Taking Stock Winner-take-all-economics

It’s a diabolical lie that education betters the middle class: the naked figures say otherwise.

Widening social gaps, growth that focuses on the rich, politicians dancing to the tycoons’ tune, democracy morphing into plutocracy or oligarchy, government by the rich, a few families in control. Sound familiar?

The elephant in the room.Photos by Getty Images and David Bachar

I don’t mean Israel this time. I mean the country branded as the freest in the world, which turned capitalism into a symbol of success, where any dream can come true. But if you still think the United States emblemizes the success of the “free” market, you should buy the book “Winner-Take-All-Politics.” It has garnered excellent reviews, including from some unexpected directions. Paul Pierson and Jacob Hacker, professors of political science, studied a marked trend in the U.S. economy in recent years: the rapid increase in inequality of income distribution. Their figures are frightening, but more important, they offer startling new explanations for the phenomenon.

Here are a few statistics regarding the U.S., to whet your appetite for more.

• From 1979 to 2009, 36% of the increase in income went to the uppermost 1% of the population. Much of that was from 2001 to 2006, when 53% of the increase in income went to that same 1%.

• From 1979 to 2006, real wages ‏(adjusted for inflation‏) increased by 50%, or 1.5% a year. But the wages of the bottom 20% barely moved in that time, while the wages of the middle class increased by 0.7% a year. Most of the increase was in the uppermost percentiles.

So far the figures are impressive, annoying but not surprising, if you’ve been observing American society.
The reasons why are well known: the technological revolution and globalization gave a tremendous advantage to members of the “knowledge economy,” people with education, mainly higher education. The ability to move commodities, people and capital around the globe at the click of a mouse utterly changed economics. The result was a world where the educated get a growing piece of the pie.

The accepted solution on both the left and right sides of the U.S. political map is to invest in education.

But Hacker and Pierson, together with French economists Thomas Piketty and Emmanuel Saez, whose paper “Income Inequality in the United States, 1913-1998,” was submitted to the National Bureau of Economic Research, suggest that the picture is far more complex.

The elephant in the room

Piketty and Saez felt that the income inequality data in the U.S., which relied on censuses, was missing the bigger picture. Most of the population doesn’t get surveyed, after all, and it was possible that that unsurveyed segment was the most important of all.

Instead, they took American income tax data starting from the 1930s, and analyzed the state of inequality.

It turns out that the only place excluded from the surveys and analyses to date is the very place where most of the action is. That is, of course, the substrata of the super-rich, the mega-millionaires. Not the ones who simply have, but the ones who have it all, and then some.

Here are some of their figures: Between 1979 and 2005, the richest 0.1% fractile of Americans received up to 20% of the entire increase in net income in the U.S. The lowest 60% received 13.5% of the increase during that time.

Find the fractiles and percentages confusing? Let’s just say that the 300,000 richest people in America received 50% more income than the 180,000,000 people at the bottom.

Do these numbers tell the whole story? No. They don’t tell the story of vanishing job security, eroding health care, spiking home foreclosures, personal bankruptcies, and the collapse of home value in the last two years.

The biggest story of inequality isn’t the widening gap between rich and poor, or poor and the middle class. It turns out that the widest gaps are between the wealthy and the ultra-wealthy.

From 1974 to 2007, the richest 1% increased its share of the economic pie from 9% to 23.5%.
But note what the French economists found for the richest 0.1%. Here is the elephant in the room. In 2009, the income of the richest 0.1% totaled a trillion dollars − yes, a thousand billion dollars.

That averages $7.1 million a year for the richest 0.1%. Now, in 1974, the average income of that 0.1% was a million dollars a year. In other words, the income of the mega-rich grew sevenfold, and their share of the American economic pie grew from 2.7% to 12.3%, more than fourfold.

Yacht ho! Diabolical trickle-up economics

Let’s slice even thinner and look at the richest 0.01% of the population. The figures are even starker. Income grew almost tenfold, from $4 million a year in 1974 to $35 million in 2009.

Globalization, education, globalization, education − those are the usual scapegoats on which widening social gaps are blamed. But it ain’t exactly so, say the researchers.

The widest gaps didn’t open between people with higher education and high-school drop-outs. The widest gaps are within the group of people with higher education. In other words, the story that social gaps will disappear with education and tools to cope with the knowledge economy is balderdash. The educated middle class is going nowhere, or painfully inching ahead, while the super-rich are whizzing past at warp speed.

It turns out, say Pierson and Hacker, that the economic boom didn’t lift all boats, but mainly the yachts. The fishing trawlers stayed mired in the shallows.

But that’s just the start of the story. The surprising part is their political explanation.

Pierson and Hacker claim something diabolical was going on: to enjoy the boom more, the yachts locked the fishing boats in place, so they couldn’t rise as well.

Trickle-down economic theory suggests that the economic benefit makes it way down from the rich to the middle class to the poor. Pierson and Hacker claim that the opposite is happening: trickle-up economics. To ensure they get even richer, the super-rich make super-sure the middle class stays put.

The inflation-adjusted income of the middle class and working class grew by 21% from 1979 to 2006, a pitiful increase of $42,900 to $52,100 a year.

Yet even that is misleading, because during that period, the middle-class work-load increased, by 10 hours a week. If that is deducted, working class income hasn’t increased in 40 years.

Over at the mansions of the richest 1%, all’s well, thank you. Their annual income grew from $337,000 to $1.2 million, an increase of 260%.

That’s enough numbers. Onto the theories. Some say the reason this has been going on for so long is “social mobility” and that the reasons for the tremendous income gaps is “the American dream”: Americans know that if they study, work hard and excel, they can reach that small clique.

It turns out that Americans believe in the American dream mainly because they don’t know the figures, or because somebody’s making sure they don’t. The American dream has been slowly dying for the last 30 years.

The number of people who climbed the ladder from poor to established, or from established to rich, is small and contracting to boot. Social mobility in America is low to begin with ‏(and is also diminishing‏), certainly compared with places such as Australia, Norway, Germay, Finland, Spain, France and Canada.

If you thought the naked data was depressing, wait till you get to the political argument that Pierson and Hacker make.

It is time to read the subtitle of “Winner-Take-All-Politics.” The book’s subtitle is, “How Washington Made the Rich Richer − and Turned Its Back on the Middle Class.”

It’s not the economy, stupid
The authors claim the blame for the tremendous social gaps, the fact that tens of millions of educated Americans are going nowhere fast while a few hundred thousand grow filthy rich, isn’t globalization, or technology or the education system. It’s American politics.

Suddenly the Israeli reader feels in familiar territory. Pierson and Hacker analyze political developments in America over the last 50 years and explain how the political system came to serve the interests of the super-rich. Not the free economy, not competition, not business interests, just those of the uber-wealthy.

They identify the turning point not as 1980, the time of “Reaganomics,” but two years before, under Jimmy Carter.

That’s when the super-rich of America grasped how to manipulate Washington and harness the American economy.

The myth is that government has no part in creating the social gaps, say Pierson and Hacker. Pierson and Hacker demonstrate how American laws and regulation were changed in favor of the rich, to the detriment of the economy. They present dozens of examples and lots of anecdotes.

Bankers on steroids

One anecdote relates to Citigroup’s formation in 1998, by the merger of Citicorp and Travelers. One of the bankers, asked about antitrust approval for the mega-merger, joked that there was no problem because Sandy would just call his bud, the president ‏(Sandy being Sandy Weill, Citigroup’s chairman‏). A few months later Wall Street launched its massive campaign to repeal the Glass-Steagall Act of 1933, which reined in the power of the bankers and deflected their conflicts of interest. The campaign worked, as did others designed to kill competition and make the strong even stronger. All this ground to a halt two years ago, as Wall Street collapsed.

Are Pierson and Hacker a couple of loony-left union lovers? Not at all. As for the unions, the two say they don’t serve the rich, or the workers, only themselves. Most Americans have no representative, not in Congress, not in the Senate, not in the White House.

The Harvard Business Review itself says that Hacker and Pierson supply the goods, proving that economic forces can’t explain the tremendous income gap. The book is highly important, says the Review, not just because it exposes the real face of inequality in America, the reasons for it, and the failure of the political system − but because it shows that inequality is the greatest danger to the health of the American economy.

The great crash of 2008-2009 may have shown that the system by which a handful of rich are getting richer and control Washington, while everybody else treads water at best or accrues debt and defaults at worst, isn’t sustainable.

America is turning into an oligarchy, conclude Hacker and Pierson. Its democracy is weakening as the rich learn how to manipulate politicians into changing the economy for their personal gain while weakening everyone else. The risks pass from the top to the taxpayer and more and more holes form in the social safety networks.

Today’s tycoons didn’t invent the wheel. Much the same happened 100 years ago. Social gaps widened to roughly their status of today. The result was the Great Depression.

At his inauguration in 1936, Franklin Delano Roosevelt said, “ For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people’s property, other people’s money, other people’s labor − other people’s lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

“Against economic tyranny such as this, the American citizen could appeal only to the organized power of government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people’s mandate to end it. Under that mandate it is being ended.”

Israelis read and sigh. With Israel’s assimilation into the OECD this year, a mirror was placed before us and it turns out that we have the widest inequality in the organization.

Our inequality is different from America’s but it’s just as terrifying. And our process of “oligarchization” is faster. What took America 40 years started here just five years ago. Prime Minister Benjamin Netanyahu studied in the U.S. and advocates market economics: but he must take a position on what good things in America he emulates, and what he should abhor.

Netanyahu could be the man under which Israel turns from democracy into oligarchy, or the man who came to his senses and began a process in which the free market seas lift all boats, not only the men in the yachts.