Riffing off John’s post of a few days ago, the most recent issue of Politics and Society (which, as I noted before, has free access for the next few months” ) has a pretty interesting debate on this topic. There are four contender. One of these – the standard technology-leading-to-inequality-story – is not discussed at any length in Politics and Society, but this accont doesn’t in any event tell us why there has been substantial variation in the impact of technology on different industrialized democracies, and hence requires at the least an account of intermediating forces.
(1): The Hacker and Pierson argument (laid out here and here. Here, the emphasis is on policy institutions. Hacker and Pierson specifically argue that one cannot just pay attention to the institutions of redistribution, which may serve, to a greater or lesser extent, to correct for inequalities created by markets, but which do not help explain e.g. the Picketty-Saez results showing a concentration of wealth among a tiny elite of hyper-rich people.
The economist (and former Bush administration official) Gregory Mankiw has evocatively likened the American super- rich to the winners of the golden ticket in Charlie and the Chocolate Factory. Most of the educated receive only the chocolate bar; a lucky few find a ticket to vast riches within the bar’s wrapper. But Mankiw’s analogy is silent on the question of how the tickets were placed in the chocolate bar and why some of the educated get the ticket and others do not. It implies that both the presence of the tickets and the selection is market-driven, when in fact, as we shall see, Mankiw’s “golden tickets” were in substantial part created by government, and their distribution has been deeply shaped by the political clout of their beneficiaries.
They respond to those (including Brad DeLong) who do not think that government policy can produce large changes in pre-income tax distribution by arguing that the key vector of change is market-making institutions which both enact new policies that help rich people, do not seek to respond to the median voter, but “to minimize the trade-offs when the desires of powerful groups and the desires of voters collide.” This set of arguments seems to me to be highly intuitively plausible (as a personal rule, I am far more attracted to models of politics and the economy that emphasize self-interest and power asymmetries than models that stress e.g. mutual advantage). Furthermore, Hacker and Pierson do make a highly convincing case that we have seen a very substantial shift in power relations so that business and its allies predominate over e.g. a greatly weakened union movement in influencing decision making. However, what they do not provide is a large set of cases demonstrating how market-making policies have worked to shift the ground in favor of the rich – instead, they provide only a couple of examples. I’d like to see a lot more evidence fleshing out this account to really be convinced. Hacker and Pierson do have a book forthcoming next year that will perhaps address the case material in greater detail. But really assessing these claims properly is going to require a long-term research program that would uncover the roots of the American political economy.
(2) The power of ideas. Neil Fligstein makes a two-fold argument – that the key vector of change is ideas about how the economy should be organized, and that we are likely witnessing the crumbling of the ideational frame that produced radical inequality.
My main argument is that the economic crisis of the 1980s produced a new consensus that attaining economic growth without government interference was the be-all and end-all of public policy. Post-1980, Congress and the president gave business whatever they wanted. They did so because they valued economic growth and wanted to reward risk taking. As a corollary, they also supported making such risk taking lucrative and they never were concerned about the distributional consequences of giving business what it wanted. … I document how the top managers and owners under the rubric of “maximizing shareholder value” worked to reform the economy to get a larger and larger share of income. … It was in the late 1980s and early 1990s that top managers began to use the arguments of agency theory to suggest that their pay should be tied to the performance of the firm, in particular, to their ability to raise the share price. … During the 1990s, pay packages for top managers grew dramatically. … My argument … implies two forces that will decrease income inequality. First, the massive destruction of wealth and income earn- ing investments means that inequality will just drop. The decline of banking will mean that the outrageous amounts paid to bankers and hedge fund managers will also lessen. But, equally important, the Obama administration seems to want to attack the problem of income inequality from a number of angles.
This captures possible causal relationships that are not included in Hacker and Pierson’s analysis. They concentrate on the role of government policy – not the internal politics of firms. It is more than plausible that the politics of “shareholder value,” and ideas about the proper relationship between shareholders and managers played an important role in generating inequality, entirely independent of the rules laid out by politicians. It is also very likely that there were interactions between these two arenas of politics that would have to be disentangled. That said, if Fligstein’s account seems to me to be stronger than Hacker and Pierson on the politics of markets, it is by the same token weaker on the politics of politics. His optimism, however cautious, about the ability of the administration to successfully attack income inequality doesn’t take nearly as much account of the difficulties of policy change as I think it should. Perhaps the Obama administration will succeed in staving off a re-enactment of the Bush tax cuts for the wealthy. But if it does, it will likely be because renewing the cuts would require active legislation (the reversion point in the case of non-agreement on taxes is that the tax cuts will lapse – this substantially improves the bargaining power of the administration). Initiatives that require Congressional approval are likely to be heavily watered down, or vetoed.
(3) Lane Kenworthy’s synthetic account, which tries to combine the kinds of argument laid out by Hacker and Pierson with a set of other factors, including ideational and technological change.
Business political capacity plays a role here too, but in this explanation the increase in that capacity is not what matters. Instead, American political institutions and a shift in perceptions of U.S. economic strength amplify the impact of corporate mobilization and political effort on policy. Shifts in the political culture and strategy of the Republican party also have an important effect on policy. Changes in technology, economic competition, and corporate governance practices contribute, together with changes in policy, to the rise in winner-take-all economic outcomes. … In Hacker and Pierson’s account, options were able to produce enormous gains for corporate executives because prior to 2005 they did not have to be expensed … an intentional lack of policy change amounted to endorsing and encouraging this development. … Let me sketch an alternative story. … American political system is especially conducive to drift. … the perception among the public and among policy makers of the health of the American economy. … the underlying pessimism continued at least until the later years of the 1990s boom. … prevailing thinking about firm governance moved steadily toward the notion that high-level executives are critical to the success of the firm and should be rewarded appropriately. … a more extensive search for quality leadership and to a willingness to pay more for it. … Clinton administration changed the tax rules … encouraged firms to accelerate the shift toward compensation via stock options. … compensation for top executives in U.S.-based firms has tracked the market capitalization of those firms, and stock values more generally, very closely. … CEO free agency … a credible exit threat. … benchmarking and leapfrogging can generate a sizeable rise over time in the average compensation package.
Accounts like this have the advantage of combining both developments in markets and in policy institutions. A really comprehensive account of how inequality came about is likely to resemble this one, at least in broad outline. However – given the current paucity of really comprehensive data and the complexity of the causal processes involved, they also have clear weaknesses. Most obviously, they do less to disentangle the underlying relationships than to provide a list of plausibly relevant causal factors, without very much sense as to how they might interact with each other. Kenworthy provides a schematic, but it is a very bare-bones one, that (I think) is less a presentation of a model than an effort to clarify thinking a little bit. It’s an open question (as I think Kenworthy himself would agree) as to whether it is better to try to start (as Kenworthy does) with an overall framework and then fill in the gaps as more empirical material is gathered, or alternatively to start with very simple models that leave out most of the complexity, and build it in as needs be. Happily, we don’t have to choose – both approaches can co-exist and argue with each other. Unhappily, this is because the study of American political economy is still in its very early stages, so that we simply don’t know what the best way to proceed is.