Thursday, October 6, 2011

A Very Smart Look at Income Inequality: The Claremont Institute Book Review of "Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned its Back on the Middle Class"

Not the book so much but the review.
The reviewer is R. Shep Melnick, the Thomas P. O'Neill, Jr., Professor of American Politics at Boston College.

He appears to have a deeper and more insightful understanding of the subject than the authors themselves and displays that mastery without polemics or the political vitriol that the topic seems to generate.

Although Claremont itself leans right, this is about as even-handed a look at a very divisive problem as you are likely to find. Melnick seems to have parked his Democrat politics (former treasurer of the New Hampshire Democratic State Committe) at the door.
The intellectual honest and academic rigor come through in every paragraph.

Plus, I get a kick out of a guy named Melnick having the Tip O'Neill endowed chair at BC.

From the Claremont Institute for the Study of Statesmanship and Political Philosophy:
Winner-Take-All Politics is destined to become an influential book. In his New York Times column Frank Rich lauded it as a "devastating indictment of both parties." The glowing blurbs on the book's back cover come from a who's who of liberal pundits: James Fallows, E.J. Dionne, Robert Kuttner, Thomas Edsall. Winner-Take-All Politics is a well-written and engaging polemic designed to get the juices flowing on the Left. But unlike most such books, it makes a serious effort to rise above invective and to inject evidence into contemporary political debates. Jacob Hacker and Paul Pierson are exceptional political scientists—at Yale and Berkeley, respectively—as well as partisan Democrats. CRB readers inclined to dismiss their arguments out of hand should take a closer look. Although the book has flaws, careful examination of its claims can illuminate the excesses and blind spots of both the Left and the Right.

Hacker and Pierson make three arguments. First, they maintain that economic inequality in the U.S. has increased dramatically in recent decades. On this there can be little disagreement. They show that since 1979 only those at the top have seen their income rise significantly: since 1979, 36% of all after-tax gains went to the most affluent 1% of the population; over 20% of those gains went to the top thousandth (0.1%) of the income distribution. Economic inequality in the U.S. is now greater than at any time since the beginning of the Great Depression.

Second, they argue that this trend was not the result of changes in the world economy, as the conventional wisdom holds, but rather the product of public policy. The book's central theme is, "American politics did it." Don't blame globalization or America's failing schools for the decline of the middle class—blame Republican policies coming out of Washington.

Third, these inequality-producing policies were themselves the result of a fundamental change in American politics that began in the late 1970s. During the Carter Administration an "organizational revolution" took place "that would transform the rules of Washington seemingly overnight." As a result, "American politics came to slam closed the long era of shared prosperity and usher in the winner-take-all economy." So profound was this transformation that it put "in jeopardy" our "fundamental principles of free government." The United States is on the verge of becoming an oligarchy—a fate Hacker and Pierson are determined to prevent.

The authors have not produced a 300-page attack on the Republican Party. They also scorn those triangulating Democrats who were drawn into this corrupt, pro-business vortex. Lured by hedge-fund campaign contributions and forced to woo centrists in order to collect 60 votes in the Senate, their party morphed into "Mark Hanna Democrats." Reviving American democracy therefore requires reforming the Democratic Party, which means moving it to the left. Their target is as much the Democratic Leadership Council as the GOP.
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By far the most convincing and disturbing chapters of Winner-Take-All Politics are those that describe the stagnation of middle-class income and the phenomenal increase in the wealth of those at the very top. Since there are many ways to measure inequality, it is easy to quibble with some parts of their analysis. For example, they ignore immigration. The period in which inequality fell substantially—1929 through the early 1970s—was also one of low immigration. In 1970 less than 5% of those living in the U.S were born abroad. Today that figure is over 11%. These new immigrants tend to be relatively unskilled, not just in comparison with native-born Americans, but also in comparison with pre-1970 immigrants. Their presence not only adds a large number of low-pay workers to the economy, but depresses wages for native-born Americans with few skills. Yet these immigrants come to America because they can earn far more here than in their country of origin. As Gary Burtless and Ron Haskins of the Brookings Institution have noted, "America's current immigration policy probably reduces global inequality at the same time it increases inequality within the United States."

At the other end of the spectrum, allegedly egalitarian countries such as Sweden make their income distribution figures look better by encouraging their wealthiest families to escape to tax havens, a move that is much more difficult for American billionaires. In his fascinating recent book The Narcissism of Minor Differences (2009, reviewed in the Spring 2010 CRB), UCLA's Peter Baldwin has estimated that if we take into account the wealth of such tax exiles, "the overall share of wealth held by those in the top Swedish percentile" would be "twice as intense a concentration of wealth as is found in America." This method of "reducing" inequality hardly seems worthy of emulation.

Nonetheless, the problem of growing inequality is undeniable and alarming. Tocqueville noted that Americans profess a "profound scorn for the theory of permanent equality of goods," but that "fortunes turn there with incredible rapidity and experience teaches that it is rare to see two generations collect its favors." Polling data shows that Americans accept substantial inequality because they believe their children can strike it rich. But as Hacker and Pierson show, intergenerational mobility has declined in the U.S. over the past several decades, and is now lower for native-born Americans than for citizens of many other advanced industrial democracies. Burtless and Haskins conclude that those born in the U.S. no longer "enjoy exceptional opportunities for upward mobility.... Particularly at the bottom end of the income distribution, American institutions are less successful than those in other rich countries in equalizing the opportunities available to children." For a nation that has always prided itself on being a land of opportunity, this development is profoundly disturbing.

What happened? The conventional argument focuses on the shift to a global, skill-based economy. Our troubled educational system has not provided our children with the advanced skills they need to compete in this new economic world. Just as importantly, increased competition and declining transaction costs have multiplied the rewards that flow to the most talented competitors, whether they are baseball pitchers, singers, novelists, tort lawyers, software engineers, or hedge fund managers. The title of Hacker and Pierson's book alludes to Robert Frank and Phillip Cook's The Winner-Take-All Society (1996), which develops at length this explanation for changes at the top of the income distribution. Hacker and Pierson never really refute such arguments, but nonetheless claim they are wrong. It wasn't the economy, stupid; it was politics. Their central claim is that good policies could have counteracted these troubling economic trends, but the federal government refused to enact them.

* * *

Unlike most writers who promote policies to counteract growing inequality, Hacker and Pierson have nothing to say about the troubled state of American public education or about changes in family structure. They focus almost exclusively on taxation, financial regulation, and labor relations at the national level. Their bête noire is the tax-cutting policy of the Reagan and George W. Bush administrations. While recognizing that the extent to which the U.S. could have increased the progressivity of the tax code and tax revenues without dampening economic growth is a complex and controversial topic, I am inclined to agree with them that the Bush cuts went far beyond what was necessary to promote economic growth...MUCH MORE