*Winner-Take-All Politics*, the new book by Jacob Hacker and Paul Pierson

by on September 23, 2010 at 6:26 am in Books, Data Source, Economics, Political Science | Permalink

That's the new book by Jacob Hacker and Paul Pierson.  I have a different take on the main argument, but this is an important book for raising some of the key questions of our time.  I would recommend that people read it and give it serious thought.  The writing style is also clear and accessible.  Two of the key arguments are:

1. Skill-based technological change is overrated as a cause of growing income inequality among the top earners.

2. "The guilty party is American politics."

You'll find an article-length version of some of the Hacker-Pierson argument here, although the book covers much more.

I agree with #1, so let me explain why my take on #2 differs:

1. Median income starts stagnating in 1973 and income inequality starts exploding in 1984, according to the authors.  However, I consider this a "long" time gap for the question under consideration, namely whether there is a direct causal relation and whether people at the top are using politics to skim from people further below in the income distribution.  Furthermore income growth stagnates around 1973 for many countries, not just the United States, and most of those countries never experienced the subsequent "inequality boom" of the Anglosphere.  If they avoided the later inequality, why didn't they also avoid the stagnation?  The discussion of the causal issues here isn't convincing and the authors' hypothesis is not compared to alternatives or tested against possible disconfirming evidence.  

2. There is a lot of talk of unions, but I could concede various points and that's still just a ten to fifteen percent one-time wage premium, when workers are unionized.  It won't much explain persistent changes in growth rates over time, whether for the top one percent or the slow income growth at the median.  Furthermore the main U.S. sectors are harder to usefully unionize than, say, Canada's mineral and resource wealth or Europe's manufacturing.

3. The authors underestimate the role of finance in driving the growth in income inequality.  Their p.46 shows a graph suggesting that non-financial professionals are 40.8% of the top 0.1 percent.  Maybe so, but the key question is what percentage of income those professionals account for.  The Kaplan and Rauh paper, not cited in this book, suggests a central role for finance.  In 2007 the top 5 hedge fund earners pulled in more income than all the CEOs of the S&P 500 put together.  On top of that, some "non-financial" incomes are driven by financial market trading, such as in energy or commodity companies.  And a lot of top-earning lawyers are doing financial deals, etc.

Turn to Table 7 of the paper cited by the authors, p.56 here.  The "non-financial" category still looks bigger but it's incomes in the finance category which grow most rapidly and Bakija and Heim suggest that stock options and asset price movements account for a big share of the growth in "non-financial" incomes.  My view is that the increasing liquidity of financial markets drove much of the trend, which was distributed across both the "non-financial" and the "financial" sector.  If liquid financial markets allow a privately-owned warehouse company to buy a trucking company on the cheap, and profit greatly (plus the managers pull in a lot), I am calling that a financial markets development, even though it's in the "non-financial" sector.

4. Let's say the story at the top is mostly one of finance.  You could describe that as: "some change in financial markets led to rapid income growth for the top earners and politics did nothing about that."  Fair enough.  But it's still a big leap from that claim to portraying politics as the active force behind the change.  Politics was only the allowing force and I don't think there was much of a conspiracy, even if various wealthy figures did push for deregulation or more importantly an absence of new regulation.  I also don't think anybody was expecting incomes at the top to rise at the rates they did; it was a kind of pleasant surprise for the top earners to be so lucratively rewarded.  So the major change is left unexplained, for the most part, and the whole story is then shifted onto the passive actor, namely the public sector, which is elevated to a major causal role which it does not deserve.

5. pp.47-51 the authors talk about tax rates.  If we had kept earlier high marginal rates, the top earners would not have received nearly so much and also they would not have worked so hard.  Maybe so, yet this won't much explain the stagnating pre-tax incomes at the median and it doesn't fit very well into the overall story, unless you wish to make a complicated "lower tax revenue, lower quality public services, MP of the median earner goes down" sort of story. 

6. If the top earners are screwing over their wage earners in the big companies, by pulling in excess wages, options, and perks, we should observe non-stagnant median pay for people who avoid working in firms with fat cat CEOs.  Or we should observe talented lower-tier workers fleeing the big corporations, to keep their wages up.  Yet no evidence for these predictions is given, nor are the predictions considered.  It is likely that the predictions are false.

7. To the extent the high incomes at the top come through capital markets, it is either value created or a transfer/redistribution.  You can argue over the percentages, but to the extent it is the former it is not at the expense of the median.  To the extent it is the latter, the losers will be other investors, not the median earner or household, who does not hold much in the way of stock (lower pension fund returns don't count in the measure of median stagnation).

8. What follows p.72 is an engaging, readable progressive history of recent American politics, but the economic foundations of the underlying story have not been pinned down.

9. In my view, most likely we have two largely separate phenomena: a) median wage growth slows in 1973 because technology stagnates in some regards, and b) liquid financial markets, in various detailed ways, allow people with resources to earn a lot more than before.  Politics may well play a role in each development, but with respect to b) its role has been largely passively, rather than architectural and driving.

Anyway, I found it a very useful book for organizing my thoughts on these topics.

Addendum: Matt Yglesias comments.

BenK September 23, 2010 at 7:31 am

Unions probably encourage growing inequality because they do next to nothing for the workforce itself; and transfer large sums to a few national bosses, lawyers, and on occaision, organized crime.

dearieme September 23, 2010 at 8:44 am

“If the top earners are screwing over their wage earners in the big companies”: eh? Surely it’s the shareholders that the CEOs are pillaging?

As for attempts to cast unions in a good light – laughable. Their job is to get a privileged wage for their members at the expense of their non-members: if economic stats are gathered over the sum of members and non-members, all that’ll show up is the success of the unions’ CEOs at pillaging.

Rich Berger September 23, 2010 at 8:53 am

This sounds like the kind of book that will not become a classic, sort of like Lester Thurow’s “Zero Sum Society”. It will, however, be enjoyed by those who pine for the good old days of a 91%, or 70% top marginal rate. Boy they really knew how to run a punitive, er progressive tax system during the Eisenhower administration.

I predict that mulp will buy a copy. If he doesn’t already have one.

a big jerk September 23, 2010 at 9:45 am

Is there more to it than some people are allowed to create money out of thin air and sell it at a discount, while the culture of the working class has been destroyed. Along with the arrival of millions of third-world peasants, this question seems easy.

Jonah Thomas September 23, 2010 at 9:59 am

1. Skill-based technological change is overrated as a cause of growing income inequality among the top earners.

There’s nothing controversial about this, is there?

2. “The guilty party is American politics.”

Did politics keep skill-based technology from increasing income inequality? Some. Politics led to increasing the number of skilled foreigners coming in, taking skilled jobs from Americans at lower pay. Politics gave us a business climate where it was obviously better to outsource skilled work to foreign nations.

If you do work that a smart third-world citizen can learn to do, why should you earn more than third-world wages? And if Barbados pegs their money to the dollar so their people will have plenty of work (but not high pay), if they subsidise US companies to use their labor, that’s a political choice on their part. The USA makes the political choice not to do that. When foreign countries pay extra so they can export to us cheap, US consumers get the benefits. Why would we care about US employment over US consumption?

But if you have a US job where you can sabotage your company, then it makes sense to pay you enough money to persuade you not to.

It looks like political choices to me.

Andrew edwards September 23, 2010 at 11:23 am

On point #6, I think there is quite a lot of lower-level talent fleeing big corporations to keep income high. We call it “consulting” or “law school” or “investment banking” and those industries attract an overwhelming share of our elite undergrads. It is possible that the “six figure salaries” many people get upset about going to 20-somethings is just what a normal GE starting salary would be if the median had not stagnated.

I don’t know a top undergrad who aspires to work for a fortune 500 company (except maybe Google). It is my understanding that this was not the case 50 years ago.

J September 23, 2010 at 11:53 am

“A groundbreaking work that identifies the real culprit behind one of the great economic crimes of our time— the growing inequality of incomes between the vast majority of Americans and the richest of the rich”

The book assumes income inequality is a bad thing. Is it? If so, does correcting it do more or less damage than leaving it as-is? It would be great if I could be as rich as a hedge fund manager, but if your solution is just to make the hedge fund mananger as poor as I am, I’ll pass.

Zephyrus September 23, 2010 at 1:28 pm

If we leave out our modern Gosplan class, has inequality actually increased over the past few decades?

Troy Camplin September 23, 2010 at 2:06 pm

Why is it, when people talk about the top income earners, that noone ever talks about Coase’s discovery that in every country on earth, no matter what the economic system, the top 20% of the population have ~80% of the wealth? There is a power law distribution of income, no matter what the economic system. This means that if you want a system where the poorest are very well-off, you have to live with the presence of a large gap between the poor and the wealthy. If you want to narrow the gap, you have to impoverish everyone. The only explanation needed is that this is a feature of all aristocratic networks — and an economy is necessarily one of these kinds of networks.

Tony September 23, 2010 at 3:23 pm

My concern on inequality isn’t the mere fact that some people have more money. My concern is more with opportunity.

If the middle class collapses to the point where most people can’t get good schooling, then they can’t move up. American society becomes an aristocracy, people become disengaged from democracy, and we lose our vitality. It’s not that the rich need to be “punished” or something, we just need to make sure that talented people from the other 98 percent have a shot.

Tony September 23, 2010 at 3:27 pm

Additionally: I think technology is the wrong story for the explosion in financial sector compensation. I think Wall Street just figured out how to make money by moving money in a circle, rather than by investing in real businesses.

I mean, the founding myth of finance is that they divert money from savers to productive businesses. Nowadays, financiers sell off companies in pieces, and small businesses get startup capital from the US Small Business Administration.

So no wonder none of that income went to the middle class or working class. Modern financial transactions don’t involve us in the slightest.

Basiliscus September 23, 2010 at 3:59 pm

Technology didn’t stagnate in 1973 and after, that’s about when the personal computer was invented and technology took off. I believe the human-added component in the corporate bureaucracy was commoditized by the computer.

John Henry’s prodigious strength was of great value before the advent of steam, but a wimp with a steam drill could do the same thing – and get paid according to the availability of wimps vs Henrys.

Tim H September 23, 2010 at 4:09 pm

Does the explosion of 401ks and money from overseas (Japan for example) in the 80′s explain the increase in wages at the top. You have wall street making a ton from the flood of investors that did not exist earlier. CEOs of blue chip companies were also awash in investment money. 401k’s contribute to your overall wealth–but not to your income.

Delirious September 23, 2010 at 8:57 pm

“median wage growth slows in 1973 because technology stagnates in some regards”

which regards?

Rich Berger September 24, 2010 at 8:53 am

“But there’s no good reason to allow someone to have, say, 1000 times as much income as the poorest person.”

Assuming that you really meant the average person rather the poorest person, who probably has an income of zero or close to it, I can think of at least one good reason – if a person has produced a product or service that people will voluntarily purchse, such that he or she earns that 1,000x, good for him. The money was earned by voluntary exchange with consenting adults.

At base, I think the punitive tax system is based mostly on envy, because most proponents seem less interested in the most efficient raising of revenue, and more on punishing success.

anon September 24, 2010 at 11:56 am

@Rich Berger:

The punitive tax system is based on a desire to prevent too frequent rebellions where the poor masses put the super-rich few on the guillotine. Voluntary exchange can only exist when a social contract exists to respect property rights. It is hard to convince a starving man that it is morally wrong to raid his rich neighbor’s pantry full of food.

anon September 24, 2010 at 2:42 pm

Rich-

Well, don’t take it too literally. But the link between extreme income inequality and social unrest seems pretty well documented. Do you disagree?

anon September 24, 2010 at 4:55 pm
Supra TK Society December 17, 2010 at 7:47 am

Is it any wonder that a lot of people

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