Left behind in America: Who’s to blame for the wealth divide?
Take a moment and think about how you feel wealth should, ideally, be spread among the American people.
If you’re like the average respondent in a 2010 Harvard Business School/Duke University study, your response was this: The richest top 20 percent of society, as determined by net worth, should control 32 percent of the wealth. The bottom 20 percent should control about ten percent. And the rest should be spread out among the 60 percent in the middle, with higher-earners taking a slightly larger share.
It probably won’t surprise you to hear that those figures don’t match reality. But you might well be shocked by just how far off they are. In the study, Americans were asked how they thought wealth was actually distributed; they estimated that the top 20 percent controlled about 59 percent of the nation’s wealth, while the bottom controlled about three percent.
That wasn’t even close: In reality, the top 20 percent controlled about 84 percent of the wealth, while the bottom quintile controlled just 0.1 percent. The combined net worth of the bottom 40 percent, in fact, accounted for just 0.3 percent of the nation’s wealth. (See chart below, where that bottom 40 percent doesn’t even show up.)
One indicator of where you fall on the spectrum is race: White households, on average, had a median wealth of $113,149 in 2009 – 20 times the median wealth of black households ($5,677) and 18 times that of Hispanic households ($6,325). That’s the largest gap between whites and minorities since the census started tracking such data in 1984.
It’s not just wealth. In 2007, U.S. income inequality hit its highest mark since just ahead of the Great Depression in 1929. And that was before the current recession brought joblessness and financial peril to scores of Americans, most of whom are on the wrong side of the wealth divide.
According to the CIA’s World Factbook, the United States now ranks 39th in the world when it comes to income inequality. What that means is that only 38 out of 136 countries have a less equitable distribution of income than the United States; the list of countries with a more equitable income distribution includes Iran, Russia, Turkmenistan and Yemen.
The financial gap has been widening. As economist Joseph Stiglitz documented in Vanity Fair in May, the top one percent of Americans have gone from taking 12 percent of the nation’s wealth 25 years ago to taking nearly a quarter today. Over the past decade, the income of the top one percent has risen 18 percent; the income of Americans in the middle, meanwhile, has fallen.
And consider this: As of 2009, according to Politifact, the net worth of the nation’s 400 wealthiest Americans was higher than the net worth of the bottom 50 percent of the nation’s households.
“We have this growing elite that makes the economy of the United States look more like a banana republic than an economic democracy,” says Democratic Rep. Jan Schakowsky of Illinois.
There isn’t a one-sentence explanation for why America’s wealth gap is far wider than Americans say they want it to be – and why it is growing ever wider. But a good place to start is with the decisions made by elected officials in Washington, many of whom are themselves in the top one percent.
Those decisions tend to follow the desires of the affluent. In his 2008 book Unequal Democracy, Vanderbilt political scientist Larry Bartels looked at how senators responded to the preferences of their constituents. Bartels found that senators are “fairly responsive” to the preferences of those in the upper third of income distribution, less responsive to those in the middle third, and “not at all responsive to the preferences of constituents in the bottom third of the income distribution.”
In other words, the data suggested that if you’re in that bottom third in terms of income, it really doesn’t matter what you think – your senator effectively doesn’t care.
A bias toward the desires of the wealthiest Americans has resulted in policies that critics say exacerbate the wealth and income divide – among them reduced capital gains tax rates, deregulation of the financial system and a reduction of tax rates on high earners. They say many politicians largely serve the wealthy and leave those on the bottom behind, pointing out that the minimum wage is currently lower than it was 30 years ago after accounting for inflation.
The growing wealth gap is “not an accident or a force of nature, it’s clearly the result of public policy,” says Schakowsky.
The Illinois lawmaker acknowledges that her party deserves some of the blame – in 1999, for example, many Democrats voted for the repeal of the Glass-Steagall Act separating commercial and investment banks, which most economists say contributed to the 2008 economic meltdown. (Schakowsky did not vote for repeal.) But she says Republicans are largely responsible for the widening income gap, pointing to a policy-based “attack on organized labor” and other initiatives.
“I would say that much more of this has to be laid at the feet of Republicans,” she said. “Surely the way out is being blockaded by the Republicans. I don’t know that there’s any economist right now that would say it’s more important to reduce the debt and deficit then to spend and create jobs and stimulate the economy. It’s just wrong.”
Schakowsky introduced a bill earlier this year to increase marginal tax rates for those making more than $1 million to 45 percent, with the marginal rate going up to 49 percent for income over $1 billion. “We need tax fairness in this country, and the Republicans right now are on a crusade against low-income people,” she says.
Conservatives reject this formulation. Kevin A. Hassett, a senior fellow at the American Enterprise Institute, says the focus should be poverty, not inequality; he calls it “immoral” and “unethical” for Democrats to push a “spread the wealth philosophy.” Hassett points to Democratic efforts to increase the top marginal tax rate in individuals — a position some Republicans have deemed “class warfare.”
“When you put a high top rate in it will cause economic damage, and that income damage will tend to impact people on the bottom end of the income distribution because they’re the most vulnerable,” he said. In pushing for an increase in taxes on high earners, he said, Democrats are making a “calculated appeal to the median voter’s greed” – and are putting politics “ahead of social justice.”
Douglas Holtz-Eakin, the former director of the Congressional Budget Office and chief economic policy adviser to John McCain’s 2008 presidential bid, argues that globalization – not congressional policy – has been the key force in exacerbating the wealth and income gaps. When the labor force became “flat” in the 1990s, he said, the economic value of Americans near the bottom of the economic ladder decreased.
“If you bring in billions of new low-skilled laborers into the world economy, the relative value of low-skilled workers go down,” said Holtz-Eakin. “I don’t think there’s anything about a tax policy that’s going to undo that. It’s a global force.” Holtz-Eakin argues that instead of “economically damaging redistribution policies,” Congress should be focused on improving education so that low-skilled workers have financial capital.
In their 2010 book “Winner-Take-All Politics,” political scientists Jacob S. Hacker and Paul Pierson examined the structural methods through which Washington produces policy that benefits high-income Americans. The key, they found, was the organized pressure put on lawmakers – which includes lobbying, campaign contributions, ginned-up “grassroots” movements and implicit or explicit threats to support rivals.
“Congress is really often responding to organized pressure,” Pierson says. “So organization matters enormously, and that has an implication for inequality because businesses and the affluent tend to be a lot more organized than anybody else.”
Organized pressure is one reason the government is legally prohibited from bargaining with the pharmaceutical industry over drug prices despite being the largest purchaser of its products; such pressure also helps explain why the Defense Department’s budget has spiraled from $51 billion in 1963 to more than $700 billion today.
Former New York Democratic Rep. John Hall, who lost his seat in the 2010 midterm elections, said the pressure on lawmakers to court affluent interests – and craft policy that will make them happy – is intense.
“I would guess that the average member of the House spends at least 30 percent of their time doing fundraising,” said Hall. “And it starts right after the election.”
What do you think?
He says lawmakers are constantly cultivating “lobbyists or other people who have a lot of money” in order to get reelected, arguing the process “just skews the democracy from one man/one vote to one dollar/one vote.”
The situation came under some scrutiny in 2008, when lawmakers’ sanctioning of a deregulated financial system resulted in a worldwide economic breakdown and a recession that has endured to this day. Anger over that event – and the bailouts that followed – gave rise to the Tea Party movement, which ostensibly reflected voter anger at a political system corrupted by influence.
But according to Pierson, all voter anger has done is “empower people who are doing everything they can to make inequality worse.” The Republican candidates for president – most of whom claim Tea Party allegiance – are now calling for increased taxes on the poor and reduced taxes on the rich. And they want to repeal the Dodd-Frank Wall Street reform bill meant to provide some protection to consumers from the excesses of a deregulated financial industry. (It should be noted that conservatives like Hassett would argue these actions actually help the poor by reducing the tax burden on job creators and eliminating regulations that can hamper productivity.)
Mitt Romney, one of the frontrunners for the GOP nomination, unveiled a job-creation plan Tuesday that eliminates capital gains taxes on many taxpayers and opposes union interests; his chief rival, longtime Texas governor Rick Perry, touts his economic record while presiding over a state with the fourth-highest poverty rate and the highest-percentage of minimum wage jobs in the nation.
Last January, the Supreme Court eliminated restrictions on the right of corporations to spend unlimited amounts on politics, making it easier for wealthy organizations and individuals to apply pressure to lawmakers. The 2012 election cycle has seen the rise of so-called “Super PACs,” massive political action committees raising tens of millions of dollars to help candidates win elections.
Meanwhile, outside groups like Crossroads GPS serve as a conduit for anonymous donors to pour further millions into the political system each election cycle – and their influence can often decide which candidate makes it to Washington. Schakowsky says the influx of hundreds of millions of dollars into the political system explains why many Americans cast ballots for lawmakers who back policies that widen the wealth and income gap. “The electoral environment is very skewed right now to the wealthiest Americans,” she says.
Pierson argues that since it’s effectively impossible to get money out of politics, the best hope for the middle and lower classes is to organize and exert pressure that counterbalances the influence of the wealthy. Some such groups, like the AARP, already exist, and organized labor has long been a major force in politics — though the labor movement has suffered a decades-long decline in membership and influence. Asked if the wealth gap could get wide enough to spur more Americans to organize to counterbalance the influence of those at the top of the ladder, Pierson was pessimistic.
“I’d like to say yes to that,” he said, “but there’s nothing in the experience of the last couple of decades that makes me confident that when people get frustrated they’ll produce the kind of politics that are going to reverse things.”