More on Inequality and Political Power

April 14th, 2012 at 3:52 pm

I ended this post from yesterday worried that the “what-me-worry” crowd re the impact of inequality on opportunity and political power are wearing dangerous blinders.  Today I stumble on this little transcript from Daron Acemoglu tersely amplifying these concerns (from the Center on American Progress series on these issues).

Acemoglu is the co-author of “Why Nations Fail,” which fully develops these ideas.  It’s on my nightstand, up next after Ed Luce’s “Time To Start Thinking,” an excellent and cautionary read re US political economics (I plan to post a review when I’m done; it actually partners well with Acemoglu et al, I think).

Daron Acemoglu on How Inequality Weakens Nations

Q: Why do nations fail?

A: Nations prosper when they have economic institutions that create incentives for investment and innovation, and that create a level playing field so that the talents of its population can be broadly deployed. But these sorts of institutions, which we call “inclusive” institutions, are the exception throughout history. Instead, most societies are under “extractive” economic institutions where they have been designed by a small group, the “elite,” to extract resources from the rest of society. Those extractive institutions suck the energy out of the system. They don’t create incentives. They don’t create a level playing field. And they don’t generally lead to sustained economic growth.

Q: What makes you concerned about the future of the United States?

A: The United States, to be sure, is still an inclusive society. Not only do we have institutions that are generally open. But also those institutions have created great innovation over the last century, particularly the last few decades.

But there are worrying signs about the United States. They start with the economic picture. If you look at U.S. wages, they have been largely stagnant. The medium income doesn’t earn much more than it did 40 years ago. And at the same time, the top 1 percent has become very rich. For example, they take home almost a quarter of the entire national income of the United States.

But more worrying than the economic inequality is the implications of the economic inequality for political inequality. Because when economic inequality leads to political inequality, then the economic institutions start sliding even worse. The people who monopolize political power will start to change the rules in their favor and at the expense of the society at large.

Q: What makes you optimistic about the future of the United States?

A: This is not the first time where economic inequality has shot up and where economic inequality has been associated with incipient political inequality. We had exactly the same picture during the gilded age and its aftermath. If anything, the robber barons of that day were more unscrupulous and more ruthless than our political elites and the very wealthy today. But despite that, the United States managed to withstand that challenge, and it did so on the strength of its institutions by mobilizing the average American, first during the populist movement, then during the progressive movement. And then, presidents such as Teddy Roosevelt, Taft, and Woodrow Wilson, who subscribed to the views of the progressive movement, started passing legislation and changes in institutions that strengthened the inclusivity of the United States and stopped the tide of inequality.

Acemoglu shares my concerns about economic inequality leading to political inequality (and his “inclusive” vs “extractive” is a cousin of YOYOs and WITTs).  Recall that the folks I was debating on this point argued that it’s really rather benign—there’s no evidence that heightened income concentration is distorting the political process.

So who’s right?  (As cited yesterday, I found Hacker/Pierson’s Winner Take All Politics to be pretty dispositive on this point.)

One way I’ve convinced myself that the “benigners” are wrong is to ask what types of policy ideas would surface under a model where political inequality was pumped up by economic inequality—and see if such ideas are being introduced if not legislated.  Here’s a list of what I came up with:

  • Regressive tax changes, trickle down, favor capital incomes over labor earnings
  • Deregulate financial markets
  • Privatize social insurance
  • Eroding labor standards (minimum wage, labor protections)
  • Diminished unionization; opposition to collective bargaining
  • Pro outsourcing
  • Monetary policy favoring low inflation over full employment
  • Diminished gov’t commitment to education
  • Eroding safety net
  • Anti-Keynesianism; pro austerity
  • Let-it-rip campaign finance
  • Smaller gov’t outlays as share of GDP

Virtually every one of these ideas is in play either in the national or state-level debate or as part of law.   The House budget authored by Rep Paul Ryan alone checks many of the boxes above, including austerity, trickle down tax cuts, much less gov’t, eroding safety net (Medicaid, food stamps), severely constraining Medicare’s growth, less commitment to education (cuts Pell grants, Head Start, job training, grants to states).  Wisconsin and other states are whacking away at unions.  The Supreme Court is in the mix with its Citizens United decision allowing money to play an even larger role in our politics, and we’ll see where they land on health care.

That said, Daron ends on an uplifting note which resonated with me.  Political mobilization in favor of politicians willing to rebuild inclusive institutions?…sign me up!

 

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12 comments in reply to "More on Inequality and Political Power"

  1. Peter Morgan says:

    How does the comparison with the gilded age stand up if we take into account the differences in the role of government in the two periods? Does the difference in the complexity of tax and financial legislation in the two periods make it impossible for a modern government to tackle wealth with comparable nimbleness? What of the comparative sizes of the manufacturing, military, agricultural, and other sectors of the economy? What other disanalogies are significant?


    • perplexed says:

      Probably the biggest difference between the two gilded ages is the degree of well organized government capture that exists today. Think about how likely it is that someone with the views of Teddy Roosevelt, Taft, or Wilson could even be elected today, let alone be able to actually implement reforms. They never had to face the extremely well funded organizations that exist today with the sole purpose of increasing government provided benefits that accrue to wealthy. The Hacker/Pierson book does an amazing job of shining a spotlight on these differences in government capture by well-funded, well-organized oligarchs and their minions. It should be at the very top of the reading lists of the 95%. The top 5% already know what’s in it and would prefer the 95% didn’t. I was hoping Acemoglu’s list of reasons to be optimistic would be longer. I haven’t read his book yet, but his prediction that “The people who monopolize political power will start to change the rules in their favor and at the expense of the society at large” seems to ignore the fact that this “prediction” had already come true prior to his book being published and is now part of our history. The question now is: how much damage has to accrue before we do something about it?


  2. pjr says:

    I am not sure how to measure it, but privatizing government jobs ought to be on this list. Usually this results in lower pay to workers at the bottom, more pay to executives above them, and more profits to business owners.


  3. davesnyd says:

    Not to deny that economic inequality is a concern, but isn’t it a symptom and not a cause?

    Few years back, I read that some inordinately large “fraction of GDP” is attributed to the US financial sector. Can’t find that but do see a reference here: http://thinkprogress.org/economy/2011/12/14/389487/financial-sector-gdp-recession/?mobile=nc that claims 8.4%. Even that seems large; what actually is “produced” by the financial sector?

    (Insert Econ 101 definition of production of goods and services as value produced by people employed in the industry here)

    Sure, but, really, what’s produced? You discussed manufacturing sector a couple days ago. We all grok what they produce– widgets and stuff coming off of assembly line.

    “Services” is a little harder to understand but same general idea: somebody pays someone to do something (fix a computer, design a business process, cut hair).

    I guess bankers are “producing” IPOs? But– where’s the value add?

    This is a long way to say: the economic inequality isn’t the problem; it’s a sign of a deeper problem that makes sense in terms of “extractive” institutions.

    The financial industry, not the government, is the extractive institution.


  4. Th says:

    “That said, Daron ends on an uplifting note which resonated with me. Political mobilization in favor of politicians willing to rebuild inclusive institutions?…sign me up!”

    This is where the current crop of economic overlords has learned their lessons from past attempts to solidify their political power. The “war on voting” is an attempt to keep their gains from being overturned at the ballot box by making sure this “political mobilization” can not occur.


    • WurfWhile says:

      Sorry, started my comment before yours, went to do a couple things, then finished before noticing what you wrote – but we’re both thinking similarly voting-wise.


  5. MarvyT says:

    This is a great post. I’d just add that our “leaders” tend to forget that a strong vibrant middle class provides the real customers that drive economic growth. One company’s employee is another’s customer. No corporation exists in a vacuum.


  6. WurfWhile says:

    Some policy ideas surfacing under the model are not on the surface economic – but have major economic impact. What do I have in mind?

    - Attacks on the voting franchise restricting those with the least financial resources such as “minorities, poor and young voters” – e.g. state-level legislation introduced in 2011 on photo ID (34 states), making voter registration harder (13 states), proof of citizenship (12 states), & reducing early & absentee voting (9 states) – see Brennan Ctr http://bit.ly/wkb4ao

    - Limitations on 1st Amendment expressions of free speech, assembly, the press and petitioning government impacting those with least access. These (I believe) are largely administrative rules, for example state- and community-level efforts to require a permit & payment for gatherings of 4 or more people in Wisconsin’s Capitol (http://n.pr/HHRLl6), related proposed limits in Indiana (http://bit.ly/wBC1LS), and protest restrictions at public schools like community colleges (http://bit.ly/HFjTUJ). A related area includes government sanctioned force against peaceful protest, such as in the last 9 months, resulting in arrests, suppression of the press and protest restrictions on public property.

    In both areas (Voting and 1st Amendment) economic inequality reinforces itself through expanding political inequalities. Another area in this vein to consider is court access (class action restrictions, mandatory arbitration, mandatory sentences, the more overtly financial penalty caps, etc).


  7. Michael says:

    As usual, you’re describing something which is bad to liberals and good to conservatives.


  8. Phillip Wynn says:

    Just to be intellectually honest with a simpatico, doesn’t JB present his list of things expected to appear in an era where economic pushes political inequality in such a way as to disguise its circularity? Surely he can’t be expected to come up with such a list in isolation from present reality, and thus shouldn’t be surprised that it matches so well that same reality. Or am I missing something?


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