ECONOMIC INEQUALITY IN THE US: THE CASE OF HACKER AND PIERSON

Hacker and Pierson make their compelling case trying to answer the question on the causes of the dramatic widening in income inequality in the United States since the late 1970s. They delve into this argument passionately but also with a scientific acumen that is hard to find when talking about such debatable topics. At first, the authors affirm that the catchphrase “inequality has grown” doesn’t give the big picture of what has happened.

They thus resort to the metaphor of the rungs of a ladder: supporting evidence, to the authors the first two rungs-namely, the top 1% incomes-have been growing apart for decades with regard to the middle class. Then, Hacker and Pierson boil down the main causes that have brought about this situation. In doing so, the authors demonstrate convincingly that the usual suspects—foreign trade and financial globalization, technological changes in the workplace, increased education at the top—are largely innocent of the charges against them.

How many times have we been told the story that the main driving force between inequality in income is education? Tons of papers and books on the return on education and the idea that education matters in determining economic rewards swept away by a simple and startling statistic: although 29 percent of Americans have college degrees, 40 percent of the income gains over the last 30 years have gone to the top 1%. That is to say, even accounting for “skill-biasedtechnological change”, a huge amount of inequality keeps occurring among workers who are part of the educational elite. As a result, within-group inequality seems to account for a major part in inequality distribution in the US since the 1970s, and the case for SBTC becomes weak.

In solving the puzzle of the factors behind the rise of inequality, where the top 1% saw its income increase by 250%, whereas the middle class economic gains have stagnated, Hacker and Pierson are crystal clear in their answer: American politics. They come to the conclusion that, over the last 30 years, an organizational revolution within American politics took place.

According to the two authors’ research, the government, regardless of its political orientation, has utterly supported a situation giving rise to an economy that showers rich on the wealthy.

For at least the period of the so-called “the Glorious Thirty Years”, in the US income have gone up at roughly the same rate: that’s why this period is labelled Broadland, where almost everybody was participating in prosperity and enjoying the fruits of America’s success. Starting from the mid-70s, the situation has been bucking this trend: a sustained hyper-concentration of income at the top, with limited benefits for the non-rich, which created stagnant social mobility, and massive gains for the richest. If until then politics has acted “like a rising tide that lifts all boats”, a “trickle-up” scenario occurred, where the rich pulled away from the rest of Americans. From then on, inequality has ballooned.

American politics has thus started out catering to the interests of the wealthiest. To the authors, what is ghastly is that those instruments available for the government, instead of being used to level off income and redistribute gains top-down, favored the few to the detriment of the many.

From the Bush tax cuts of 2001 to the massive government bailouts of the financial system in 2008, many are the examples that drove the two authors to write this book.

Business, Wall Street and ideological conservative organizations have ever since made inroads into the Congress and pushed hard for free market policies and for cutting down public expenditures. Simultaneously, a lot of organizations that used to represent the middle class- from labor unions to broad-based civic organizations and organizations at the local and grassroots level, have lost momentum.

Thus, inequality didn’t just happen, it has been politically engineered. Nevertheless, as the two authors point out, politics and policy’s role has been consciously downplayed. And politicians have shirked their responsibilities in creating such a situation. Wrongly. An extra-explanation has been added to shield politics: government and its policies would have no power in influencing pre-tax income, even much less in swinging pre-tax income distribution. You are completely off-topic, Hacker and Pierson state. Government and policy matter.

Government could affect the distribution of “market income”, i.e. altering the minimum wage, the regulation of corporate governance or the regulation of financial markets. In short, government sets the rules the market has to comply with. But, instead of working in favor of the common good, it decided to pull the strings for the wealthiest. Look at the tax system, Hacker and Pierson say: although the richest are hit hard by income taxes, overall, they pay less federal taxes than they used to: government has indeed cut dramatically taxes on payroll and corporate and estate taxes. As a result, progressivity at the very top has become flatter rather than steeper, causing the wealthiest to pay less overall. Not to mention the many existing loopholes through which rich Americans could get away with filing their tax income return declaring less taxable cash. In a country shaken by 2008 subprime mortgage crisis, Hacker and Pierson say, it’s also worth mentioning the skewed corporate governance system where executive compensation and severance packages are more than twice the average for other rich nations.

To conclude, in authors’ eyes the large imbalances in this winner-take-all-economy have been propelled by what government has been doing since the mid 70s. The main take of the two authors is that inequality in the US is fueled by rent-seeking behaviors, cronyism and what in the school of public choice would be called “regulatory capture”: in short, when individuals or group of individuals with high-stakes in the outcome of regulatory decisions become predominant in regulatory agencies and prioritize their rather than public interests. For the authors, the relationship cause-effect is pretty straightforward: wealth remains the primary determinant of power. That’s why the Hacker and Pierson ask the government should to take center stage again, repel rent-seeking and exercise its power for the many, at first establishing a fair tax system that would redistribute wealth top-down. Nevertheless, other authors, such Cochrane, cast doubts on this explanation and openly mention a lack of predictive accuracy and internal logic: if the matter of debate is rent-seeking and the state’s patronage to the wealthiest, how on earth is more government the solution? Wouldn’t more government intervention bring about more cronyism, leading to more demand for tax lawyers, lobbyists and loopholes?