
insurance. Even before the crash of 2008, the Panel Study of Income Dynamics at
the University of Michigan found that over any given two-year stretch in the
two preceding decades, about half of all families experienced some decline in
income.
Today, nearly one out of every five working Americans is in a part-time
job. Many are consultants, freelancers, and independent contractors.
Two-thirds are living paycheck to paycheck. And employment benefits have
shriveled. The portion of workers with any pension connected to their job has
fallen from just over half in 1979 to under 35 percent today. In MetLife’s 2014
survey of employees, 40 percent anticipated that their employers would reduce
benefits even further.
The prevailing insecurity is also a consequence of the demise of labor
unions. Fifty years ago, when General Motors was the largest employer in
America, the typical GM worker earned $35 an hour in today’s dollars. By 2014,
America’s largest employer was Walmart, and the typical entry-level Walmart
worker earned about $9 an hour.
This does not mean the typical GM employee a half-century ago was “worth”
four times what the typical Walmart employee in 2014 was worth. The GM worker
was not better educated or motivated than the Walmart worker. The real
difference was that GM workers a half-century ago had a strong union behind
them that summoned the collective bargaining power of all autoworkers to get a
substantial share of company revenues for its members. And because more than a
third of workers across America belonged to a labor union, the bargains those
unions struck with employers raised the wages and benefits of non-unionized
workers as well. Non-union firms knew they would be unionized if they did not
come close to matching the union contracts.
Today’s Walmart workers do not have a union to negotiate a better deal.
They are on their own. And because less than 7 percent of today’s
private-sector workers are unionized, most employers across America do not have
to match union contracts. This puts unionized firms at a competitive
disadvantage. Public policies have enabled and encouraged this fundamental
change. More states have adopted so-called “right-to-work” laws. The National
Labor Relations Board, understaffed and overburdened, has barely enforced
collective bargaining. When workers have been harassed or fired for seeking to
start a union, the board rewards them back pay—a mere slap on the wrist of
corporations that have violated the law. The result has been a race to the
bottom.
Given these changes in the organization of the market, it is not surprising
that corporate profits have increased as a portion of the total economy, while
wages have declined. (See charts above.) Those whose income derives directly or
indirectly from profits—corporate executives, Wall Street traders, and
shareholders—have done exceedingly well. Those dependent primarily on wages
have not.
Victor Juhasz
The underlying problem, then, is not that most Americans are “worth” less
in the market than they had been, or that they have been living beyond their
means. Nor is it that they lack enough education to be sufficiently productive.
The more basic problem is that the market itself has become tilted ever more in
the direction of moneyed interests that have exerted disproportionate influence
over it, while average workers have steadily lost bargaining power—both
economic and political—to receive as large a portion of the economy’s gains as
they commanded in the first three decades after World War II. As a result,
their means have not kept up with what the economy could otherwise provide
them. To attribute this to the impersonal workings of the “free market” is to
disregard the power of large corporations and the financial sector, which have
received a steadily larger share of economic gains as a result of that power.
As their gains have continued to accumulate, so has their power to accumulate
even more.
Under these circumstances, education is no panacea. Reversing the scourge
of widening inequality requires reversing the upward distributions within the
rules of the market, and giving workers the bargaining leverage they need to
get a larger share of the gains from growth. Yet neither will be possible as
long as large corporations and Wall Street have the power to prevent such a
restructuring. And as they, and the executives and managers who run them,
continue to collect the lion’s share of the income and wealth generated by the
economy, their influence over the politicians, administrators, and judges who
determine the rules of the game may be expected to grow.
The answer to this conundrum is not found in economics. It is found in
politics. The changes in the organization of the economy have been reinforcing
and cumulative: As more of the nation’s income flows to large corporations and
Wall Street and to those whose earnings and wealth derive directly from them,
the greater is their political influence over the rules of the market, which in
turn enlarges their share of total income. The more dependent politicians
become on their financial favors, the greater is the willingness of such
politicians and their appointees to reorganize the market to the benefit of
these moneyed interests. The weaker unions and other traditional sources of
countervailing power become economically, the less able they are to exert
political influence over the rules of the market, which causes the playing
field to tilt even further against average workers and the poor.
Ultimately, the trend toward widening inequality in America, as elsewhere,
can be reversed only if the vast majority, whose incomes have stagnated and
whose wealth has failed to increase, join together to demand fundamental
change. The most important political competition over the next decades will not
be between the right and left, or between Republicans and Democrats. It will be
between a majority of Americans who have been losing ground, and an economic
elite that refuses to recognize or respond to its growing distress.
Robert B. Reich, a co-founder of The American
Prospect, is a Professor of Public Policy at the Goldman School of Public
Policy at the University of California at Berkeley. His website can be found
here and his blog can be found here [3].
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[2] http://act.prospect.org/page/s/25thanniversary
[3] http://www.robertreich.blogspot.com/
[2] http://act.prospect.org/page/s/25thanniversary
[3] http://www.robertreich.blogspot.com/
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