BY ETHAN WAGNER
“We must make our choice,” warned the American jurist Louis Brandeis nearly a century ago, writing on the state of American society. “We may have democracy, or we may have wealth concentrated in the hands of a few—but we can’t have both.”[i] A few years later, as Brandeis joined the U.S. Supreme Court, the country was undergoing a major economic transition. With the passage of the federal income tax amendment, an increase in labor union membership, and the advent of the forty-hour workweek, the United States would soon leave behind the Gilded Age, an era when the titans of industry accumulated enormous wealth while the masses toiled for meager wages. In its place arrived the Great Compression, a period characterized by greater economic equality, shrinking income and wealth gaps between the rich and poor, and the rise of the American middle class. Between 1945 and 1974, incomes grew at a nearly uniform 3 percent each year for people at every level of society.[ii]
To most economists, the Great Compression was a welcome development, albeit an unsurprising one. Hewing to the ideas of Simon Kuznets—the Nobel Prize–winning economist who theorized that income inequality is low in pre-industrial economies, sharply rises during industrialization (as happened during the Gilded Age), then drops in the post-industrial age—mainstream economic thinking assumed that post-WWII America would enjoy steady growth and prosperity shared by all.
Then something happened. America’s ride down the pleasant slope of the Kuznets curve bottomed out; sometime in the mid-1970s, the Great Compression began to unravel and then reverse itself. In 2013, wealth distribution is even more unequal than during the height of the Gilded Age. Between 1979 and 2008, all income gains in the country went to the top 10 percent of earners, and more than 87 percent of those income gains went to the top 1 percent. During the same period, average income for the bottom 90 percent actually declined.[iii]
Chronicling this reversal—and what it portends for our society writ large—come two new books with somewhat differing takes on how our growing economic disparity is transforming public life. In Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, Chrystia Freeland insists that we must overcome our discomfort and squeamishness about discussions of class if we hope to address the challenges that widening income and wealth gaps pose to social cohesion. Meanwhile, Twilight of the Elites: America After Meritocracy by Christopher Hayes provides a tour of an America that has not only become less economically equal, but has also suffered an unprecedented crisis of authority. According to Hayes, who writes for the Nation and hosts his own show on MSNBC, virtually every pillar of American society—from government officials and business executives to athletes and the media—has profoundly lost the trust of the citizenry through incompetence and corruption, or both.
Freeland, a Harvard alum; managing director and editor, Consumer News, at Thomson Reuters; and former business journalist for the Financial Times, offers a solid primer on the history of income inequality and shifting levels of wealth, both in this country and around the world. She summarizes the groundbreaking work of economists like Angus Maddison, the aforementioned Kuznets, and in more recent years, Emmanuel Saez and Thomas Piketty. The data featured by Freeland supports popular conceptions of the United States—at least historically—as a land largely free of the class distinctions that divided the European social order. From the country’s founding until the Gilded Age—even through its unconscionable era of slavery—America could boast one of the most equitable income distributions among all developed countries.
Unfortunately, that is no longer the case. As economist Robert Reich has observed, by 2005 the two richest men in America together possessed greater wealth than the bottom 120 million combined.[iv] Freeland guides readers through the most likely explanations for our yawning income gap, ranging from the decline of unions to the wave of deregulation, from downward pressure on wages due to international trade and outsourcing to the advent of technologies that have increased productivity while obviating the need for human labor. Citing the works of renowned economist Joseph Stiglitz, political scientists Jacob Hacker and Paul Pierson, and journalist Timothy Noah among others, Freeland does a thorough job of summarizing the most persuasive theories, given the breadth and complexity of research on the topic and the lack of a clear explanatory consensus.
There is, however, widespread agreement on how society views the growth in inequality. Freeland cites a Duke University survey in which American respondents are shown wealth distribution spreads from two unnamed countries. In the first country, the richest 20 percent own 84 percent of all wealth; in the second, that top quintile owns just 36 percent; 92 percent of respondents say they prefer the wealth distribution of the latter. The first country is the United States; the second is Sweden. The study also asks respondents what the ideal wealth distribution should be. On average, respondents think the richest 20 percent should possess 32 percent of national wealth.[v] From 2009 to 2010, 37 percent of income in the United States went to just 15,000 Americans—or the richest .0.01 percent.[vi] This discord—between the lofty vision we have for our society and the far harsher reality—is why, Freeland writes, “it is not just the super-rich who don’t like to talk about rising income inequality. It can be an ideologically uncomfortable conversation for many of the rest of us, too. That’s because even—or perhaps particularly—in the view of its most ardent supporters, global capitalism wasn’t supposed to work quite this way.”[vii]
After a strong start, the rest of Plutocrats drifts a bit from fact toward anecdote and reads like an updated version of Richistan, Robert Frank’s pre-crisis book that gawked incredulously at how the other half-of-a-percent live. Freeland colorfully treads familiar ground, describing the tendency of the uber-wealthy to build self-contained worlds unto themselves, replete with concierge doctors, private jets, and personal chefs. Many of these denizens of Davos consider themselves of no one country but of many, or of the world. A succession of technological innovations—air travel, television, digital music, Internet communications—have enabled not only financiers and chief executive officers (CEOs), but athletes, musicians, and even tailors to vault from the ranks of the modestly well-off into the class of what bankers refer to as UHNWIs (ultra–high net worth individuals).
In contrast to Freeland’s book, Twilight of the Elites focuses less narrowly on the economic split between the rich and the rest and more on the broader disillusionment of what Hayes terms “the fail decade,” in which American society “applies the principle of accountability to the powerless and the principle of forgiveness to the powerful.”[viii] For Hayes, the key distinction is not between rich and poor but between what he terms the institutionalists, who generally think the status quo serves us well and are loathe to disrupt the existing order, and the insurrectionists, who “not only think there is something fundamentally broken about our current institutions and the social order they hold up, but [that] the only way to hold our present elites accountable is to force them to forfeit their authority.”[ix] To put the stakes of our predicament in stark relief, Hayes notes a 2010 Pew poll reflecting that our present lack of trust in institutions spans Congress, banks, corporations, media, labor unions, the Supreme Court, the United Nations (UN), and almost every other institution except the military.
Hayes is also alarmed by rising economic inequality, but he reserves his most fervent opposition for an unlikely group: those who have attained their success through merit—or as he wryly fashions it, “merit.” Of course, it’s an uphill battle to persuade American readers that focusing on merit is a cause for concern, and Hayes seems to understand this. He prefaces his broadside against “meritocracy” by conceding that society is unquestionably better off in the present day than it once was, when race, gender, ethnicity, religion, and sexual orientation disqualified many segments of society from reaching positions of power and success. The specific subjects of the author’s ire are these new, well, plutocrats who may have achieved their success through merit but have since become a self-perpetuating class unto themselves, pulling up the ladder once they’ve scaled it so that the same opportunities are no longer accessible to the rest. Ralph Waldo Emerson’s observation that “the existence of an upper class is not injurious, as long as it is dependent on merit” would find no sympathy with Hayes.[x]
After staking out such a counterintuitive position, Hayes frustratingly ends his book with that trite hallmark of respectable centrists everywhere: a rote call to put aside ideology and partisanship for the sake of society’s betterment. There are many missed opportunities when Hayes could engage more substantively with the legitimate philosophical arguments of his opponents; why, for example, is an estate tax a just method of raising revenue? But Hayes elides the rationale and assumes most readers already know and agree with him, rather than engaging with opposing views.
Often left out of discussions of income equality is a fundamental question, to which both Freeland and Hayes give somewhat hasty treatment: why does it matter? Incumbent upon those sounding the alarm on income inequality is explaining why it should concern us, especially if society is still providing for the basic needs of the poorest. Put another way: why should we concern ourselves with the height of the ceiling so long as there is an adequate floor?
After all, even Hayes concedes that our wealthiest citizens are not a landed gentry, but self-made men and women. Aside from the Walton and Mars heirs (Wal-Mart and Mars candy company, respectively), not a single person among the fifty richest Americans in 2012 inherited his or her wealth.[xi] In 1916, the wealthiest 1 percent of Americans earned only one-fifth of their income from paid work; today that figure is nearly two-thirds.[xii] “As a consequence,” observe economists Saez and Piketty, “top executives (the ‘working rich’) have replaced top capital owners (the ‘rentiers’) at the top of the income hierarchy during the twentieth century.”[xiii] Even Goldman Sachs CEO Lloyd Blankfein, villain of the Occupy Wall Street protests, was born in a housing project in East New York. Furthermore, is income inequality more deserving of our attention than poverty? Viewed alongside the rest of the world, the United States is doing quite well; to the vast majority of humanity, are our discussions of income equality little more than quibbling between the haves and the have-mores?
Succinctly expressing this view is the Chairman of Goldman Sachs Asset Management Jim O’Neill, whom Freeland quotes at length:
Globalization may widen inequality within certain national borders, but on a global basis it has been a huge force for good, narrowing inequality among people on an unprecedented scale. Tens of millions of people . . . are being taken out of poverty by the growth of their economies. While it is easy to focus on the fact that China has created so many billionaires, it should not be forgotten that in the past fifteen or so years, 300 million or more Chinese have been lifted out of poverty. . . . Rather than be worried by such developments, we should be both encouraged and hopeful. Vast swaths of mankind are having their chance to enjoy some of the fruits of wealth creation. This is the big story.[xiv]
Data from the Organisation for Economic Co-operation and Development (OECD) supports this view, with projections indicating that the world’s middle class will grow from two billion today to almost five billion by 2030.[xv] So again, why should we be concerned about the growing gap here at home, when so many around the world are emerging from poverty?
Here’s why: the gulf between the rich and the rest has widened so much that it now threatens to dissolve the already tenuous links that bind our society together. To illustrate, consider the case of John Paulson, the notorious hedge fund manager who made more than $5 billion in 2010. That works out to $159 every second or $2.4 million an hour.[xvi] That’s more than the median American worker, with an annual income of approximately $50,000[xvii] will earn over the course of an entire forty-year career. We see stirrings of upheaval in the Tea Party’s anger over bailouts, the Occupy movement’s protests against the income gap, and the emerging research on the physical and emotional toll long-term unemployment has taken on a large segment of the population. British social scientists Kate Pickett and Richard Wilkinson have documented convincingly that income inequality leads to social decay.[xviii] They provide evidence that the size of the gap between rich and poor, rather than simple poverty levels, is a far greater factor in driving drug use, violence, teenage pregnancy, and a variety of other ills that eat away at our social cohesion.
Income inequality has also contributed to the corruption of the American political system. Our political process is overwhelmingly responsive to the preferences of the affluent at the expense of the rest of the population, ineluctably undermining our democracy. Freeland and Hayes both cite Princeton political scientist Martin Gilens, who writes:
There has never been a democratic society in which citizens’ influence over government policy was unrelated to their financial resources. In this sense, the difference between democracy and plutocracy is one of degree. But by this same token, a government that is democratic in form but is in practice only responsive to its most affluent citizens is a democracy in name only.[xix]
This brings to mind Anatole France’s caustic observation that “the law, in its majestic equality, forbids the rich and the poor alike to sleep under bridges, to beg in the streets, and to steal bread.”[xx] In a 1999 speech, economist Finis Welch delivered a full-throated defense of income inequality. Welch went on to note that an unequal society only risked danger when “the low-wage citizenry views society as unfair, when it views effort as not worthwhile, when upward mobility is impossible or so unlikely that its pursuit is not worthwhile.”[xxi]
Inequality—and its close cousin, lack of economic mobility—matters because we are drifting perilously close to the society Welch described. Despite the presence of all those self-made billionaires atop the Forbes list, the data tell a different story: that the vaunted, venerable American dream is, to put it bluntly, becoming a fairy tale. A landmark study by Daniel Aaronson and Bhash Mazumder at the Federal Reserve Bank of Chicago showed that after rising for three decades after 1950, intergenerational income mobility has fallen precipitously since 1980, roughly the same time when income inequality in the county began to worsen.[xxii] Today, economic mobility is two and a half times higher in Canada and three times higher in Denmark than in the United States.[xxiii]
Many have weighed in with proposals of how to combat income inequality. But whatever the remedy, time is short before this growing wealth gap produces irreversible changes in our nation, and the economic dispossession afflicting ever-larger segments of our population metastasizes into something corrosive to our entire society. For it is not only power that corrupts. So, too, does powerlessness.
Photo source here.
Ethan Wagner is a 2013 graduate of Columbia University’s School of International and Public Affairs in New York, specializing in economic development, international media, and communications.
[i] Dilliard, Irving, ed. 1941. Mr. Justice Brandeis – Great American 1856-1941. St. Louis: The Modern View Press.
[ii] Frank, Robert H. 2011. The Darwin economy: Liberty, competition, and the common good. Princeton: Princeton University Press.
[iii] Economic Policy Institute. 2008. The state of working America: When income grows, who gains?
[iv] Freeland, Chrystia. 2012. Plutocrats: The rise of the new global super-rich and the fall of everyone else. New York: Penguin Group.
[v] Norton, Michael I., and Dan Ariely. 2011. Building a better America—One wealth quintile at a time. Perspectives on Psychological Science 6(1).
[vi] Rattner, Steven. 2012. The rich get even richer. New York Times, 25 March.
[vii] Freeland, 2012.
[viii] Hayes, Christopher. 2012. Twilight of the elites: America after meritocracy. New York: Crown Publishing.
[x] Emerson, Ralph Waldo. 1909. Aristocracy. The works of Ralph Waldo Emerson, in 12 vols. Fireside edition. Boston and New York.
[xi] The Forbes 400. 2012. Forbes.
[xii] Freeland, 2012.
[xv] Pezzini, Mario. 2012. An emerging middle class. OECD Observer. Organisation for Economic Co-operation and Development.
[xvi] Muir, David. 2010. Hedge fund manager John Paulson takes home record $5 billion in 2010. ABC News, 28 January.
[xvii] Tavernise, Sabrina. 2012. U.S. income gap rose, sign of uneven recovery. New York Times, 12 September.
[xviii] Pickett, Kate, and Richard Wilkinson. 2012. Sorry Nick Clegg—social mobility and austerity just don’t mix. Guardian, 15 May.
[xix] Gilens, Martin. 2005. Inequality and democratic responsiveness. Public Opinion Quarterly 69(5): 778-796.
[xx] France, Anatole. The red lily. 2007. Dodo Press.
[xxi] Noah, Timothy. 2010. The United States of inequality, entry 10: Why we can’t ignore growing income inequality. Slate, 16 September.
[xxii] Aaronson, Daniel, and Bhash Mazumder. 2007. Intergenerational economic mobility in the U.S., 1940 to 2000. Federal Reserve Bank of Chicago working paper.
[xxiii] Stephen, Andrew. 2007. Born equal? New Statesman, 9 August.